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HAQ & ISLAM’s

BUY

Target Price for December 2009 BDT 4925

Today’s price BDT 2885 (14 th December)

Pharmaceuticals & Chemicals sector

Share In Issue 8.94mln

Market Cap BDT 34837.467mln

December 2008

VALUATION OF SQUARE PHARMCETICAL Ltd.

sector Share In Issue 8.94mln Market Cap BDT 34837.467mln December 2008 VALUATION OF SQUARE PHARMCETICAL Ltd.

Valuation of Square Pharmaceutical Ltd

Course: Portfolio Management

Prepared for Mr. Md Mohiuddin Associate Professor IBA, DU

Prepared by Ashek Ishtiak Haq (ashanto123@yahoo.com) Minul Islam (minul@gmail.com) MBA 41 st D IBA, DU

This report is an academic endeavour. It is not, under any circumstances, to be used or considered as an offer to sell, or a solicitation of any offer to buy. Due care has been taken to ensure authenticity and reliability of data and information. However, analysts make no representation or warranty as to the accuracy or completeness of such information. All opinions and projections expressed in this report represent our judgment as of this date and are subject to change without prior notice.

Brief Overview

Square Pharmaceuticals Limited (SPL) is leading the Pharmaceuticals sector from the very beginning. DPL grow as pharmaceutical industry matured and yet today it is one of the fastest growing sectors of the country with a growth rate close to 15%. The positives that differentiate is the market leader; it controls approximately 20% of the market share. Second, the company is about to enter the European market by next year. Third it has a large and diversified portfolio of investment and businesses that gives it very sustainable earnings. Strong brand image, a large distribution network, large product portfolio and creative marketing make us optimistic about the future potential of the company. Therefore, we recommend BUY with a December 2009 target price of BDT 4925.

The pharmaceuticals market is an Oligopoly in nature despite the presence of more than 250 companies. The top 15 players control around 73% of the market share.

Though the sector is reaching maturity as indicated by the stable sales growth for last few years. However, new opportunities of export are opening up and 3 year CAGR of revenue was

15%.

Attainment of the UK MHRA certification for its manufacturing plant and opening of many new markets within next year, as stated by company officials, convinced both the analysts of booming growth for coming years.

Our DDM model gives us a fair value of BDT 4,925 for December 2009 whereas our PE based relative valuation technique gives us BDT 3,971 for the same period. On the other hand when we value SPL by using the sum of the parts, we arrive at a value of BDT 6,332 for December 2009. Considering the assumption and market perception we back the DDM approach and our bet is that SPL stock will reach a price of 4,925 by December 2009.

 

2002

2003

2004

2005

2006

2007

2008

2009 E

2010 E

2011 E

2012 E

2013 E

P/E P/B EV/EBITDA EV/Sales P/Sales DivYield (only Cash Basis) RoE

33.85X 33.61X

26.50X 20.47X 22.05X

19.73X

18.60X

20.11X

16.88X

14.62X

13.96X

11.82X

7.85X

6.68X

5.60X

4.62X

4.02X

3.51X

3.05X

4.25X

3.88X

3.55X

3.32X

3.01X

15.70X 15.39X

12.29X 10.47X

9.81X

8.42X

8.22X

6.54X

5.46X

4.63X

4.23X

3.59X

13.26X 12.51X

11.36X 10.05X

8.88X

7.31X

6.42X

5.04X

4.34X

3.74X

3.39X

2.90X

11.73X 11.06X 10.04X

8.89X

7.85X

6.46X

5.68X

4.45X

3.83X

3.31X

3.00X

2.57X

2.6%

2.4%

2.4%

2.7%

2.6%

1.7%

1.4%

3.0%

3.2%

3.4%

3.6%

3.8%

21.5% 23.0%

24.7%

19.5%

19.0%

17.5%

17.7%

24.0%

25.4%

24.6%

26.7%

Macro Analysis

According to the Economist Intelligence Unit most of the developed world will be in recession in 2009. The global economy will grow by 2.6% (on a purchasing power parity, or PPP, basis), the slowest pace since 2002. The big industrialized countries will expand by a mere 0.3% in 2009, while developing- world growth will slip to 5.9%, a full percentage point lower than in 2008.

World trade will increase by 3% in 2009, a third of the rate in 2006. Trade growth in emerging markets will be healthier, at 8-9%, but this is not entirely good news: emerging Asia’s openness to trade will leave it exposed to the downturn in the wealthier countries. South-east Asia will be hurt by a lacklustre euro zone and will feel some of the pain from the downturn in the United States. Weaker global demand will push commodity prices lower, including oil. As China and India slow infrastructure spending, commodities like cement, iron, and steel’s price will fall.

The US and European central banks will cut interest rates as economies slide and inflation recedes. With more than half a trillion dollars of assets already written off by global banks, a return to normal credit conditions remains far away.

World Trade and GDP World GDP Growth (real terms, at PPP), % World Trade Growth
World Trade and GDP
World GDP Growth (real terms, at PPP), %
World Trade Growth ($ value), %
5.4
4.8
5.2
5.3
4.2
4.5
3.6
4.1
3.8
3
3.4
3
2.4
2.6
1.8
1.2
0.6
0
2008
2009
2010
2011
Year
Growth %
Pharmaceutical sales $ bn (manufacturer's sales) World 902.4 Eastern europe 35 and Russia Latin America
Pharmaceutical sales
$ bn (manufacturer's sales)
World
902.4
Eastern europe
35
and Russia
Latin America
43.2
Japan
67.5
Asia and
145.2
Australasia
Western Europe
249
North America
420.9

In the health frontier, Rapid urbanisation and a growth in sedentary living are helping to drive epidemics in diabetes and cardiovascular complaints across Africa, the Middle East, Asia and Latin America. India, for example, will have more than 30m diabetes sufferers in 2009, the most of any country. That number is expected to more than double in the next 20 years. China, in a different illness, is estimated to have more than 100m hypertension sufferers, with 3m new cases expected each year.

illness, is estimated to have more than 100m hypertension sufferers, with 3m new cases expected each
illness, is estimated to have more than 100m hypertension sufferers, with 3m new cases expected each

The average life expectancy of a woman in 2009 will be 75 years for the first time in history. Men will reach a life expectancy of 70 two years later. Recession or no, global health-care spending will expand in 2009 as longer lived consumers place a premium on having the latest therapies or drugs.

In the developing world, the swelling ranks of the middle class will increase demand for pharmaceuticals, while rising government-provided benefits for the elderly will ensure continued growth of the sector. Health-care spending per head will rise by 4.3% in 2009 and pharmaceutical spending by 7.2%. Total drug sales will be worth $1.2trn in 2012. The explosion in the amount of chronic disease in the developing world will push down the cost per treatment.

Bangladesh at a Glance

Annual data

2007(a)

Historical averages (%)

2003-07

Population (m)

158.7

Population growth

1.8

GDP (US$ bn; market exchange rate)

67.8

Real GDP growth

6.1

GDP (US$ bn; purchasing power parity)

196

Real domestic demand growth

5.6

GDP per head (US$; market exchange rate)

427

Inflation

7.5

GDP per head (US$; purchasing power parity)

1,233

Current-account balance (% of GDP)

0.5

Exchange rate (av) Tk:US$

68.87(b)

FDI inflows (% of GDP)

1.0

(a) Economist Intelligence Unit estimates. (b) Actual.

 

The political scene will remain unsettled during the early part of 2009. The general election is expected to be held in December 2008. The electoral reforms have been completed. However, the timing of the poll could be delayed by a few months at the most, as the EC attempts to complete all the preparations set out in the election roadmap. Assuming that an election is held and that all the parties take part, it is likely to be a contest between the two long-established rivals, the Awami League and the Bangladesh Nationalist Party. However, tensions could escalate if the caretaker government goes ahead with the formation of a National Security Council, which could give the army a bigger role in politics than was the case before the imposition of emergency law in early 2007. From the early perception by the international media Awami League could win the election.

The biggest risk to political stability centres on the timing of the next general election. Given the huge task of holding civic elections and local government elections before setting a date for the parliamentary poll, there are concerns that all the preparations may not be completed in time for a general election to be held by end-2008. A sustained campaign of violence by any of the numerous militant groups in Bangladesh would constitute another threat to political stability. Although the leading figures in two of the country's four main banned militant groups have been executed, huge networks of full-time and part-time activists remain intact.

Relations with India are expected to improve during the forecast period. High-ranking officials from Bangladesh and India have agreed to co-operate on a range of economic and security issues, and this process is expected to continue in 2008-12.

Economic policy in the forecast period will focus on continued economic liberalisation, although progress will be slow. Bangladesh will seek to attract foreign direct investment, particularly in the textile industry. Efforts to diversify the tax base and to improve revenue collection will achieve some success. Demand for energy will continue to outstrip supply, but the situation should improve slightly from end-2008, as new power plants come on stream.

Real GDP growth will average 6.2% a year in 2008-12, driven largely by strong private consumption and gross fixed investment expansion. The economy will remain dependent on both the agricultural sector—which provides the main stimulus to private consumption—and the textile industry, which accounts for the country's largest category of exports. Record inflows of expatriate workers' remittances will ensure that the current-account deficit as a proportion of GDP will stay below 1% during the forecast period.

Projected Figures

Key indicators

2007

2008

2009

2010

2011

2012

Real GDP growth (%)

6.4

6.2

6.0

6.2

6.4

6.4

Consumer price inflation (avg; %)

9.1

8.5

9.0

6.8

6.6

6.0

Budget balance (% of GDP)

-3.9

-4.8

-5.2

-4.8

-4.8

-4.7

Current-account balance (% of GDP)

1.2

-0.3

-0.3

-0.6

-0.7

-0.7

Exchange rate Tk:US$ (av)

68.87

68.66

70.03

72.21

74.54

77.17

Exchange rate Tk:€(av)

94.27

106.26

105.05

101.63

99.51

101.09

Outlook for 2008-09

The Economist Intelligence Unit expects the budget deficit in fiscal year 2008/09 (July-June) to rise to the equivalent of 5.2% of GDP, compared with the official target of 5% in the 2008/09 budget.

Real GDP is expected to grow by 6% in 2008/09, driven by strong household spending and investment.

Consumer price inflation is expected to remain high over the forecast period, averaging 8.2% in 2008 and 8.8% in 2009.

The trade deficit is expected to swell to record levels in 2008-09 as demand for industrial raw materials strengthen and international oil prices stay high.

The Global Financial Crisis: The consequences of the ongoing global financial crisis for the Bangladesh economy are too early to predict with a measure of reliability; much will depend on how the crisis evolves and unravels in the near term. Three possible scenarios could unfold, though, with the implication for economies such as that of Bangladesh depending on the width and depth of the crisis. In the first scenario, the crisis leads to a slowdown in global economy but is followed by a quick upturn. The financial rescue packages start to work and the developed country economies get back to their recent growth trends. The second scenario could be a recession lasting for 1-2 years with negative to zero growth rates. This would result in sluggish demand and higher rates of unemployment in developed economies. The third scenario could be one where recession develops into depression, lasting for 3-4 years, with negative growth rates, high unemployment in developed countries, and a drastic fall in effective demand. This is likely to have dire global repercussions. Impact on and implications for Bangladesh economy will critically hinge on which particular scenario actually emerges from the current crisis. Anything bordering the third scenario will have adverse consequences for economies such as Bangladesh, while even the second scenario is likely to be detrimental to the interests of Bangladesh economy in FY09.

OPENING AND SETTLEMENT OF L/C (FY2008 VS. FY2009, JULY – AUGUST)

 
 

FY 2008

FY 2009

Growth %

 

Opening

Settlement

Opening

Settlement

Opening

Settlement

Consumer Goods

526.04

334.56

269.59

277.29

-48.75

-17.12

Rice

149.42

69.71

0.67

81.15

-99.55

16.41

Wheat

168.24

69.06

98.1

16.79

-41.69

-75.69

Intermediate Goods

267.7

227.66

393.61

251.65

47.03

10.54

Industrial Raw Materials

1330.02

1114.18

1784.82

1619.39

34.19

45.34

Textile Fabrics Accessories

468.31

463.49

554.69

545.63

18.44

17.72

Textile Fabrics Accessories BBLCs

432.45

426.23

513.4

512.31

18.72

20.2

Fabrics

338.66

327.29

394.22

393.58

16.41

20.25

Petroleum and Petroleum Products

276.87

371.82

489.55

435.32

76.82

17.08

Capital Machinery

306.8

250.81

267.3

293.63

-12.88

17.07

Machinery for Misc Industries

262.66

207.43

353.14

281.76

34.45

35.83

Commercial Sector

368.05

250.29

427.81

357.24

16.24

42.73

Industrial Sector

252

161.59

289.63

331.1

14.93

104.9

Other L/Cs

620.05

411.88

717.44

688.34

15.71

67.12

Total

3590.14

2918.34

4275.45

3847.38

19.09

31.83

There are several transmission mechanisms through which global financial crisis could impact on the Bangladesh economy. Exports, although earnings posted a very high growth in July, 2008, could slow down in the face of sluggish demand in the developed country markets which account for four-fifths of Bangladesh’s global exports. Anecdotal information from apparels exporters indicate some slowdown in order placement, although it is still not clear whether it is cyclical, seasonal or is originating from the expected sluggish consumer demand in developed countries. In general, low-priced, mass-produced items, where Bangladesh is most strong, are not affected by economic slowdown in developed market since income elasticity of such items tends to be very low. Economic slowdown could even induce some shift in demand from the middle-segment of the market to the lower-end (the so-called Wal-Mart effect). Indeed, Wal-Mart sales went up by about 3 per cent in August 2008. However, a tightening of apparels price is to be expected, with major buyers putting pressure on exporters to reduce their price offers. Additionally, WTO negotiations could be adversely affected because of the global crisis and initiatives such as the DF-QF market access for LDCs may not witness much progress. Developed countries could become more protective. Initiatives such as the New Partnership for Development Act (NPDA 2007) could become victims of the crisis.

Act (NPDA 2007) could become victims of the crisis. Remittance flow, three-fourth of which comes from
Act (NPDA 2007) could become victims of the crisis. Remittance flow, three-fourth of which comes from

Remittance flow, three-fourth of which comes from the Middle-Eastern countries, could be affected if there is a recession in developed economy with knock-on effect on investment flow to the region.

Commodity prices are coming down already; any economic slowdown could lead to further fall in prices. This should benefit commodity dependent Bangladesh and have positive impact on the inflationary situation in the economy. The challenge will be to identify an optimal strategy to pass on the benefits to the long suffering consumers. Evidently, in case of commodities such as fuel cross-subsidisation considerations (between octane, petrol, diesel and kerosene) will be required.

Bangladesh outperforms other equity markets

       

July,

2005

2006

2007

2008

Bangladesh (DSE)

-15%

-4%

87%

0%

USA (S&P 500)

3%

14%

4%

-14%

China (Shanghai Composite)

-8%

130%

97%

-49%

Japan (NIKKEI 225)

40%

7%

-11%

-14%

India (SENSEX)

42%

47%

47%

-34%

Pakistan (KSE 100)

54%

5%

40%

-16%

Vietnam (VN-Index)

29%

144%

23%

-53%

Bangladesh’s share market is

not exposed to global capital

flows

in

extent

(only about 2.5 per cent

to

any

large

the context

of

market

capitalisation

of

about

USD14.0 billion).

However,

the continuing

need

for

strengthening

of

the

oversight function

of

SEC

should not be undermined.

Whilst the ongoing crisis sends a cautionary note with regard to risky and foreign currency denominated derivatives, opportunities to attract portfolio investment to Bangladesh’s share market should not be left unattended, and will need to be explored and exploited.

view of the global financial crisis, in addition to the already high inflation rate,

Bangladesh will need to face the challenge of following a monetary policy which can ensure adequate liquidity in the banks and generate economic activities in order to alleviate poverty and accelerate economic development.

Monetary Policy

In

The MPS of the BB for the period July-December 2008 “aims at using the monetary policy for ensuring reasonable price stability essential to sustaining high economic growth, shielding the economy from global price and financial turbulences and downside risks, and tapping new upside opportunities” (Monetary Policy Statement, Bangladesh Bank, July 2008).

As a response to the current financial crisis the BB has been pursuing an accommodative policy in view of domestic and global economic developments, and has resisted the repetitive suggestion of the International Monetary Fund (IMF) to raise interest rate and follow a contractionary monetary policy. It is expected that the BB will follow an independent monetary policy to control inflation and stimulate investment as always, keeping in view the domestic and global realities.

Interest rate on 5‐ year NSD Inflation Rate (12 month average) Real rate of interest
Interest rate on 5‐ year NSD
Inflation Rate (12 month average)
Real rate of interest on 5‐ Year NSD
14.00
12.00
10.00
8.00
6.00
4.00
2.00
0.00
June 2004
June 2005
June 2006
June 2007
December
March 2008 June 2008
2007
Percent

However, in very recent times, the BB has raised the repo rate to somewhat discourage credit expansion (from 8.50 per cent in August, 2008 to 8.60 per cent in September 2008. Reverse repo rate has been changed to 6.75 percent from 6.50 per cent).

Striking a balance between high inflation and interest rate has always been a challenge for the BB

while devising a monetary policy. The long term interest rates have either declined or remained the same over the years. For example, interest rates on 5-year and 10- year Bangladesh Government Treasury Bond (BGTB) have declined, while the interest rate on National Savings Directorate (NSD) certificates remained same in June 2008, compared to December 2007 (Table 3.1). This implies that the real rate of interest (RRI) has declined in the face of high inflation.

Weighted average interest rate of Government long term T-bill/bonds and inflation

 

BGTB

NSD

 

Real Rate of Interest on

 

5-

10-

3-

5-

Inflation Rate (12 month avg)

5-Year

10-Year

3-Year

5-Year

Period

year

year

year

year

BGTB

BGTB

NSD

NSD

June 2004

8.00

10.00

10.50

11.00

5.83

2.17

4.17

4.67

5.17

June 2005

8.75

9.93

10.00

10.50

6.49

2.26

3.44

3.51

4.01

June 2006

10.60

12.09

10.00

12.00

7.16

3.44

4.93

2.84

4.84

June 2007

 

12.14

11.50

12.00

7.20

 

4.94

4.30

4.80

December 07

10.65

11.73

11.50

12.00

9.11

1.54

2.62

2.39

2.89

March 2008

10.60

11.72

11.50

12.00

10.00

0.60

1.72

1.50

2.00

June 2008

10.60

11.72

11.50

12.00

9.94

0.66

1.78

1.56

2.06

Growth in M2 280,000 260,000 240,000 220,000 200,000 180,000 160,000 140,000 year tk in crore
Growth in M2
280,000
260,000
240,000
220,000
200,000
180,000
160,000
140,000
year
tk in crore
Sep‐05
December
Mar‐06
June
July
August
September
October
November
December
January ,07
February
March
April
May
June
July
August
September
October
November
December
January ,08
February
March
April
May
June
July
August

witnessing for some years.

Falling Inflation: General, Food and Non‐food inflation (general) Point to point inflation (food) point‐to‐point
Falling Inflation: General, Food and Non‐food
inflation (general) Point to point
inflation (food) point‐to‐point
inflation (non‐food) point‐to‐point
16
14
12
10
8
6
4
2
0
Time
Percentage
2000
‐ 2001
2002
‐ 2003
2004
‐05
August
November
January ,2006
March
May
July ,2006
September
November
January ,2007
March
May
July ,2007
September
November
January ,2008
March
May
July
September
Interest Rate Spread Lending rate Deposit rate 14 13 12 11 10 9 8 7
Interest Rate Spread
Lending rate
Deposit rate
14
13
12
11
10
9
8
7
6
5
4
Time
Percentage
Jun/01
Sep/01
Dec/01
Mar/02
Jun/02
Sep/02
Dec/02
Mar/03
Jun/03
Sep/03
Dec/03
Mar/04
Jun/04
Sep/04
Dec/04
Mar/05
Jun/05
Sep/05
Dec/05
Mar/06
Jun/06
Sep/06
Dec/06
Mar/07
Jun/07
Sep/07
Dec/07
Mar/08
Jun/08

M2.There has been an upward trend in case of Broad Money Supply (M2) during the FY08. M2 has posted a rise of 18.64 per cent as of end July 2008 compared to July 2006. This growth has been due to growth in the domestic credit by 21.61 per cent during July 2007 and July 2008. Due to increased remittance flow, Net Foreign Assets (NFA) has continued to increase in recent times. During July 2007 and July 2008, NFA increased by 13.98 per cent. Net Domestic Assets (NDA) has also experienced an increase of 19.51 per cent during July 2007 and July 2008. This constant growth in the money supply is a sign of the economic expansion the country is

annual average rate

of inflation (12-month annual average CPI, 1995-96 = 100) increased to 10.00 per cent in August, 2008 from 7.78 per cent in August, 2007. The increasing trend continued till March, 2008 when it reached 10.0 per cent. Then it started declining in September. Inflation dropped drastically on October due to adequate supply of boro and aus rice in the market following a bumper harvest. The overall inflation rate on a point-to- point basis dropped by 2.93% point to 7.26% in October as price of both food and non-food items fell. Inflation on food items fell 3.99% and on non-food items it fell 1.24%.

Inflation

The

Interest

spread between lending and borrowing rates, interest rate has been a contentious issue as far as business and banking community were concerned. The BB has already directed the major commercial banks to reduce the interest rate spread and reduce their lending rates. The lending rate (calculated on a quarterly basis) of scheduled banks was 12.29 per cent in June, 2008 as compared to 12.75 per cent in December, 2007. Their deposit rate (also calculated on a quarterly basis) stood higher at 6.95 per cent in June, 2008 as compared to 6.77 per cent in December 2007 (Table 3.9

high

rate

In

view

of

and Figure 3.8).

Steady Exchange Rate (end of month) 68.75 68.7 68.65 68.6 68.55 68.5 68.45 Time Exchange
Steady Exchange Rate (end of month)
68.75
68.7
68.65
68.6
68.55
68.5
68.45
Time
Exchange rate

the EURO owing to the global financial crisis.

Exchange Rate

between Bangladesh Taka (BDT) and US Dollar (USD) has remained stable for the last one year or so. This is because of the introduction of floating exchange rate in 2003 to contain fluctuations of Taka against foreign currencies, particularly the US Dollar. During August, 2007 and August, 2008, Taka appreciated slightly by 0.26 per cent. At the end of August, 2008 Taka per USD decreased to Tk.68.52 from Tk.68.70 at the end of August, 2007. Taka

exchange rate

The

depreciated against Euro by 7.38 per cent in August, 2008 compared to August, 2007. However, very recently taka is appreciating against

Balance Of Payment

(In million USD)

 
     

July

July

FY2007

FY2008

FY2008

FY2009

Trade balance

-3458

-5541

-502

-342

Services

-1255

-1525

-125

-175

Income

-905

-1005

-115

-93

Current transfers

6554

8743

612

879

Official transfers

 

97

127

0

0

Private transfers

6457

8616

612

879

of which : Workers' remittances

5979

7915

567

821

Current account balance

936

672

-130

269

Capital account

490

576

1

1

Financial account

762

-431

230

-243

Errors and omissions

-695

-213

60

151

Overall balance

1493

604

161

178

Reserve assets

-1493

-604

-161

-178

Balance of Payments Bangladesh’s external sector was in tight situation in FY08, with export earnings of USD13.94 billion and import payments exceeding USD19.48 billion in the FY08. However, July FY09 experienced an improvement in trade balance in comparison to July of the last fiscal (In July FY08, trade balance was USD507 million whereas in FY09 it came down to USD342 million). Trade balance recorded a larger deficit of USD5541 million in FY08 compared to the deficit of USD3458 million in FY07.

However, balance on the current account recorded a surplus of USD672 million in FY08 against the surplus of USD936 million

during FY07, mainly thanks to a larger current transfer of USD8743 million. There was surplus in current account in July FY09 (USD269 million) in the backdrop of negative balance in the corresponding month of the last fiscal year (USD130 million).

This surplus mainly originated from private transfers in the form of worker’s remittances which was USD7915 million in FY08 with a robust growth of 32.38 per cent against USD5979 million in FY07. The growth of workers’ remittances also continued in July FY09 (USD821 million) compared to the corresponding period of July FY08 (USD567 million). The overall balance also showed a surplus of USD604 million during FY08 against the surplus of USD1493 million during FY07 due to surplus in current account and capital account of USD672 million and USD576 million respectively (Table 5.5). Overall surplus balance was registered in the first month (July) of FY09 (USD178 million) against the surplus of USD161 million in July of FY08.

respectively from September 2008. Stock market indicators rose in the first quarter of FY2009, after

respectively from September 2008.

Stock market indicators

rose in the first quarter of FY2009, after which they started declining. The Dhaka Stock Exchange (DSE) general index reached 2,966.8 points at the end of September 2008, a rise of 7.5% from July. The DSE general index then dropped by 7.4% in October. Although the share of foreign portfolio investment in the country’s stock market is small and the global financial crisis is not expected to have significant effects on the domestic stock market, the downward movements in share prices were likely caused by market speculation and selling pressures from nervous retail investors. DSE market capitalization reached Tk1,068 billion, increasing by 10.1% from July 2008 to September 2008; however, it declined to Tk1013 billion in October 2008. Similar trends were observed at the Chittagong Stock Exchange (CSE), the country’s other stock exchange. The CSE selective categories index rose to 5,892.7 in September 2008 from 5,517.5 in July 2008, a rise of 6.8%; while market capitalization rose by 7.5% during the same period. However, in October, the CSE selective categories index declined by 7.3%. Both the DSE and CSE indexes continued to fall and reached 2,584.02 and 5,164.21 points respectively on 9 November 2008, representing decline of 12.9% and 12.4%

Capital Market

2008, representing decline of 12.9% and 12.4% Capital Market With respect to IPOs, the number of

With respect to IPOs, the number of companies that floated their shares in FY08 were 12, which was 2 more compared to the previous fiscal year. However, total issued shares, sponsors’ part, and public offer etc. in FY08 were not found to be very promising for potential investors. Oversubscription in the context of IPOs had made the share of public offer to decrease by about 49 per cent. In case of 9 upcoming IPOs (four from insurance and one each from leasing, housing finance, textile, iron steel and ICD) public offering as percentage of total shares was found to be low (22 per cent of total shares vis- a-vis 37 per cent in FY08) which is a matter of concern for small scale investors

Industry Analysis:

With a USD 600mn industry and an average annual growth rate of 12%, the Bangladeshi pharmaceutical industry is the biggest (in volume) amongst all the LDCs.

Primarily a generics industry producing about 8,000 different brands which meet 97% of the domestic demand. Local companies enjoy 86% market share. Of the 245 registered pharmaceuticals, the top ten players account for 65% market share.

According to the WTO TRIPS agreement, LDC’s are exempted from “Patent Protection” until 2016 allowing legal reverse engineering and sale of patented products. This provides a unique opportunity for Bangladesh over India and China, who are under the patent regime.

Bangladesh has made significant progress in the export market. Between 2003 and 2006 pharmaceutical exports increased to about 61 countries from 51 and quadrupled in value from USD 7.9mn to USD 36.5mn.

Since many companies have acquired international certifications like USFDA, UKMHRA and TGA, Bangladesh can penetrate into regulated and unregulated markets.

Industry grew by 41.8% over last 3 years. The Pharmaceutical Sector is one of the fastest growing sectors in Bangladesh. In 2007 the Bangladesh pharmaceutical market was worth nearly USD 600mn and it is growing at a steady average rate of 11.57% over the last five years. The last three years has seen an average growth rate of 13.7% and the last year alone has given an impressive growth rate of 15.8%. The Pharmaceutical Sector is the second highest contributor to the National Ex- Chequer and the largest White Collar Labor intensive employment sector of the country. The growth of the industry is depicted in the table below.

Bangladesh pharmaceutical market (in mn USD)

Quarter

2004

2005

2006

2007

1 st

94.1

95.8

123.7

142.2

2 nd

110.6

120.4

136.8

156.6

3 rd

107.5

128.2

157.9

154.2

4 th

104.4

145.6

91.6

137.6

Total

416.5

490.0

510.0

590.6

91.6 137.6 Total 416.5 490.0 510.0 590.6 The Bangladeshi Pharmaceutical Mark et is primarily a

The Bangladeshi Pharmaceutical Market is primarily a generic market producing both patented and off-patented products. This is popularly known as Branded Generic Market since any manufacturer can produce the same molecule (either patented or off-patented) and market it in different brand names. There are currently 450 generics registered in Bangladesh, out of which 117 are in the controlled category i.e. in the essential drug list. The remaining 333 generics are in the decontrolled category. The total number of brands that are registered in Bangladesh are currently estimated to be 5,300, while the total number of dosage forms & strengths are 8,300 and cover all the important groups. Local manufacturers hold over 86% market share whereas only 13% share is held by the MNCs. Out of the top ten players in the market, nine are local pharmaceutical companies, with Snaofi- Aventis as the only MNC. The top two domestic manufacturers, namely Square and Beximco Pharmaceuticals have a cumulative market share of over 27%, while the top five have a market share of 44.5% and the top ten domestic manufacturers contribute about 64% of the total pharmaceutical market of Bangladesh.

In Bangladesh there are currently a total of 245 companies out of which 200 have operations in the country. The market is totally dominated by the local companies and there are only 5 multi-nationals currently operating. The 245 companies together have 5300 brands registered in Bangladesh. The table below lists the top ten pharmaceutical companies in Bangladesh in terms of sales value and market share.

Top 10 Manufacturers in Bangladesh by sales - 2007

Company Name

Sales USD mn

Share (%)

Square

106.5

18.03

Beximco

54.3

9.19

Incepta

43.5

7.37

Acme

31.9

5.4

Eskayef

26.8

4.54

Drug Int.

23.1

3.91

Aristopharma

22.9

3.88

Sanofi aventis

22.4

3.8

A.C.I.

22.4

3.79

Renata

21.5

3.63

Source: IMS Report,4th Quarter - 2007

Top 10 Market Player by Market Share 20 Square 18 16 14 12 10 Beximco
Top 10 Market Player by Market Share
20
Square
18
16
14
12
10
Beximco
8
Incepta
6
Aristopharma
Renata
4
Acme Eskayef Drug Int.
ACI
Sanofi aventis
2
0
0
1
2
3
4
5
6
7
8
9
10
11
Market Standing
Market Share
3 4 5 6 7 8 9 10 11 Market Standing Market Share Top Selling Brands

Top Selling Brands in 2007 (USDmn)

Brand

Company

Sales

Share

Growth

NEOCEPTIN

Beximco

8

1.35

34.06

SECLO

Square

7.3

1.24

63.1

NEOTACK

Square

6.3

1.07

21.26

NAPA

Beximco

6

1.01

10.17

CIPROCIN

Square

5.7

0.97

44.8

LOSECTIL

Eskayef

5.7

0.96

39.88

PANTONIX

IAP

4.3

0.74

33.97

FIMOXYL

Sanofi Aventis

4.3

0.73

19.26

LEBAC

Square

3.6

0.61

13.75

ENTACYD

Square

3.3

0.56

24.92

 

Source: IMS Report, 4th Quarter - 2007

Square Pharmaceuticals is also the market leader in terms of the number of products manufactured. Companies like Square, Beximco and Incepta continue to mark their strong presence by being in the top 5 with Opsonin posing a strong presence at the

3rd position. Many smaller local companies like Gaco Pharmaceuticals, produce quite a large number of drugs without making much revenue enough to challenge the top

10.

without making much revenue enough to challenge the top 10. The graph and table below show

The graph and table below show the sales values and the market shares of the top 10 brands in the market. As expected, the top brand is a drug concerning the alimentary disease class. Consistently

enough, Square and Beximco play a vital and predominant role. Although Square is the market leader in terms of market share, “Neoceptin”, a product of Beximco is the market leader in terms of brands.

The history of pharmaceutical exports from Bangladesh dates back to the late

80's. At that point, only one or two major pharmaceutical companies of Bangladesh took proactive efforts to initiate export. These companies on their own initiative started exporting their bulk drugs as

well as finished formulations to some of the less-regulated overseas markets like Myanmar, Vietnam and Nepal. After being successful in these less-regulated markets, in the early 90's, a few companies of Bangladesh took the initiative to explore some of the moderately regulated markets like Russia, Ukraine and Singapore.

The Export Story

 

Export Statistics (in million USD)

Year

Finished products

Raw materials

No. of countries

2001

4.5

0.2

17

2002

5.9

0.6

32

2003

7.9

0.3

51

2004

20.3

0.02

62

2005

20.6

0.1

67

2006

36.5

0.1

61

2007

35.9

n/a

65

 

Source: Primary Interview, DDA

Bangladesh

Pharmaceutical Industry is exporting its quality products to around 65 countries of the world and the volume of exports has more than quadrupled from around USD 8 million to almost USD 36 million in the last 4 years.

Today,

Bangladesh has made significant

progress in the export market. Between 2003 and 2006 pharmaceutical exports increased to about 61 countries from 51 and quadrupled in value from USD 7.9 million to USD 36.5 million thus resulting in an average annual growth rate of 91.8%. This growth in the export can be largely credited to the low- cost factors of production that exist in Bangladesh in the form of low labor, infrastructure and power costs.

Bangladesh exports a wide range of pharmaceutical products covering all major therapeutic classes and dosage forms. Besides the regular brands, Bangladesh exports high-tech specialized products like inhalers, suppositories, nasal sprays, sustained release products, etc. Apart from overseas retail customers, Bangladesh has also been supplying to world-renowned hospitals and institutions like Raffles Hospital, Singapore, KK Women & Children Hospital, Singapore, Healthway Medical Group, Singapore, Jinnah hospital, Pakistan, Aga Khan Hospital, Pakistan, Mission for Essential Drugs (MEDs), Kenya and State Pharmaceutical Corporation (SPC), Sri Lanka. The quality and efficacy of the products being exported from Bangladesh have been well accepted by the doctors, chemists, patients and regulatory bodies of all the importing countries. The packaging and presentation of the products of Bangladesh are comparable to any international standards; in fact, they have been highly appreciated internationally.

At present, Bangladesh imports over 80% of the local API requirement. Even though, a number of 21 local pharmaceutical companies are producing 41 APIs for pharmaceutical products. Bangladesh currently has the capacity of producing APIs worth of USD 29.7 million.

Table 9: Major API manufacturers in Bangladesh and their products - 2007

Company

List of API Products

Beximco Pharmaceuticals Ltd.

Amlodipine, Amoxycillin, Ampicillin, Celecocib, Rofecoxib, Paracetamol, Diclofenac, Cloxazillin, Flucloxacillin, Cetirizine Fluconazole, Ciprofloxazin, Ranitidine, Cephalexin

Square Pharmaceuticals Ltd.

Amoxycillin, Paracetamol, Diclofenac, Cloxazillin, Flucloxacillin, Cephalexin

Drug International Ltd.

Amoxycillin, Diclofenac, Cloxacillin, Flucloxacillin, Cephalexin

Globe Pharmaceuticals Ltd.

Amoxycillin, Diclofenac, Cloxacillin, Flucloxacillin, Cephalexin

Gonoshashtaya Pharmaceuticals Ltd.

Amoxycillin, Paracetamol, Diclofenac, Cloxazillin, Flucloxacillin, Cephalexin

Sunipun Pharmaceuticals Ltd.

Paracetamol

Opsonin Chemicals Ltd.

Amoxycillin, Paracetamol, Diclofenac

Source: GTZ. (2007). 'Study on the Viability of High Quality Drugs Manufacturing in Bangladesh.' Federal Ministry of Economic Cooperation and Development

Entry Hard A capital intensive industry requiring huge fixed costs in machinery and extensive R&D
Entry Hard
A capital intensive industry
requiring huge fixed costs in
machinery and extensive R&D
Government policy makes it
hard for the MNCs to enter
the market.
Suppliers Strong
Rivalry Intense
Buyer Strong
Currently only 20% of the API
are produced internally the
rest are imported. Too small
size of the most of the players
makes it unattractive for
investment in API production.
About 245 firms operate with
only 5 MNCs.
Top 10 players hold about
64% of the total market.
Square and Beximco together
holds 25% market
Due to restriction on direct
promotion of drugs cos’ have
to market through key opinion
leader i.e. the doctors by
inducing them to suggest a
particular drug. This often
results in unfair practice.
Substitute High
The 245 companies have
5,300 brands many firms
offering similar products and
services because of the
absence of patent protection.
Cost of switching is relatively
low.

Porter’s Five Forces Analysis of the Industry

Square Pharmaceuticals Ltd. Company Overview

Background

Square Pharmaceuticals started as a Partnership Firm in 1958. It converted into a Private Limited Company in 1964. The company made its initial price offering in 1995. It has achieved MHRA certificate as the first pharmaceutical company of Bangladesh. Square Pharmaceuticals Limited is the largest pharmaceutical company in Bangladesh and it has been continuously in the 1st position among all national and multinational companies since 1985. At the end of 2007 as well, Square was the leading company with annual sales worth BDT 68.9bn (USD 106.5mn) and market share of 18%. Such is the dominance of Square that the closest competitor Beximco has only about half the market share.

Plant & Size

Square Pharmaceuticals has three GMP facilities in Bangladesh. The first factory located in Pabna started operations in 1958. The second, known as the "API Unit" began production in 1995. The third unit located 50 kilometers north of Dhaka has been in operation since 2002. This facility is geared oral capsules and tablets. The company plans to use this factory as part of its export strategy.

Products

Square manufactures products in the following categories:

Tablets: Non-Coated (plain, chewable, dispersible, vaginal) Coated (sugar coated, film coated, enteric coated) Sustained/Extended Released (coated, non – coated). Capsules: Granulated Material filled, Pellets Filled Suppositories: Suppocire based Injections: Vials containing Dry Powder for Injections, Small Volume Liquid Parenterals Liquids: Oral Syrups (Sugar based, Non-Sugar based), Oral Suspensions, Topical Liquids Spray, Drops, Ointment, Cream and Powder: Small Volume Sterile Eye & Ear Drops Small Volume Nasal Drops & Sprays Topical Ointments & Creams Topical Antibiotic Powder Oral Dry Powders: Dry Suspensions (Antibiotic & Anti Infectives), Dry Syrups (Antibiotics) Dry Powder Inhalers: Partial Filled (Premix) Capsules for Respiratory Tract Application with a Device Metered Dose Inhalers: Pressurized Canisters for Oral use with an Actuator

International Trade

Square pharmaceutical is already supplying products to the following markets:

Asia: Afghanistan, Bhutan, Cambodia, Macau, Malaysia, Myanmar, Nepal, Papua New Guinea, Sri Lanka, Tajikistan, Vietnam, Yemen Africa: Gambia, Ghana, Kenya, Libya, Mauritius, Niger, Somalia, Sudan, Tanzania South America: Belize, Costa Rica, Guatemala

Square pharmaceuticals is also supplying to the UK further to the approval of its general plant by the MHRA. The markets under exploration are:

Asia: Hong Kong, Iran, Laos, Maldives, Philippines, Qatar, Saudi Arabia, Thailand, UAE Africa: Algeria, Chad, Comoros Island, Ethiopia, Malawi, Mozambique, Nigeria, Rwanda, Sierra Leone, South Africa

Europe: Germany, Kosovo, Romania, Russia, Ukraine South America: Brazil, Colombia, El Salvador

Square plans to penetrate into the developed nations with its exports in the future.

API Scenario

The Pharmaceutical Bulk Manufacturing Plant:

• Established in 1992 and commercial production started in 1995.

• It is the one of the largest manufacturers of pharmaceutical bulk products in Bangladesh.

It is well equipped with modern machinery.

It has got the feasibility of reverse engineering of bulk drug under post WTO scenario.

Square is presently the largest quality-bulk drugs manufacturer in the country. Until 1996 it was involved only for the internal consumption of Square Pharma. Since 1997 it started marketing the API to all top local pharmaceuticals like Aventis Pharma, Novartis Bangladesh Ltd., Glaxo Smith Kline, ACI Ltd., Beximco Pharmaceuticals Ltd., etc.

SWOT Analysis of Square Pharmaceutical Ltd:

Has own API plant whereas 80% of the industry’s API requirement is imported. SPL is
Has own API plant whereas 80% of the industry’s
API requirement is imported.
SPL is planning to capitalize on TRIPS and about to
enter in to Europe Market.
Received the UK MHRA
certification
for
its
manufacturing plant and waiting to enter the
European market in the next year.
Square enjoys 18% of the market, making it the
biggest player in the market
Strong brand image, quality of products, the largest
distribution network in the country and doctors’
level marketing
SPL is the only pharmaceutical company in
Bangladesh that has the largest investment portfolio
in different businesses and subsidiaries. For
example, Square Spinning Mills Ltd (SCL)
contributes 14% of SPL’s revenue.
SPL has the largest product portfolio comprising of
more than 430 products. So far in 2007, 17 new
products have already been introduced.
The pharmaceuticals market is an Oligopoly in nature despite the presence of companies. more than
The
pharmaceuticals
market
is
an
Oligopoly
in
nature despite the presence of
companies.
more than 250
Given the country's lack of spending power, the
pharmaceutical market remains tiny in comparison
with the population size. Pharmaceutical spending is
amongst the lowest in the world in per capita terms.
Healthcare expenditure consists of only 3.4% of
GDP.
R&D activities of the company have to be improved
if it wants to compete with global players.
Square’s textiles subsidiaries seem not to be adding
value; rather they are taking value away from the
pharmaceutical business.
The market is dominated by cheap, locally produced
generic drugs used for the treatment or prevention
of basic illnesses. Therefore major revenue sources
come from antibiotics, vitamins, pain-killers and
anti-asthma drugs.
Industries in Bangladesh including some world class manufacturing industries that are providing 97% of the
Industries in Bangladesh including some world class
manufacturing industries that are providing 97% of
the total medicine requirement of the local market.
The industry is worth USD 593 mn, which grew by
41.3% in the last 3 years. It has enjoyed an average
growth of 12% for last 5 years.
Local companies and MNCs together meet 95% of
the country’s drug demand but the local
manufacturers dominate the industry; they enjoy
approximately 87% of market share,
Low presence of the MNC, there are only 5 big MNCs
operating in the market.
More than 97% of sales revenue comes from the
local market. Bangladesh is the 7 th most populated
country with a population base of 150m. With the
prevalence of diseases, Bangladesh ranks 167 in the
world in terms of life expectancy at birth.
As per TRIPS/WTO agreements only 50 LDCs
including Bangladesh will be able to export their
patented drugs. Among the 50 LDCs, Bangladesh is
the only country which has a strong manufacturing
base for pharmaceuticals and is therefore in a unique
position to exploit this opportunity.
Bangladesh Govt. declare this Sector as “Thirst
Sector” for 2006-2009 & EPZ declares as the “Export
Product of the year 2007”
Between 2003 and 2006 pharmaceutical exports
increased to about 61 countries from 51 and
quadrupled in value from USD 7.9 million to USD
18 | Page
36.5 million thus resulting in an average annual
growth rate of 91.8%.
Price Hike of Raw materials. Recently few new industries have been established with hi tech
Price Hike of Raw materials.
Recently few new industries have been established
with hi tech equipments and professionals
Patent Law, which is valid up to 2016 for Least
Developed Countries like Bangladesh.
Lack of Hi tech Quality control Laboratory,
establishment of API Park by the Govt, necessary
action for Process Loss of API by the Govt.
After 2016 the advantage enjoyed by Bangladesh
will evaporate.

Company Valuation

Our analysis of the square pharmaceutical limited (SPL) is based on Present value of cash flow, (PVCF) and Relative Valuation techniques.

In the PVCF approach, we estimate the value of the stock through estimation of future dividend (D), and free cash flow to equity (FCFE) based on future growth rate (g) and required rate of return (k). This section discusses the underlying assumptions behind the estimations and lists the final result.

Estimation of Financial Statements On basis of historical data, macro-analysis, and company information, projected balance sheet and income statement for SPL has been prepared. The complete balance sheet has been included in the appendix-2: Financial Statements-Historical & Estimated, with the assumptions and rational governing the projection.

Required rate of return Risk free Rate is calculated on basis of Bangladesh Government Treasury bond rate that equals to 10.6%. As the analysts consider an investment time frame of 5 years, they believe the 5 year BGTB rate should be the base to estimate required rate of return instead of the 91- days T-bill rate. BGTB rate is inflation-adjusted so no estimation of inflation has been done.

Stock market return from 2003-2008 with conjunction of SPL return been used to estimate the risk premium of SPL and market return which is average of return annual return from 2003-08, is 0.38

Trade Date

DSE Index

Price SPL

Return DSE

Return SPL

01-01-03

845.85

308.39

   

01-01-04

967.15

545.72

0.143404

0.769577483

01-01-05

1999.71

1227.68

1.067636

1.249651836

01-01-06

1669.80

923.46

-0.16498

-0.24780073

03-01-07

1,583.09

1122.47

-0.05193

0.215504732

01-01-08

3008.913

2483.33

0.900658

1.212379841

From regression between DSE return and SPL return, we find the following

Covariance of Return of DSE and SPL, Cov SPL,M = .27 Variance of DSE return, σ M 2 = 0.32

β SPL =0.84

Risk Premium for SPL is .84X(.25-.07)=0.15

Expected rate of return = 22% yearly

FCFE Approach

FCFE Estimation

FCFE has been calculated from the financial statement prepared using the following formula

FCFE=Net Income+Depreciation Expenses-Capital Expenditure-Change in WC+New Debt- Repayment of Debt

Value/Output

PV of FCFE Less Debt No of share Price

77,34,50,05,495.20 89,95,87,261.00

12072240

6,332.33

Dividend discount Model

Dividend estimation:

 

FCFE

2009

88,87,32,304

2010

4,57,51,33,864

2011

12,13,21,09,167

2012

24,47,81,76,742

2013

35,27,08,53,418

Historical data indicates a compound annual growth rate of -7.0%, however the dividend and net operating profit after tax (NOPAT) of Square pharma has a negative correlation of 0.6. As square pharma is investing heavily on fixed assed (Fixed asset CAGR for the period is 30%), it paid lesser dividend.

We depend on the total dividend paid by the pharma industry to estimate the dividend to be paid by SPL instead of historical data or NOPAT. Our assumption is justified as correlation coefficient between dividend paid by SPL & total Pharma industry is about 90%. And it has been found that the dividend paid by SPL vary around 23 to 25 percent of total dividend paid by the industry, however last year the dividend come down to 12% of industry dividend. We consider three different views-pessimistic, average and optimistic, to determine the dividend paid by SPL on basis of total dividend paid in Pharma industry.

Total dividend to be paid by pharmaceuticals is correlated to GDP measured at market price. A correlation factor of 73% has been found between the two and for the last five years, the correlation coefficient stood at 85% the total dividend paid by the Pharmaceutical is about 10% of GDP. For estimated GDP growth rate, we consider the forecast of Intelligence unit of Economist group,

Dividend Growth rate estimation:

Growth rate has been estimated using historical data that included two approach-using average compound growth rate, and use of Retention rate (RR) & Return on Equity (ROE). From dividend estimation, we saw, the CAGR approach provides an unacceptable result. However, from ROE and RR, we find better estimation of growth rate.

Growth Rate g Dividend (Historical)

2003

2004

2005

2006

2007

2008

Payout Ratio

27.46%

25.98%

26.49%

31.96%

22.87%

25.89%

ROE

21.00%

23.00%

25.00%

19.00%

19.00%

18.00%

Growth Rate, g=RRXROE

15.60%

17.00%

18.20%

13.30%

14.60%

13.00%

We believe, the dividend growth rate will pick up with opening up of new export destination in European market. However, due to political instability and global financial turmoil, which hopefully will not affect pharmaceutical, we are little pessimistic. And our final standpoint is that if everything goes

normal, the growth rate will rise while if things go wrong the growth rate will stumble and might come below 10%. For past data we estimate the growth rate will be around a constant figure for three years in a row.

g

Dividend

2009-11

2012-14

In usual business/Scenario

15%

18%

Pessimistic view

13%

10%

Value/Output

Stock Price from Dividend Discount Model

 

Dividend payment

@ Moderate Growth Rate

@ Low Growth Rate

more than industry average

4,811.43

2,780.33

like before

4,925.93

3,707.11

lower than industry average

7,388.89

5,560.66

Analysts believe from discussion with company insiders and business performance that dividend payment will be as usual and the company will grow at moderate rate. Hence our bet is on BDT 4925BDT for SPL stock.

Relative Valuation techniques

Earning Multiplier From historical data we find, P/E ratio for SPL is higher than industry average. Though our historical data differ from that of DSE reporting, we have continued with our calculation as we don’t know the assumptions and process DSE adopted to calculate P/E.

From the historical data we project the P/E for SPL is likely to vary from 30 to 25.

Value/Output

 

Sectoral

 

Year

PE a

SPL

2003

10.76

50.42

2004

18.19

39.76

2005

10.84

30.71

2006

11.76

33.08

2007

21.05

29.59

2008

20.23

27.91

a Source

LankaBangla Finance

 

2009

2010

2011

2012

2013

Earnings per Share

106

126

146

153

180

Price Earnings Ratio

 

=30

3176.34

3784.66

4370.63

4577.26

5406.86

=25

3153.88

3642.19

3814.38

4505.72

 

Final value of SPL stock

We applied DDM, FCFE, and Earning multiplier approach to determine the value of SPL stock.

The DDM is based on GDP while FCFE is based projected financial statement of the company that requires estimation of revenue and expense based on macro analysis. Earning multiplier approach based P/E ration that is pivoted on industry analysis and in depth study of the company.

After a close look of the values that we obtain, we can discard some findings as those refer some unrealistic situation like paying a dividend that is more than industry average in a low growth situation. And our

final valuation from three different approaches is listed below. All the approaches indicate a buy decision. Though we believe from our market perception, a value of 6,332 is unlikely.

Approach

Assumptions

Value

Under/Overvalue

DDM

 

4,925

Undervalue in market by

2,050.00

FCFE

 

6,332

Undervalue in market by

3,475.00

Earning Multiplier Approach

PE=30

3,176

Undervalue in market by

301.00

PE=25

3,153

Undervalue in market by

278.00

Hence our final stand is that SPL stock price will be and should be BDT 4,925 by then end of 2000. And ee are recommending BUY as the analysis show the stock is undervalued by 1526 BDT on average considering latest market price of 2885 BDT (Close of Dec 4, 2008).

Appendix :Financial Statements

Forecasted Revenue

Square Pharma

Local:

2004 2009 E

2010 E

2011 E

2012 E

2013 E

Pharmaceuticals Product Growth

5,07,30,41,083

10,07,52,84,369 11,80,08,23,300 13,78,45,51,079 15,24,99,70,046 17,87,97,06,652

15.5%

17.1%

16.8%

10.6%

17.2%

 

%

of Total SPL Sales

92.54%

85.72%

84.34%

79.46%

72.43%

67.55%

Basic Chemicals

32,17,28,657

28,32,11,554 30,21,05,273 35,16,71,636 39,16,58,264 34,29,71,250

 

Growth

-20.7%

6.7%

16.4%

11.4%

-12.4%

%

of Total SPL Sales

6%

2%

2%

2%

2%

1%

Agrovet products*

2,73,63,822

52,21,09,096 47,45,57,926 90,65,39,335 1,56,64,89,732 1,87,97,87,679

 

Growth

168.1%

-9.1%

91.0%

72.8%

20%

%

of Total SPL Sales

0.50%

4.44%

3.39%

5.23%

7.44%

7.10%

Pesicide Products

12,94,56,436 29,82,50,882 68,71,31,455 1,58,30,61,991 3,64,71,70,060

 

Growth

67.9%

130.4%

130.4%

130.4%

130.4%

%

of Total SPL Sales

1.18%

2.32%

4.37%

8.42%

15.36%

Total Local Sales Growth

5,42,21,33,562

11,01,00,61,455

12,87,57,37,382

15,72,98,93,504

18,79,11,80,033

23,74,96,35,641

17.71%

16.95%

22.17%

19.46%

26.39%

%

of Total SPL Sales

98.91%

93.67%

92.03%

90.68%

89.24%

89.73%

Export:

 

5,99,54,358

74,37,35,384

1,11,56,03,076

1,61,76,24,460

2,26,46,74,244

2,71,76,09,093

Growth

250%

50%

45%

40%

20%

%

of Total SPL Sales

1.09%

6.33%

7.97%

9.32%

10.76%

10.27%

Gross Sales for SPL Growth VAT( 15% of Sale)

5,48,20,87,920

11,75,37,96,839

13,99,13,40,458

17,34,75,17,965

21,05,58,54,277

26,46,72,44,735

23%

19%

24%

21%

26%

 

1,76,30,69,526

2,09,87,01,069

2,60,21,27,695

3,15,83,78,142

3,97,00,86,710

Net Sales

 

9,99,07,27,313

11,89,26,39,389

14,74,53,90,270

17,89,74,76,136

22,49,71,58,024

Historical and Projected Balance Sheet

Square Pharmaceuticals Limited ASSETS:

2002

2003

2004

2005

2006

2007

2008

2009 E

2010 E

2011 E

2012 E

2013 E

Current Assets:

   

Cash & cash Equivalent Short Term Loan Merketable Securities Advance, Deposits & Pre-payment Accounts Receivable Inventories Total Current Assets Long term Investment Investment-Long Term (at cost) Investment- Associate Undertakings Preliminary Expense Total Long Term Investment Fixed Assets Property, Plant & Equipment-at cost Less: Accumulated Depriciation Net Fixed Assets Capital Work -in -Progress Total Fixed Assets Total Assets Liabilities & Shareholder's Equity Current Liabilities:

3,17,77,525

3,01,37,159

44979899.00

382074333.00

316720982.00

139855179.00

205295694.00

400943269.67

776004144.21

1388659587.09

1310548456.77

1690936868.36

59,26,21,908

38,63,34,814

815577152.00

1281695105.00

1897124652.00

1418893703.00

1510502334.00

2363814453.76

2711365638.64

2817566186.51

3196741288.49

3813778838.36

6,40,00,000

2,02,50,000

20250000.00

20250000.00

20250000.00

20250000.00

20250000.00

20250000.00

20250000.00

20250000.00

20250000.00

20250000.00

10,36,73,589

12,44,58,455

107177611.00

146042777.00

166492706.00

236455395.00

288806440.00

307491359.46

373905699.62

457273069.44

529684152.14

609910490.26

14,61,44,642

14,05,36,470

225115010.00

267527741.00

288732137.00

322864637.00

360245646.00

443729272.92

502072378.22

555579468.96

638722065.99

739659121.58

51,42,76,326

73,98,35,432

795856209.00

1144912356.00

1342364478.00

1544191798.00

2026736322.00

2335667806.62

2732921561.65

3241203711.01 3792209160.24

4421828524.94

1,45,24,93,990

1,44,15,52,330

2008955881.00

3242502312.00

4031684955.00

3682510712.00

4411836436.00

5871896162.42

7116519422.34

8480532023.01 9488155123.63 11296363843.49

51,08,00,000

1,19,72,00,000

1221900000.00

1660833364.00

1915833364.00

2792186364.00

3611744164.00

4373169647.06

5430783611.78

6589848222.73

7446072187.62

8982590791.17

51,08,00,000

1,19,72,00,000

1221900000.00

1660833364.00

1915833364.00

2792186364.00

3611744164.00

4373169647.06

5430783611.78

6589848222.73

7446072187.62

8982590791.17

1,08,99,21,364

3,25,78,25,743

3408474009.00

3786220623.00

4030138469.00

5803500191.00

6893452889.00

6923010213.50

7363438440.69

8017660144.89

8818686838.13

9603503851.69

58,87,71,710

88,98,99,023

1171335118.00

1468862152.00

1756377308.00

2272496682.00

2805020718.00

2977726506.78

3156307114.96

3348570847.28

3559025184.57

3789302568.19

50,11,49,654

2,36,79,26,720

2237138891.00

2317358471.00

2273761161.00

3531003509.00

4088432171.00

3945283706.72

4207131325.73

4669089297.61

5259661653.56

5814201283.50

2,06,16,71,687

15,76,41,175

402266589.00

687238515.00

1077707832.00

481239419.00

59114649.00

880856454.38

1308443408.40

1602053386.48 1569634027.12 2016716050.01

2,56,28,21,341

2,52,55,67,895

2639405480.00

3004596986.00

3351468993.00

4012242928.00

4147546820.00

4826140161.09

5515574734.13 6271142684.09 6829295680.69 7830917333.51

4,52,61,15,331

5,16,43,20,225

5870261361.00

7907932662.00

9298987312.00

10486940004.00

12171127420.00

15071205970.58