SBL Monthly BD Market Update of March16

April 17th, 2016

Index Synopsis of 2015

Sheltech Brokerage Limited

(SBL) is one of the leading and
fastest growing brokerages in
Bangladesh.
A Corporate TREC holder of
Dhaka Stock Exchange Ltd.
TREC no. 120.
Sheltech Brokerage Limited
Corporate Office: Otobi Center,
14 Dilkusha C/A, (Level 5)
Dhaka-1000, Bangladesh.
Tel: +88 02 711 57 33
Tel: +88 02 712 56 66,
Tel: +88 02 711 73 86
info@sheltechbrokerage.com
www.sheltechbrokerage.com

Points Change

DSEX

4357.5

-154.4

DSES

1052.1

DS30

1649.0

N. M. Al Hossain
Head of Research & Investment
hossain@sheltechbrokerage.com
Md. Aslam Hossain
Research Executive
aslam@sheltechbrokerage.com

DSEX 52 Week H/L 5334/3960 Market P/E (LTM)

13.9x

-3.4%

Market Cap in bn

14.3x

-73.9

-4.3%

(BDT/USD)

-47.6

-4.3%

(360 Days)

Market Div Yield

2440.1/31.1 Market P/E

(Audited)

2.87%

Market P/E

14.9x

(Annualized)

DSEX lost 154 points (-3.42%) throughout the month of March16 with a turnover loss of
(-7.5%). The DS30 index comprising of blue chip stocks has lost 73.9 points (-4.28%). Market
got support at Fibonacci 61.8% retracement level of 4303 at the end of the month. Market is
now trading Below the 200 days WMA of 4564.4.

Month started with a major sell-off due to the liquidation of two mutual funds managed by
AIMS holding portfolio over BDT 1556.5 mn ($21.13mn) as of 31 st December 2015. BSECs
press release on 17th February ordering liquidation of these two funds within 14 days triggered the sell-off . Market tried to recover day after the selloff ended on 2 nd march, but market
took a blow after the news of Bangladesh Bank cyber heist of $101 mn. Further foreign sell-off
forced the market down and mainly Large Cap stocks took the hit. Market gained little confidence after DSE held meeting with the top brokers. Moreover, the deadline to mitigate the
bank exposure is rumored to extend which has brought courage among the investors.

The market reaction to recent positive news like extension of capital market exposure, fuel
price reduction proposal, greater private sector credit growth and record FDI flow, has been
muted given there was an overwhelming consensus in the market that foreign sell-off will occur due to the emerging markets depreciation of currencies, lower local private sector investment to GDP, de growth in remittance and proposed upward gas price revision.

The proposed hike in gas prices by BERC might again dampen the market if it is approved.
Businesses dependent on gas will suffer as their expenses will go up. This news could be a major game changer and is compelling many investors to sit in the rails and wait to see how it
pans out. Moreover, the international commodity price have increased in recent weeks amid
concerns regarding raising Fed rate which could narrow down the current account balance
and consequently depreciate BDT and edge up inflation for a while.

So overall, we remain unconvinced that the fundamentals have turned sufficiently positive to
trigger a rally of the stock market. If the support of 4370 is honored by DSEX, then 4440 is
the next resistance level where some profit-taking is likely to be exercised. Otherwise If 4370 is
broken down, then 4303 will be the next support level. It seems that DSEX has strong resistant at 4440, It will need very strong buy pressure to break 4440. DSEX will ride up to 4540
if this level is broken up.

Company snap shots of ARGONDENIM, BSRMLTD, BSRMSTEEL, ENVOYTEX,

SQUAREPHRMA.

EDITORS:
Moin Uddin
Chief Executive Officer
moin@sheltechbrokerage.com

Valuation

Index

Cross- Country Market Comparison

Mostafa Noman
Research Executive
noman@sheltechbrokerage.com

Index Return (YTD)

P/E

Ahsanuzzaman
Research Intern
ahsan@sheltechbrokerage.com

Source: Bloomberg, DSE, SBL Research.

SBL Monthly BD Market Update of March16

April 17th, 2016

BD Market Registered a Loss of % in March 2016

AIMS relinquishing the two funds, Bangladesh Bank heist, continued foreign sell offs in Blue Chip stocks and few lower than expected earnings declaration precipitated the fall of index. Moreover, growing concern regarding the extension of the exposure of banks in
capital market stressed the investors. However, things started to look brighter after the regulators held a meeting with top brokers and the
news of extending the deadline for mitigating the exposure limit spread, which returned hope to the investors just at the end of March.

Source: DSE, SBL Research.

Liquidation of Two Mutual Funds Pushed the Market Down

March started with a major sell-off due to the liquidation of two close end mutual funds, AIMS and Grameen1, managed by
Asset and Investment Management Services (AIMS) of Bangladesh Limited with a portfolio value of BDT 1,656.5 mn as of 31st
December 2015. BSECs press release, after the ruling of high court on 17th February ordering the liquidation of these two
funds within 14 days, triggered the sell-off. As a result, the funds had to clear their portfolios by 2nd march. In that period
DSEX lost around 125 points. These two funds mainly possessed large cap stocks like SQURPHARMA, GP, BRACBANK,
UPGDCL, few MNCs and banks. The block market data on 2nd march displayed a transaction of BDT 335 mn which also implied the sell-off. Hence, these stocks experienced massive correction due to the sell pressure. After two days of negative index,
market tried to gain strength on 3rd march but spiral sell-off from the investors pulled the market down the next day. However,
market reversed on 7th march on the back of positive export data, which fetched USD 2.85 billion in February 2016 with a
growth of 8.92% YoY. A study performed by London Based BMI research expressed concern on countrys banking outlook
which also projected currency depreciation against the dollar.

Source: DSE, SBL Research.

SBL Monthly BD Market Update of March16

April 17th, 2016

Bangladesh Bank Heist that Shocked the Financial Market
The second week commenced with a news about a major heist which hacked around USD 101 mn reserves of Bangladesh Bank
from US Federal Reserve. Out of hacked USD 101 mn, USD 81 mn was transferred to Philippines and USD 20 mn to Sri
Lanka. USD 20 mn was recovered as Sri Lanka notified and returned the money to Bangladesh Bank quickly. However USD
81 mn was still at large. The BB heist news was circulating in every international and local media. This added woes to the already downbeat market. As a result, investors confidence in the outlook of the market faded more. The market hovered
around a narrow range and amid all the pessimism, closed slightly higher, which was caused by the movement of large cap
stocks specifically belonging to fuel, power and engineering sectors. The market tried to revive in that week but the negative
news weakened the upward force.

Slower Remittance Flow Amid Malaysias U-Turn and the Resignation of BB Governor
The third week of March started on negative knobs after a streak of four positive sessions which inched the index down by 4.3
points. Investors took a cautious stance by tapering their moves due to the key issues, such as the recent BB heist, U.Ks refusal
to accept cargo shipments and Malaysias cancellation of bringing
new workers from Bangladesh. Malaysias refusal to take 1.5 mn
workers from Bangladesh is thought to have a negative impact on
the overall economy of Bangladesh. Remittance flow also slowed
down during the first three months of the year. Marchs remittance
flow was USD 1.281 billion which was 4.27% less than last fiscal
years month of March. Experts reasoned the decrease in remittance
due to the slower growth of Middle Eastern countries because of
tumbling international oil price. DSE clawed higher on 15th march
following the resignation of BB governor Dr. Atiur Rahman. Markets optimistic view returned, as exuberant investors were given
respite from the fall. The DSE election also spurred a mixed reaction among investors while substantial profit booking had also been
observed during the positive U-turn. However, this optimism of the
investors was short lived as the dividend declaration of Summit power (SUMITPOWER) and Summit Purbanchol (SPPCL)
failed to meet the expectation of investors. Consequently, this lower than expected news and a merger proposal of SUMITPOWER with SPPCL, Summit Uttranchol Power and Summit Narayanganj Power contributed to hammer the market down by
more than 34 points. SUMITPOWER and SPPCL lost 15% and 22% respectively from the date of declaration till the end of
the month. Moreover, foreign sell off in specific large cap stocks exaggerated the situation.

Large Caps Weighs Index Down

The start of fourth week continued third weeks negative momentum. The large cap stocks like SQURPHARMA,
LAFSURCEML, GP, HEIDELBCEM, BATBC, LINDEBD and other MNCs mainly took the hit during this time. The foreign
institutions relinquished these large cap stocks which caused the
price correction in such stocks. Blue chip stocks like BATBC faces tax dispute with National Bureau of Revenue (NBR). NBR
claimed that BATBC evaded taxes in 2009 to 2013 which equaled
to a total amount of TK 19.24 bn. This prevailing dispute was
pulling the prices down. Another large cap LINDEBD slumped
due to the uncertainties surrounding plant sell off in Tejgaon that
investors were supposedly expecting. But once the expectation did
not materialize after the price appreciation, investors abandoned
the stock which corrected the price. LAFSURCEML and SINGERBD took the hit due to the lower than expected EPS announcement. SINGERBD announced a dividend of only 65% which was
substantially lower than last years 220% dividend. Similarly, LAFURCEML and HEIDELBCEM could not meet the expectation
of the investors by declaring dividend lower than last years.
Source: DSE, SBL Research.

SBL Monthly BD Market Update of March16

April 17th, 2016

Especially HEIDELBCEM, which declared a dividend of 300% which was 21% lower than the declaration of 2014. The market
welcomed the introduction of Dragon Sweater and Spinning Limited (DSSL) which started trading on 23 rd March. Although
the introduction did not have any effect on the index but few investors freed up their funds to acquire its stocks. This was evident when the index slid 29 points that day. In addition, investors were still kept in the dark regarding the extension of banks
exposure in capital market which fuelled further uncertainties. This led the investors rush to free up their hands off the stocks
in panic mode which depressed the market more.

Source: DSE, SBL Research.

Anticipation of More Spike in Federal Rate Moved the Fund Managers to Continue Sell-Off
The foreign sell-off began the moment when Fed was pondering to
increase the rate back in 2014, and this trend continued as the anticipation of rate hike was growing stronger. This induced the foreign investors to reduce their net holding position in the stocks. When Fed
finally increased the interest rate in December 2015, Dollar eventually
appreciated against the frontier and emerging economies. However,
Bangladeshs currency did not depreciate as much as expected.
The foreign institutional investors were expecting the dollar to
strengthen more against major emerging currencies. As the news was
spreading that Federal Reserve was pondering to increase interest rate
more by few increments in the current year. As the Bangladeshi currency is pegged against the dollar, BDT exchange rate does not truly
display the depreciation or appreciation if any occurs. On the other
hand, Indian Rupee (INR) and Chinese Yuan (CNY) have been depreciating to facilitate foreign investment and export business.

As it can be observed from the graph, the volatility of INR was quite
high ranging from 53 to 66.3 from 2013 to March 2016. Whereas, the
change in BDT against USD was not that much during the same period. The exchange rate with USD remained quite stable which helped
to maintain a fair value in imports.
Source: Bangladesh Bank, SBL Research, XE.com

SBL Monthly BD Market Update of March16

April 17th, 2016

The Support of Fibonacci Retracement
The continued downward condensation caused DSEX to lose 89 points that week and close at 4370, the lowest level since November 11, 2015. DSEX suffered the highest loss of 51 points on Monday 28th March. The market value turnover was also low
on that day and the day before. Such low turnover was last witnessed in the middle of December last year. On 29th March,
DSEX slipped to 4285 before springing back up to 4311 points. This adverse condition impelled the worried regulators to call a
meeting with top brokers of DSE to discuss the present situation of the market. Following the meeting on 29th March, market
got support from Fibonacci 61.8% retracement level of 4300 level. DSEX climbed up further 55 points in the last two days of
fifth week. This rise was possibly because of the news of the arrests of Basic Bank Limiteds official along with three others including the managing director of Emerald oil for loan scams.

Source: SBL Research.

Technical Update of DSEX

DSEX got resistant at Andrews Pitchforks (3 green parallel lines)1st level of 4466, DSEX also honored this line previously at
4602 in last week of february16. RSI (14 days) also took resistant at 50 level. DSEX may go down to its next support level of
4370. If 4370 is broken, then 4303 will be the next support level. EMA (34) line is also acting a resistant. It seems that DSEX
has strong resistant at this level, DSEX will need strong buy pressure to break this pitchfork line. On the other hand if this line
is broken, DSEX will ride upto 4540.

SBL Monthly BD Market Update of March16

April 17th, 2016

What Future Awaits
Mixed news have been circulating so far in the month of April after a drab month of March. Market reacted buoyantly after the central
bank eased the deadline of capital market exposure. Contrary to last months pessimism regarding the economy, private sector growth
rate has propelled to a new height. In addition, foreign funds more than USD 2 bn, the highest ever, have been injected in the economy
in the form of FDI. Also, the increase of job opportunities abroad will speed up the remittance and reserve growth. And Finally, lower
lending rates encouraging the business to borrow which is stimulating export growth as a whole. Optimist news like these are reflecting in
the capital market as well. Also, governments recent decision to lower fuel prices will lower distribution and electricity costs.
Lower lending rates coupled with good export growth have been encouraging. As a result, private sector growth has seen an unprecedented increase of 15.11% (Feb15 to Feb16) surpassing all expectations. Overseas jobs from January to March, on the other hand, also
soared to an increase of 75% compared to last years three months. Middle eastern countries boosted their hiring of Bangladeshi people
which might propagate the remittance earning in the near future.
However, the market reaction to recent positive news has been muted given there was an overwhelming consensus in the market that
foreign sell-off will occur due to the emerging markets depreciation of currencies, lower local private sector investment to GDP, de growth
in remittance and proposed upward gas price revision.
The proposed hike in gas prices by BERC might again dampen the market if it is approved. Businesses dependent on gas will suffer as
their expenses will go up. This news could be a major game changer and is compelling many investors to sit in the rails and wait to see
how it pans out. Moreover, the international commodity price have increased in recent weeks amid concerns regarding raising Fed rate
which could narrow down the current account balance and consequently depreciate BDT and edge up inflation for a while.

So overall, we remain unconvinced that the fundamentals have turned sufficiently positive to trigger a rally of the stock market. If the
support of 4370 is honored by DSEX, then 4440 is the next resistance level where some profit-taking is likely to be exercised. Otherwise
If 4370 is broken down, then 4303 will be the next support level. It seems that DSEX has strong resistant at 4440, It will need very
strong buy pressure to break 4440. DSEX will ride up to 4540 if this level is broken up, .

Extension of Capital Market Exposure

The government has taken several moves to allay fear of worried investors by indicating that it will not directly interfere in the
capital market. Bangladesh Bank has also allowed the banks and NBFIs to increase a substantial amount of their paid up capital
in funds like special purpose vehicles (SPV) and alternative investment funds (AIF). Moreover, investors are hoping that the
deadline for banks to limit their exposure might be extended which is a breath of fresh air to their ears. Month of April and
May also bear several earnings report (either quarterly or annually) of many listed companies. These reports will reflect the expectations of the investors as price buildup of such stocks may occur.

Glimmer of Hope for the Retrieval of Hacked BB Money

On top of all that, Bangladesh Bank along with the help of international agencies are trying hard to recover the positive image
after losing USD 81 mn to the hackers. According to a news on New Age Bangladesh, USD 34 mn can still be retrieved. Additionally, a Bangladesh Bank lawyer is confident that every penny of the stolen money will have to be returned by the Federal
Reserve. Initially USD 101 mn was hacked but USD 20 mn of the hacked money was recovered from Sri Lanka. Technically
this is a good news for the market as it is now standing on a strong support level and if the expectations of the investors are duly met then the market will spring up to compensate for the losses of March.

USD Losing Strength

Meanwhile, if the speculation about the Feds decision to raise interest rates is proved to be true then Bangladesh capital market can witness more foreign sell off. Although foreign investments account for only 1.5% to 3% of the amount invested in the
capital market, further sell off may again start a chain reaction, which will lead the local investors to run for the exit door. However, USDs appreciation has gotten stagnant recently amid stronger oil prices. If the trend continues, then the offshore institutional investors will not find depositing money in the US as lucrative. This again can turn their heads towards the emerging
and frontier capital markets such as Bangladeshs.
6

SBL Monthly BD Market Update of March16

April 17th, 2016

Fuel to Become Cheaper and Gas Price to
Balloon Up
Governments decision to slash fuel price by nearly 15% for
octane and petrol, & 25% for diesel and kerosene will be a
boon for the industries that are heavily dependent on these
commodities. Distribution costs along with electricity production costs by generators that run on fuel will be reduced. However, Bangladesh Energy Regulatory Commission (BERC) has
proposed a massive hike in domestically and commercially
used gas prices to the government. According to the new proposal, BERC wants almost 80% to 130% increase in gas prices. This will have serious implication for the manufacturing
industries heavily dependent upon gas use.
The proposed increase of gas price will outweigh the cost savings resulting from the reduction of fuel price. The industries
that are dependent on gas for production and transportation
might lose a fraction from their bottom line.

Current Price

Proposed Price

(TK/Litre)

(TK/Litre)

Diesel

68 TK

51.0 TK

Petrol

96 TK

81.6 TK

Octane

99 TK

84.2 TK

Kerosene

68 TK

51.0 TK

Fuel Type

Proposed Gas Tariff

Figures in BDT

Present

Proposed

Home Use
Single Burner
Double Burner
Domestic Use (PCM)*
Captive Power Generators (PCM)*

600
650
7
8.3

1,100
1,200
17
19.2

CNG (PCM)*

35

58

*PCM =Per Cubic Metre

Inflation Slightly Edges Up

The point to point inflation basis rate of March slightly edged
up to 5.65% from Februarys 5.62%. Food inflation rose to
3.89% from 3.77% of February. However, non-food inflation
rate declined slightly to 8.36% in March, 2016 from 8.46% in
February, 2016. The slight increase could be due to recent rise
in pay scale of government officials and international commodity prices. Moreover, the upcoming month of Ramadan is
expected to bring higher inflation rate as food prices are expected go up during this month. It is not yet certain when
the government will move to increase the proposed gas price.
If this materializes, then both the domestic and business entities will have to count higher expenses. However, for now, the
recent slash in domestic oil prices may put a downward pressure on the inflation for the short and middle term. If inflation rate lowers, then the lending rate of the creditors will also
go down, propelling the businesses to borrow more.

Investments in Private Sector

Private sector credit growth increased for the July-January period of 2015-16. Credit to the private sector stood at BDT
6221.99 bn in January 2016 while it was BDT 5745.99 bn in
the beginning of the fiscal year (June, 2015). The growth was
15.11% in Feb16 (YoY) while the eight months data (Jul15
Feb16) suggested a 9.29% increase from the same period previous year. Thanks to the dropping yield state, credit growth
has grown substantially despite dull business activities nationwide. Although, the increase of personal loan including home
loans attributes to the increase of credit growth.
a

SBL Monthly BD Market Update of March16

April 17th, 2016

Recent Business Stimulation Spurs Credit
Growth
Bangladesh Bank reported a rise of 15.11% on 11th April,
2016. This growth surpassed the expected 14.8% ceiling set
for June 2016. On the back of stable political situation, rising
purchasing power and lower lending rates, businesses have
been encourage to borrow money for expansion. This is a
good indication for the financial institutions, especially the
banks, who also reported a 32% rise in profit. As the banks
are sitting on a large number of liquid cash, they will be able
to utilize this raw material and invest more in the private sector if the sector flourishes more. Lower inflation rate caused
the cost of borrowing to decrease. Consequently, this has increased borrowing from FIs. If this trend of decreasing lending
rate continues, then heavily leveraged companies will be relieved from high interest expenses. These companies will also
realize positive NPVs sooner.

Good News Ahead for Remittance as Overseas Jobs Climbs Up

Overseas jobs increased from January to March as a total

of 190,868 Bangladeshis travelled abroad for jobs. This
number is significantly higher than the same quarter last
year up by 82,159 from 107,709 Bangladeshis. Countries
such as Oman, Qatar and Saudi Arabia increased the
recruitment from Bangladesh. This large number of employment can pump up the remittance inflow into the
country.

Forex Reserve Hits 28.07 Billion as BOP Surplus Widens

Countrys foreign exchange reserve hits a new mark. The reserve now stands at USD 28,238.53 mn. An increase of 0.06% from
last month of this fiscal and 23% from the previous year. The slower pace of import growth led by lower global commodity
price and appreciation of BDT helped the reserve get through a new high. Two major contributors of reserve are export earnings and wage earners remittance evidenced mixed performance. Exports mounted 13.6% in last month (February16 vs February15) while the rate of increase was 5.15% (February 15 vs February 14) YoY. Pharmaceutical, Furniture and leather product
export ascended while RMG export set down for the month.
The balance of Payment status improves for the month led by squeezing imports, improving exports and increased foreign direct investments. The current account balance stands at USD 2268 mn for July-January 2015-16 while this was USD 1843 mn
for the same period of the previous year. Petroleum import dropped almost 30% on year to year basis which helped to attain a
lower import values. During the July-January period of 2016, FDI swelled 30.6% to USD 1.23 billion also.

SBL Monthly BD Market Update of March16

April 17th, 2016

Foreign Direct Investment (FDI) Crosses

USD 2 Billion Mark
The annual inflow of foreign direct investment (FDI) crossed
the USD 2.0 bn level for the first time in Bangladesh last year.
Bangladesh Bank updated statistics on FDI, reported that the
net inflow of FDI stood at USD 2.23 bn in 2015. This amount
was 44.10% higher than the FDI worth USD 1.55 billion in
2014. The provisional estimation of FDI last month, however,
showed that the net inflow of FDI was USD 1.89 bn in 2015.

Mixed Performance of Export-Import

Countrys January export brought home USD 2.85 billion.
This reported a surge of 13.60% year on year basis. The cumulated amount of exports in the first eight months stands at
USD 22.12 billion which is 8.92% higher than last year. Garments export which constitutes 80% of total export basket,
fetched USD 2.36 billion in February. In contrast import
slowed somewhat and divulged a growth of 5.50% in January,
2016 compared to last year. The growth was 6.74% in last
year of this period. The net exposure let the country reveal a
favorable balance of payment figure and sustaining stable exchange ratios. Trade deficit eased a bit to USD 4.05 billion in
the first eight months of the current fiscal year compared to
that of USD 4.06 billion in the same period of last fiscal year.
If the local currency depreciates because of rising inflation,
then imports will become expensive on the other hand, exports will earn more revenue.

SBL Monthly BD Market Update of March16

April 17th, 2016

10

SBL Monthly BD Market Update of March16

April 17th, 2016

11

SBL Monthly BD Market Update of March16

April 17th, 2016

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SBL Monthly BD Market Update of March16

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SBL Monthly BD Market Update of March16

April 17th, 2016

Block Trades of March

14

Argon Denims
Ltd
Close Price
Market Cap (BDT in bn)

23.8
2.3

Outstanding Shares (in mn)

99.3

Sponsor holding (%)

49%

Category

Year End

Dec

Key Comps
Annualized
EPS

EPS' 15(Q3) EPS' 15(Q2) EPS' 15(Q1)

Audited
EPS'14

EPS' 14
(Q3)

EPS' 14
(Q2)

EPS' 14
(Q1)

Year end

Q No.

0.87

1.16

Dec

3.03

0.88

0.85

0.64

3.47

0.86

Company vs
Industry

Audited
Income
Y-o-Y

Annualized
Vs Audited
Growth

Current
Quarter
Y-o-Y

Quarter Q-o
-Q

ARGONDENIM
Textile

26.7%

-12.7%

2.3%

3.5%

Profit
Growth
(5 Yr
CAGR)
15.4%

8.2%

-13.3%

6.7%

11.4%

13.1%

Higher Growth Outlook with

Increase in Energy Expense may
Hold Subjective

Key Financials
(mn BDT)

Audited
LTM P/E Annualized
P/E (2014)
P/E (2015)

P/B

6.8x

8.9x

7.8x

1.1x

10.7x

12.9x

12.4x

1.0x

2011 2012 2013 2014

Revenue
Gross Profit
EBITDA
Operating Profit
Net Income
Total Asset
Total Debt
Total Equity

1,178.7
271.9
364.5
302.7
98.3
1,909.5
1,155.2
621.4

1,588.4
325.1
408.6
325.1
135.9
5,000.9
1,736.6
1,757.3

2,171.3
461.0
606.4
461.1
226.8
3,832.9
1,648.7
1,991.6

2,521.3
577.2
696.6
560.8
287.5
4,065.7
1,523.6
2,235.5

A new Factory cum Office Building has been constructed within the factory premises, where the machineries of Expansion Project have been installed. The Major competitors of the business are considered as Mahmud
Denims Ltd, Sha Sha Denims Limited, Partex Denims Ltd, Envoy Textiles
Ltd etc, while ADL capturing 5.2% of the local denim market, Envoy
textiles 12.5% and ShaSha Denims 7.2%.

Profitability

Industry Views

ROE Decomposition

In Bangladesh there are 27 factories producing a total of 360 mn yards

(6.5% global market share) of denim fabrics against a demand of 760 mn
yards (13.05% global market share) per annum. A substantial demand is
covered through importing from China, India, Pakistan & other countries.
Bangladesh Holds 22.8% share in EU and 11.3% in USA denim market
which suggests a 11.1% growth in last year. Global denim consumption is
estimated at about 5.5 billion meters per year and growing at 3-4% per
year. Currently in local market, ETL has a production capacity of 50 mn
yards, Argon (18 mn) & Indian Arvind Denim (30 mn).

Net Profit Margin

Asset Turnover
Financial Leverage

Capacity utilization & further expansion

Stock

DSEX

Last
Week

-2.85%

-0.77%

Last
Month

-8.43%

-1.60%

Last
Year

-2.1%

1.1%

Velocity

30.2%

33.6%

Argon Denims Limited (ADL) was incorporated on 13 July, 2006. It engages in producing medium and premium range denim fabrics in various
weights ranging from 4.5 oz to 13 oz. The factory is situated at Sreepur in
Gazipur district of Bangladesh.

ADL currently have 102 looms while its production capacity stands at 18
mn with a capacity utilization rate of 73.39% in 2014. This suggests a
further board to grow. The rate of utilization endorsed a growth of 18%
from the last year. The management have a plan to increase the utilization
rate to 85% in FY 2015. During the year 2014, ADL also invested 56.17
mn for expansion of the business. This expansion was deemed to raising
production aligned with higher export outlook. The last nine months
revenue suggests a flat growth (YoY) while revenue picked up 16% last year
(on full year basis).

Hike in Gas price will deteriorate profit margin

Argon Denims Limited has a connected load of 1145 KW. The average
consumption would be 860 KW, at rated load factor of 70%. The company has a diesel generator with duel fuel firing capabilities. BERC recently
proposed a fresh 130% tariff hike on industrial gas usage. In addition, the
hint from the government on a 10-15% probable revision on Diesel & Oil
price. ADLs recent financial statements did not reflect the last Gas tariff
hike (more than 100%). In our focus the last hike is going to increase the
charge by BDT 40 mn while the proposed tariff hike (if implemented) will
increase the charge by more 80 mn BDT. Which signifies a probable slash
of 50 basis point within the gross margin (yearly).
Export Incentive
ADL currently sell most of its products to European destination while
actively exploring new markets in USA, Japan & Australia. The recent
move by the government to increase the cash subsidy for RMG products by
2% to European destination will spring up the revenue for ADL.

2011

2012

2013

2014

Gross Profit Margin

EBIT margin

23.0%
25.6%

20.4%
20.4%

21.2%
21.2%

22.8%
22.2%

ROE

31.6%

11.4%

12.1%

13.6%

2011

2012

2013

2014

8.3%
1.2
3.0

8.5%
0.4
2.9

10.4%
0.4
2.3

11.4%
0.6
1.8

2011

2012

2013

2014

N/M
N/M
N/M
N/M

34.76
19.5%
7.3%
38.2%

36.6%
41.8%
41.8%
66.8%

16.1%
25.2%
21.6%
26.7%

Growth
Sales Growth
Gross Profit Growth
Operating Profit Growth
Net Profit Growth

(6 Months)

Risk
Debt to Capital
Interest Coverage

Valuation Metrics
(Year end)
P/OCF
PEG
Price/Sales
Dividend Yield
EV/EBITDA

2011

2012

2013

2014

0.6
2.3

0.5
2.3

0.4
2.9

0.4
3.0

2011

2012

2013

2014

NM
NM
NM
NM
NM

NM
NM
NM
NM
NM

53.6x
2.2x
2.3x
0.8%
10.8x

17.0x
0.7x
1.1x
NM
6.2x

Valuation Argument
ADL is trading at a LTM P/E multiple of 8.9x and at an EV/EBITDA of
6.2x while its major counterpart Envoy Textiles is trading at LTM P/E of
10.3x and EV/EBITDA of 11.0x. Two major Denim Fabrics producer in
India Arvind Ltd. (Trading at P/E of 20.4x and EV/EBITDA of 9.7x) &
Nandan Denim (Trading at P/E of 7.1x and EV/EBITDA of 4.7x).

15

Bangladesh Steel
Re-Rolling Mills
Close Price
Market Cap (BDT in bn)
Outstanding Shares (in mn)
Sponsor holding (%)
Category
Year End

178.5
35.8
195.1
57%
A
Dec

Key Comps
Audited EPS
(2015)

4.78
Company vs
Industry

EPS 15 (Q3)

EPS 15 (Q2)

1.04

0.9

Audited Income
Y-o-Y

Annualized Vs
Audited Growth

EPS 15 (Q1)

Audited
EPS' (2014)

EPS 14 (Q3)

EPS 14 (Q2)

EPS 14 (Q1)

Year end

Q No.

0.18

0.67

0.49

-0.05

0.25

Dec

Profit Growth

Audited
LTM P/E
P/E (2014)

Audited P/E
(2015)

P/B

(5 Yr CAGR)

Current
Quarter

Quarter Qo-Q

Y-o-Y

BSRM

698.0%

698.0%

284.0%

273.0%

-6.3%

327.9x

N/M

37.3x

3.4x

Engineering

-12.6%

33.9%

56.9%

-10.5%

-2.7%

28.2x

24.8x

21.0x

2.0x

Higher Capacity expansion amid

margin expansion affirm efficiency
BSRMLTD is the flagship company of BSRM group which is pioneer in
the country on steel making. It operates two different units. The re-rolling
unit produces MS Rod, Channel, Angles. Another unit, which is called
Steel Melting Works produces MS Billet. After the completion of BMRE
project in 2015 December it sufficed to produce 500 grade Rebar and
TMT bar also. The company resells imported angles, channel, I Beam, H
Beam, and ingot. BSRMLTD has two associates, BSRM Steels (31.19%)
engages in manufacturing different graded re bars, BSRM Steel Mills ltd,
BSRM Steel Mills Ltd (44.97%) which is said to be the largest induction
furnace billet making plant is Asia and expected to start commercial operation in April, 2016. The company has its own billet making plant known
as SMW (Steel Melting workshops) which produced 1,28,002 MT billets in
2015. The Factory of BSRM Ltd is located at 147/148/149, Baizid Bostami Road, Nasirabad I/A, Chittagong.
The BMRE project that went through 2015 distressed production to few
extent while the company sold 54,433 MT re-bars in 2015 compared to
76,818 MT in 2014.

Investment Thesis
Capacity Expansion
The BMRE project in the company increased the production capacity of
the Re-Rolling unit from 120,000 M. Ton to 450,000 M. Ton last year.
Before the production slowed down in 2014 due to the BMRE, the company had a capacity utilization of about 89% in the year 2013. Given its full
capacity utilization it could earn BDT 900 mn cumulatively in a full year
basis.

Key Financials

2011

2012

2013

2014

2015

12,664.4
1,076.5
865.9
865.9
1,150.8
14,854.8
6,395.3
4,404.9

14,043.4
697.5
734.0
486.2
453.9
16,840.4
5,266.1
7,526.3

8,602.4
500.1
564.1
285.0
943.8
21,299.3
7,931.1
8,273.9

8,049.9
188.3
170.8
-66.2
109.1
22,766.0
12,342.9
8,431.8

7,802.0
458.0
444.2
207.2
827.7
26,940.1
14,593.3
9,803.7

Profitability

2011

2012

2013

2014

2015

Gross Profit Margin

EBITDA margin
EBIT margin
ROE

8.5%
6.8%
6.8%
8.4%

5.0%
5.2%
3.5%
1.9%

5.8%
6.6%
3.3%
3.0%

2.3%
2.1%
-0.8%
0.3%

5.9%
5.7%
2.7%
2.3%

ROE Decomposition

2011

2012

2013

2014

2015

Net Profit Margin

Asset Turnover
Financial Leverage

9.1%
0.3x
0.8x

3.2%
0.2x
0.7x

11.0%
0.1x
0.6x

1.4%
0.1x
0.7x

10.6%
0.1x
0.7x

Revenue
Gross Profit
EBITDA
Operating Profit
Net Income
Total Asset
Total Debt
Total Equity

Growth

2011

2012

2013

2014

2015

65.9%
135.3%
122.5%
340.6%

10.9%
-35.2%
-43.9%
-60.6%

-38.7%
-28.3%
-41.4%
107.9%

-6.4%
-62.4%
-123.2%
-88.4%

-3.1%
143.3%
-413.0%
658.7%

2011

2012

2013

2014

2015

0.6x
2.3x

0.4x
2.0x

0.5x
1.2x

0.6x
-0.1x

0.6x
0.3x

Valuation Metrics (Year End)

2011

2012

2013

2014

2015

P/OCF
Dividend Yield

N/M
N/M

N/M
N/M

N/M
N/M

-17.7x
1.1%

-16.6x
0.3%

EV/EBITDA

N/M

N/M

N/M

121.4x

54.4x

Production Stance

2011

2012

2013

2014

2015

Capacity (MT)
Production (MT)

N/M
N/M

120,000
94,127

120,000
106,810

120,000
42,116

450,000
45,689

Sales Growth
Gross Profit Growth
Operating Profit Growth
Net Profit Growth
%

Stock

DSEX

Last
Week

-5.1%

-0.7%

Last
Month

6.5%

-1.6%

An associate company named BSRM Steel Mills Limited has been formed
to make BSRMLTD self dependent from billet price fluctuations. The
newly formed company will have a billet production capacity of 862,000
M. Ton. Which is expected to begin commercial production in April,2016.
The direct input for MS Rod production is scrap materials, which is partly
sourced from its sister concern Burhani Scrap traders.

Last
Year

155.%

7.0%

Velocity 79.7%

33.6%

Lower Raw Material Price

Debt to Capital
Interest Coverage

Vertical Integration

Raw material price of Scrap & Billet ( two key ingredients in steel sector)
has dropped substantially in the last year following the tumbling global
prices, which believed to improve BSRM to capture a hefty margin. The
price of Billet dwindled 56% in last one year while scrap price revised
almost 50% down in 2015.
Hefty Associate Income
In 2015 it earned BDT 500 mn. From BSRM Steel Ltd, whereas a BDT
520 mn profit recognized as one off gain from increase in investment in
BSRM Steel Mills Ltd (BSRMSML). However if BSRMSML goes in to full
operation in 2016 it is expected to add BDT 391.2 mn given full capacity
utilization. In addition BSRM Ltd earned BDT 180 mn management fee
from BSRM Steel under management sharing agreement.

(6 Month)

Risk

Savings from lower interest rate

As countrys interest rate is now in single digit this will benefit the highly
leveraged entitys like BSRM. The benefit from the lower local interest rate
and reliance on Offshore & UPAS financing for its project loans will lead
to save substantial amount in financial expense.

16

BSRM Steels Limited

Close Price

91.4

Market Cap (BDT in bn)

31.5

Outstanding Shares (in mn)

341.7

Sponsor holding (%)

71%

Category

Year End

Dec

Key Comps
Audited EPS
(2015)

EPS 15 (Q3)

EPS 15 (Q2)

EPS 15 (Q1)

Audited
EPS' (2014)

EPS 14 (Q3)

3.63

0.51

6.38

1.71

2.2

0.88

Company vs
Industry

Audited
Income
Y-o-Y

Annualized Vs
Audited
Growth

Current
Quarter
Y-o-Y

BSRMSTEEL

75.7%

75.7%

217.8%

-7%

Engineering

-12.6%

33.9%

56.9%

-10.5%

Capacity Expansion, Vertical Integration may prove instrumental.

Bangladesh Steel Re-Rolling Mills Ltd. (BSRM), pioneer in the countrys
steel re-rolling industry started its commercial operation in April 2008 and
is the flagship concern of BSRM Group which was established in the year
1952. The plant is fully automated 700,000 TPA re-rolling mill supplied
by Danieli of Italy. The Factory is located at 78/79 Nasirabad I/A Baizid
Bostami Road, Chittagong. The other concerns of BSRM are BSRM Steels
Ltd , BSRM Wires Ltd , BSRM Iron & Steel Co.Ltd , BSRM Re-Cycling
Inds. Ltd , Meghna Engineering Works Ltd , Chittagong Power Co.Ltd ,
Karnafuly Engineering Works Ltd and H. Akber Ali & Company Ltd. The
main product of BSRM Steel is Xtreme500W, besides that it also produces
Grade 80, 420, 300 & 75 Bars.
BSRM Steel has 25.35% associate investment in BSRM Steel Mills Ltd
which is now an associated company of BSRM Steels and owns 95% interest in its only subsidiary BSRM Iron and Steel Company Ltd (BISCO) and
have expressed its intention of capturing 100% ownership of BISCO and
thereby amalgamated its operation in its last BOD meeting held on February 10, 2016. The group uses induction furnace technology by using steel
scraps as raw materials to produce billet.

Value Drivers
Capacity Expansion
The last BMRE expansion project added 100,000 M. Ton per annum
capacity with its existing 600,000 M. Ton per annum capacity which is
currently being fully utilized. The capacity utilization in last 2 fiscal was
99.50% & 104%. The BMRE project also added values to the company by
making it capable of manufacturing Grade 80 Re-Bars which it entitles as
BSRM Maxima. The increased capacity will turn BSRM group as largest
producer of Steel and Re-bars in the country.
Backward Vertical Integration
BSRMSTEEL has a subsidiary company named BSRM Iron and Steel Co.
Ltd. which has a billet production capacity of 180,000 M. Ton and currently running 90% of its capacity. The newly formed associate company
BSRM Steel Mills Ltd has a billet producing capacity of 862,000 MT which
is said to be the largest billet making plant of this group. The Steel Melting
Work Division of BSRMLTD (Which produces Grade 40 & 60 bars) also
produces Billets which is sold to BSRM Steel after fulfilling the demand of
its amalgamated operation. Moreover it has its own scrap processing unit
in Nasirabad, Chittagong named as BSRM recycling industries Ltd.
Power Plant
In The fiscal year 2015 BSRMSTEEL acquired merchant power plant
license from BERC to build a 150 MW coal fired power plant in
Mirersorai, Chittagong. It also has a plan to build another 150 MW power
plant in Khulna under this license. Currently it meets demand by tapping
power from 230 JV national grid line through a substation.
Expanded profit margin

EPS 14 (Q2)

EPS 14 (Q1)

Year end

Q No.

1.21

1.18

Dec

Audited
P/E (2014)

LTM P/E

Audited P/E
(2015)

P/B

3.8%

25.1x

17.6x

14.3x

3.8x

-2.7%

28.2x

24.8x

21.0x

2.0x

Quarter Q-o-Q Profit Growth

(5 Yr CAGR)

Key Financials
(mn BDT)

2011

2012

2013

2014

2015

Revenue
Gross Profit
EBITDA
Operating Profit
Net Income
Total Asset
Total Debt
Total Equity

31,242.6
2,464.7
2,076.4
1,885.4
922.3
24,070.3
19,461.7
3,159.9

38,262.4
2,475.5
1,925.9
1,703.8
1,001.2
26,844.2
19,034.9
6,356.3

36,294.9
3,828.3
3,084.8
2,860.7
1,898.9
28,681.4
17,999.0
7,929.3

38,571.1
3,488.0
2,774.8
2,548.0
1,247.6
32,381.5
21,290.6
8,662.2

33,493.2
4,815.0
3,925.8
3,683.0
2,097.3
28,484.5
15,367.6
10,262.7

2011

2012

2013

2014

2015

7.9%
6.6%
6.0%
34.2%

6.5%
5.0%
4.5%
21.0%

10.5%
8.5%
7.9%
26.6%

9.0%
7.2%
6.6%
15.0%

14.4%
11.7%
11.0%
22.2%

ROE Decomposition

2011

2012

2013

2014

2015

Net Profit Margin

Asset Turnover
Financial Leverage

3.0%
1.6x
7.2x

2.6%
1.5x
5.4x

5.2%
1.3x
3.9x

3.2%
1.3x
3.7x

6.3%
1.1x
3.2x

Profitability
Gross Profit Margin
EBITDA margin
EBIT margin
ROE

Growth
Sales Growth
Gross Profit Growth
Operating Profit Growth
Net Profit Growth
%

Stock

DSEX

Last
4.2%
Week
Last
5.8%
Month
Last
44%

-0.04%

Velocity 49.4%

33.4%

(6 Months)

2011

2012

2013

2014

2015

41.4%
10.8%
2.4%
-14.1%

22.5%
0.4%
-9.6%
8.6%

-5.1%
54.6%
67.9%
89.7%

6.3%
-8.9%
-10.9%
-34.3%

-13.2%
38.0%
44.5%
68.1%

-1.6%
3%

Risk

2011

2012

2013

2014

2015

0.9x
2.5x

0.7x
12.2x

0.7x
4.1x

0.7x
3.5x

0.6x
4.8x

Valuation Metrics
(Year end)

2011

2012

2013

2014

2015

P/CF
P/E Ratio
PEG
Price/Sales
Dividend Yield
EV/EBITDA

-5.5x
34.9x
2.2x
1.5x
1.5%
10.6x

27.4x
22.1x
1.6x
0.7x
1.5%
12.6x

5.6x
11.8x
0.6x
0.6x
2.3%
8.3x

-10.8x
24.0x
2.7x
0.8x
1.7%
10.7x

4.4x
14.1x
1.2x
0.8x
3.5%
6.5x

Debt to Capital
Interest Coverage

Production Stance
Capacity (MT)
Production (MT)

2011

2012

2013

2014

2015

550,000
523,624

600,000
580,147

600,000
630,305

600,000
623,918

700,000
602,832

Revenue dropped by 13.2% due to average selling price and drop in quantity produced for 1 month due to BMRE project. However gross profit
grew by 13.8% which indicates average selling price per ton is lower than
the import cost of billet. There is a one off gain in income statement of
BDT 76 mn. As the associate company will go online in May/June, 2016
this will augment the bottom line by 11 mn given the plant is fully utilized .

17

Oligopolistic Market Nature

MS Steel Billet Price Chart.

Bangladesh has the lowest steel consumption per capita in Asia. The annual per capita steel consumption in Bangladesh is 25 KG which is much
lower compared to India (75.3 Kg), Japan of 65.2 KG & South Korea (55.4
KG). At present three big steel makers, BSRM, Abul Khair Steel & KSRM
supply more than 50% of the countrys annual demand which is 3.5 to 4
mn ton of steel. BSRM & KSRM set to expand their capacity further to
fully control the market for iron metal. With the planned capacity expansion projects, annual production of BSRM alone cane cover 21% of countrys total demand for steel. These consolidation among the largest millers
will make small millers difficult to do business here, which evinces potentiality of existing large firms in keeping desired margins.
Improved Technological Substructure
BSRM is the only producer of MS rod in Bangladesh which have EMF
(Elongation at maximum force). This unique feature led BSRM achieve the
status of Ductile Bar producer. In essence , BSRM also launched countrys first Grade 80 rod entitled BSRM Maxima which is essentially designed for countrys mega project with assurance of 100000 psi tensil
strength minimum.

Import duty to make local sourcing competitive

Before the billet making facilities were available the company sourced its
raw material through import. At present, Iron ore price has slashed more
than the price of scrap as demand toppled in China. This allowed China
to dampen its excess production at a lower price globally. China has been
using blast furnace technology to produce billet through iron ore as its
major ingredients. However to protect the local manufacturer the government increased import duty by BDT 2000 per ton in the last budget. This
stance is expected to continue near future which will make local billet
producing competitive.
Lower interest rate environment A boon for the company
BSRM has a capital structure consists of 54% debt and 46% equity Capital. Most of the debt of its is short term in nature (Short term debt 97.2%
& Long term 2.8%). The high financial leverage (3.22) is the key driver of
the companys ROE, though, it is incurring substantial interest burden
(1.21 in 2015) which is exhausting a portion of the net margin. The financial expense is expected to go down in lower interest rate environment &
availability of lower cost offshore financing, foreign financing & Usance
Payable at Sight (UPAS) L/C facility in future. Moreover per unit fixed
cost will be benefitted from the increasing profit margin and higher capacity expansion.
Risk Factors

Sluggish growth due to weaker real estate demand.

Higher leverage may get hurt under weaker sales revenue.
Further decrease in iron ore prices than scrap prices can make import
price of Billet price more favorable which would lead to looses in
associate investment in BSRM Steel Mills Ltd.

18

Envoy Textiles
Ltd
Close Price

36.3

Market Cap (BDT in bn)

5.5

Outstanding Shares (in mn)

152.0

Sponsor holding (%)

46%

Category

Year End

Sep

Key Comps
Annualized
EPS

EPS 15
(Q3)

EPS 15
(Q2)

EPS 15
(Q1)

Audited
EPS' 14

EPS 14
(Q3)

EPS 14
(Q2)

EPS 14
(Q1)

Year end

Q No.

1.08

3.94

1.11

1.24

1.21

Sep

4.32
Company vs
Industry

Audited
Income
Y-o-Y

Annualized
Vs Audited
Growth

Current
Quarter
Y-o-Y

Quarter Q-o
-Q

Profit
Growth
(5 Yr
CAGR)

Audited
P/E (2014)

ENVOYTEX

78.3%

9.6%

-10.7%

284.0%

6.6%

9.21x

10.3x

8.4x

1.0x

Textile

8.2%

-13.3%

6.7%

11.4%

13.1%

10.6x

12.7x

12.2x

1.0x

Backward Linkage and Room for

Growth might Add Values
Envoy Textile Ltd. (ETL) is the largest local denim fabrics manufacturing
company in Bangladesh. The core revenue of the company comes from
deemed export through export oriented RMG against back to back L/C.
The factory of ETL is located in Jamirdia, Bhaluka, Mymensingh. ETL
initiated the first denim project in Bangladesh with rope-dyed technology.
ETL is setting up a spinning unit with an investment of approximately
BDT 3 billion having a capacity of 17,500 ton yarns per annum which is
expected to be complete in April, 2016.
Revenue Composition
Revenue from deemed export accounts 70.59% of the total revenue which
was 53.30% in the previous year. Direct export to world wide destinations
constitutes 15.47%. In total ETL exported 31.7 mn yards of fabrics in
2015 and is considered to be the largest denim manufacturer in Bangladesh. The current capacity utilization of 67% inspires further opportunity
for growth for ETL.
Industry facts
At present there are 27 factories producing a total of 360 mn yards of
denim fabrics (6.5% global market share) while countrys total demand is
720 mn ( 13.09% global market share). The global demand for denim
apparels is 5.5 bn yards per annum growing at 3-4% per year. Envoy holds
a 9% market share of the whole. Bangladesh Holds 22.8% share in EU
and 11.3% in USA denim market which suggests a 11.1% growth in last
year. Currently in local market, ETL has a production capacity of 50 mn
yards, Argon (18 mn) & Indian Arvind Denim (30 mn), whereas Bangladesh Import 124 mn yard fabrics from Pakistan.
Investment Thesis
ETL sold 31.7 mn yard fabrics in 2014-15 which had a growth of
19.5% from last year where it was 26.55 mn yard in 2013-14. With
4.43% hike in price realization revenue grew by 24.8% in 2014-15.
The last revealed Q1 financial statement reflects a top line growth of
35.3% (yoy).
With the last hike of Gas price by more than 100% ETLs total Gas
charge increased by more than 120%. Moreover if the recent proposal of another fresh Gas tariff hike takes place, the cost will increase by another 130.1%.
Depreciation charge for the year 2015 increased by 69% from last
year while latest Q1 expressed a rise of 50.3% (YoY). This significant
increase is hurting the profit margin which is attributed to the additions in second unit of production during 2014 and 2015.
The combined effect slashed the gross profit margin (GPM) by 100
basis point in Q1 2015-16 from full year GPM of 21.3% in 2014-15.
If the proposed gas tariff hike takes place this will cut the gross margin by another 50 basis point (yearly).
The recent move by the government to increase the cash incentive to
exports in EU destinations by 2%.
A 2-3% profit margin is expected to increase on a full year basis when
the new spinning unit will go online in June, 2016 as the additional
unit has captive demand for its production.

LTM P/E Annualized

P/E (2015)

P/B

Key Financials (mn BDT)

2011

2012

2013

2014

2015

Revenue

3,345.7

3,758.2

3,983.6

4,391.2

5,479.1

Gross Profit

702.2

790.9

873.7

770.4

1,169.3

EBITDA

461.7

474.1

692.3

537.8

987.0

Operating Profit

461.7

474.1

513.5

348.0

666.6

Net Income

442.3

424.3

435.5

310.9

571.2

Total Asset

5,903.3

6,912.4

8,901.3

10,262.6

11,730.3

Total Debt

1,275.7

1,383.1

1,445.9

3,902.2

4,807.0

Total Equity

3,761.7

3,925.9

5,323.7

5,402.5

5,805.1

Profitability

2011

2012

2013

2014

2015

Gross Profit Margin

20.9%

21.0%

21.9%

17.5%

21.3%

EBIT margin

13.8%

12.6%

12.8%

7.9%

12.1%

ROE

11.7%

11.0%

9.4%

5.8%

10.1%

ROE Decomposition

2011

2012

2013

2014

2015

Net Profit Margin

13.2%

11.2%

10.9%

7.0%

10.4%

Asset Turnover

0.5

0.5

0.5

0.4

0.5

Financial Leverage

1.5

1.6

1.7

1.7

1.9

2011

2012

2013

2014

2015

Sales Growth

N/M

12.3%

6.0%

10.2%

24.7%

Gross Profit Growth

N/M

12.6%

10.4%

-11.8%

51.7%

Operating Profit Growth

N/M

2.6%

8.3%

-32.2%

91.5%

Net Profit Growth

N/M

-4.0%

2.6%

-28.6%

83.7%

Growth

Stock
-1.8%

DSEX
-0.7%

Last
-4.0%
Month
Last
-21.2%
Year

-1.6%

%
Last
Week

3.7%

Velocity 30.6% 33.5%

(6 Months)

Risk

2011

2012

2013

2014

2015

Debt to Capital

0.2

0.2

0.2

0.4

0.4

Interest Coverage

2.8

2.5

3.0

1.5

2.3

2011

2012

2013

2014

2015

P/OCF

N/M

N/M

5.1x

31.1x

20.2x

PEG

N/M

N/M

3.3x

8.1x

1.8x

Price/Sales

N/M

N/M

1.6x

1.5x

1.1x

Dividend Yield

N/M

N/M

3.6%

2.5%

4.0%

EV/EBITDA

N/M

N/M

11.2x

19.5x

11.0x

Valuation Metrics

Valuation Argument
ETL is trading at a LTM P/E multiple of 10.3x and at an EV/EBITDA of
5.6x while its major counterpart Argon Denim is trading at LTM P/E of
8.9x and EV/EBITDA of 6.2x. Two major Denim Fabrics producer in
India Arvind Ltd. (Trading at P/E of 20.4x and EV/EBITDA of 9.7x) &
Nandan Denim (Trading at P/E of 7.1x and EV/EBITDA of 4.7x).

19

Square Pharmaceuticals Limited

Key Comps
Annualized
EPS
12.18

EPS 16
(Q3)
9.48

EPS 16(Q2)

Annualized
Vs Audited
Growth
31.7%

Quarter
Y-o-Y
38.4%

6.8%

16.4%

23.7x

21.3x

21.1x

5.3x

28.3%

32.3%

8.0%

13.8%

27.7x

23.5x

21.6x

3.6x

Close Price

257.1

Market Cap (BDT in bn)

163.5

Outstanding Shares (in mn)

623.59

Company vs
Industry

54%

Company

Audited
Income
Y-o-Y
21.1%

Industry

16.1%

Sponsor holding (%)

Category

6.09

New Export Market, and Growth

from New Production Capacity
Square Pharmaceuticals Limited (SPL) is the flagship company of Square Group. It is
the largest generic drug producer of Bangladesh with 18.8% of market share. Its business also ranges from Active pharmaceutical Ingredients (API), AgroVet Products,
Pesticides, Fabrics and Textile to Hospital. SPL offers more than 738 products in different dosage forms. Total sales turnover of SPL is now more than BDT 26.6 Billion (USD
332.5 mn), growing at 12.0%(CAGR) during last 5 years and 14.6% in FY 2014-15.

Investment Thesis:
Huge Market
According to IMS, Bangladeshs present pharmaceutical market (including institutional
sales) size is BDT 132.0 bn. Local pharmaceutical market size is BDT 110.0 bn, and it is
expected to hit BDT 157 bn by 2018 with a CAGR of 9.3%. Pharmaceutical export
market size was USD 69.1 mn (BDT 5.4 bn) in FY 2013-14 against Indias USD 14.8
bn.
Strong Financial Performance
SPLs 5 years CAGR of revenue and net profit is respectively 12.0% & 16.4%. Its 4
years average ROE & ROA are respectively 20.8% & 16.3%.The companys financial
leverage is lowering year to year, as it uses less debt financing. The Debt to Capital ratio
is 0.03%, which reduced in half according to last year.
Margin Expansion in Q3 of 2015-16 led to higher growth

SPL has an impressive PAT (profit after tax) growth of 44.2% in Q3 2015-16 YoY,
Which is mainly driven by net turnover growth of 19.5% and margin expansion.

EPS 16
(Q1)
3.28

Last
Audited EPS'
EPS 15
Dividend
15
(Q3)
30%C,
10.80
7.61
12.5%S
Quarter Profit Growth
Audited
Q-o-Q (5 Yr CAGR) P/E (2015)

Key Financials (In mn BDT)

Revenue
Gross Profit
EBITDA
Operating Profit
Net Income
Total Asset
Total Debt
Total Equity

EPS 15
(Q2)
5.22

EPS 15
(Q1)
2.76

Year
end
March

LTM P/E Annualized

P/E (2016)

P/B

2012

2013

2014

2015

19,798.1
7,890.3
5,385.1
4,150.9
3,620.1
24,562.2
3,223.4
19,251.5

20,202.0
8,893.1
5,960.2
4,841.6
4,213.8
27,551.7
2,948.8
22,586.2

23,268.4
10,307.7
7,148.9
5,967.7
4,946.2
31,046.1
1,776.2
26,739.6

26,684.6
11,741.7
8,758.1
7,049.6
5,981.6
35,191.2
916.3
31,093.3

Profitability

2012

2013

2014

2015

Gross Profit Margin

EBITDA margin
EBIT margin
ROE

39.9%
27.2%
21.0%
20.6%

44.0%
29.5%
24.0%
20.1%

44.3%
30.7%
25.6%
20.1%

44.0%
32.8%
26.4%
20.7%

ROE Decomposition

2012

2013

2014

2015

Net Profit Margin

Asset Turnover
Financial Leverage

18.3%
0.8x
1.3x

20.9%
0.8x
1.2x

21.3%
0.8x
1.2x

22.4%
0.8x
1.1x

Growth

2012

2013

2014

2015

Sales Growth
Gross Profit Growth
Operating Profit Growth
Net Profit Growth

16.6%
17.9%
18.3%
11.1%

2.0%
12.7%
16.6%
16.4%

15.2%
15.9%
23.3%
17.4%

14.7%
13.9%
18.1%
20.9%

2012

2013

2014

2015

0.1x
8.9x

0.1x
13.6x

0.06x
33.7x

0.03x
44.4x

Valuation Metrics
(year end)

2012

2013

2014

2015

P/CF
PEG
Price/Sales
Dividend Yield
EV/EBITDA

17.2x
1.6x
3.2x
1.1%
12.0x

12.5x
1.0x
3.3x
1.4%
11.3x

20.1x
1.5x
5.5x
1.1%
17.8x

21.2x
1.1x
5.1x
1.2%
15.2x

Value Drivers

TRIPS council approved extension of the transition period for pharmaceutical

products for least developed countries till 2032. The waiver will allow to enjoy
exemptions from patent obligations for pharmaceutical products stipulated in the
TRIPS agreement, which enables Bangladesh to produce these items at significantly reduced costs during the transition period of 17 years.
Top 10 therapeutic classes covers around 46.84% market share with a wavg
growth rate of 14.47%. Calcium (24.49%), Cholesterol and Triglycerides
(21.36%), Anti-Epileptics (21.3%) has the highest growth of highest value segment in 2015. Top 10 prescribed drugs in Bangladesh covers around 8.8% of
total market share, among them 4 drugs are SPLs which covers around 4.1% of
total market share.
Anti-ulcer drugs have the highest market size of BDT 19.23bn ($247.06 mn) with
14.73% market share. Omeprazole dominated the market previously eg, Seclo,
but Esomeprazole (patent expired in 2014 ) eg, Nexum, Maxpro replaced
Omeprazole in recent year, which also registered a growth of 26.64% in 2015.
The patent expiration provide an opportunity to explore the export in the patent
regime market of USA, EU etc.
SPL got US FDA approval on June15, Which is required to export drugs to the
US, the worlds largest drug market. During the year 2014-15, The export saw an
increase of 34.46% comparing previous year. SPL has given a thrust for increasing
the export volume.
The expiration of patent of some Blockbuster Drugs (specially for Arthritis &
cholesterol, eg Humaira, Rosuvastatin Calcium) within 2016 will create a big
opportunity for SPL. Around 6 of the top 20 prescribed drugs will face patent
expiration within next 5 year. (SPL is already producing rosuvastatin calcium in
the brand name of Rosuva & after patent expiration, it will be easy to get raw
materials at a cheap price from different sources.)

Stock

DSEX

Last
Week

-1.2%

-0.8%

Last
Month
Last
Year

-3.8%

-1.6%

10.9%

0.8%

Velocity
(6 Months)

15.66% 33.61%

Risk
Debt to Capital
Interest Coverage

Square Formulations Limited, one of SPLs subsidiary company going to start its
operation with annual capacity of 8000 mn tablets and 2000 mn capsules.

Risks & Challenges

The cost controlling will be eminent if any drug is listed as essential drug by
the authority.

India has its own API Park and as a result, it can offer competitive prices in
global markets compared to Bangladesh. The API Park of Bangladesh has
already been delayed by years.

20

SBL Monthly BD Market Update of March16

April 17th, 2016

Major News:
Stocks Fall for Fifth Consecutive Day
On March 2nd (Wednesday) stocks fell for a consecutive fifth day
in a row and reached a low of three and half months.
Source: http://www.thedailystar.net/business/stocks-fall-3-monthlow-784939
Another ATM Fraud and 1000 ATM Cards Seized at Airport
The security of peoples money came under threat as the news of
credit and debit card fraud became widespread. Few foreigners
along with some bank officials were arrested relating to the recent
City Bank theft of money using counterfeit electronic cards. Moreover, 1000 illegal electronic cards were seized from Shahjalal Intl
Airport.
Source: http://www.thedailystar.net/backpage/another-atm-fraud785377
Source: http://www.thedailystar.net/frontpage/1000-illegal-atmcards-seized-dhaka-airport-785425
Budget Plan has Begun
The budgetary plan for the fiscal year 16-17 has already begun.
The outlay of the plan is to get bigger with amount estimated
around Tk 340,000 crore. This amount is 15% more than last years
budget.
The GDP growth target is set at 7.2 and inflation target is around 6
percent.
Budget deficit target at 5%.
Source: http://www.thedailystar.net/business/eyes-next-budgetoutlay-get-bigger-785467
Remittance Fall
Remittance continues to slide with February's inflow of $1.13 billion -- the lowest in four months.
February's receipts were 4.2 percent lower year-on-year and 1.73
percent month-on-month, according to central bank statistics. In
January, remittance stood at $1.15 billion, down 7.23 percent from
a year earlier.
Source: http://www.thedailystar.net/business/remittance-falls-fourmonth-low-786124
Mega Projects to get Separate Budgets: Muhith
The government plans to formulate a separate budget for transformational mega projects in the next fiscal year, Finance Minister
AMA Muhith said yesterday.
Source: http://www.thedailystar.net/business/mega-projects-getseparate-budget-muhith-786121

Exports on the rise

Exports brought home $2.85 billion in February, up 13.6 percent
year-on-year.
The amount is a decline of 10.66 percent from January, when
$3.19 billion was received in export earnings, according to data
from the Export Promotion Bureau.
Source: http://www.thedailystar.net/business/exports-the-rise787369

BAPI Members to get Active Pharmaceutical Ingredients

(API) Industrial park.
The park's 42 plots will only be allocated to BAPI members and
the association has already received applications from 32 companies for a total 57 plots, he said.
All formalities, including plot allotments, will most likely be completed by June this year, said SM Shafiuzzaman, secretary general
of the BAPI.
Source: http://www.thedailystar.net/business/drugmakers-getboost-787351
$100m Stolen from Bangladesh Bank
Bangladesh Bank has identified the people involved in the hacking
of around $100 million (Tk 780 crore) from its foreign currency
account with the Federal Reserve Bank of New York, claim BB
officials.
Almost the entire amount was transferred online to the Philippines
banking system and a small portion of it to Sri Lanka by suspected
Chinese hackers on February 5, they said.
Source: http://www.thedailystar.net/frontpage/hackers-steal-100mbb-account-788026

Taka to Weaken Against Dollar

The taka is likely to weaken against the dollar this year, impacted
by a significant slowdown in remittance growth due to low oil
prices and poor economic growth prospects in the Middle East,
according to an analysis.
The lacklustre investment outlook in Bangladesh will also exert
downside pressure on the taka, said the London-based BMI Research, a company of Fitch Group.
Source: http://www.thedailystar.net/business/taka-weaken-againstdollar-year-report-787903
Inflation Declines to 5.62 Percent
Inflation fell 45 basis points to a 41-month low of 5.62 percent in
February from the previous month, propelled by a decline in food
and non-food inflation.
Food inflation stood at 3.77 percent in February, down from 4.33
percent in January, according to data from Bangladesh Bureau of
Statistics.
Non-food inflation decreased 28 basis points to 8.46 percent in
February from January, although it increased in the last several
months.
Source: http://www.thedailystar.net/business/inflation-falls-41month-low-788518

Retrieval of BB Funds May Take Several Years

It may take several years for Bangladesh Bank to recover the fund
stolen from its account with the Federal Reserve Bank of New
York by hackers last month and laundered to the Philippines, a
central bank official said yesterday.
The recovery process is complex and lengthy. It may take 5 to 13
years to get back the money that was hacked from our account,
said the BB official, citing examples of similar cases.
Source: http://www.thedailystar.net/business/long-battle-ahead-bb
-retrieve-stolen-funds-788512
21

SBL Monthly BD Market Update of March16

April 17th, 2016

Stock Market Lacks Vibrancey: Muhith
The finance minister stated that while inaugurating the mobile app
for DSE.
Source: http://www.thedailystar.net/business/stockmarket-lacksvibrancy-says-muhith-788905
Business Climates Must be Improved: Standard Chartered
Bank
Bangladesh will need to significantly increase investments and
improve business climate to attract more private equity and
achieve a sustainable growth rate beyond 7 percent by fiscal 2017,
a team of Standard Chartered Bank Global Research said.
Source: http://www.thedailystar.net/business/bangladesh-mustimprove-business-climate-more-growth-stanchart-788896

BB Kept Hacking Episode Under Wraps

Bangladesh Bank has come under criticism from certain quarters
for hiding the information of the hacking of its systems by cyber
thieves, even from the finance minister.
Finance Minister AMA Muhith came to know about the embezzlement of $101 million of the central bank's money deposited with
the New York Federal Reserve Bank in the first week of March -about a month after the cyber attack took place.
Source: http://www.thedailystar.net/business/bb-kept-the-hackingepisode-under-wraps-789640
Fallout Worries Exporters
Airlines carrying cargo between Bangladesh and the UK on indirect routes are being asked to ensure it is re-screened before its
final leg into the UK. As part of a set of interim measures, cargo
will not be allowed on direct flights from Dhaka to the UK until
further notice.
Source: http://www.thedailystar.net/frontpage/fallout-worriesexporters-789967

Malaysia Suspends Hiring 1.5 Million Bangladesh Workers

Following a series of controversies, Malaysian deputy prime minister yesterday said the initial plan to bring in 1.5 million Bangladeshi workers has been scrapped officially.
Drawing huge criticisms from Malaysian trade unions, NGOs and
civil society, Kuala Lumpur had signed a manpower deal with
Dhaka on February 18 amid economic downturn and political conflicts in the Southeast Asian country and fear of corruption in the
recruitment process.
Source: http://www.thedailystar.net/frontpage/not-worker-be-hired
-kl-790372
Website Launched for Trade Investors
With just the click of a button, anyone can now gather information
on the government's internal and overseas trade and investment
policies as the commerce ministry yesterday launched the Bangladesh trade portal.
Source: http://www.thedailystar.net/business/website-launchedinvestors-790753

Bangladesh Bank Governor Quits Over Cyber Heist and Fazle

Kabir Becomes New Governor
Setting a rare example, Atiur Rahman stepped down as Bangladesh Bank governor yesterday amid strong criticism over his handling of the $101 million cyber theft.
Following huge pressure from the government, Atiur tendered his
resignation to Prime Minister Sheikh Hasina in the morning.
Source: http://www.thedailystar.net/frontpage/bb-governor-quitsover-cyber-heist-791818
Source: http://www.thedailystar.net/frontpage/fazle-kabir-next-bbgovernor-791776

Plastic Money Not So Safe

About 10 million bank clients are potentially easy victims of
fraudulent charges to their debit and credit accounts because they
are using the vulnerable magnetic stripe cards. Customers can lose
their personal data and money because their banks have not bothered to adopt chip-embedded cards despite several warnings from
the Bangladesh Bank.
Source: http://www.thedailystar.net/frontpage/plastic-money-cards
-unsafe-1043614

Banking Outlook Bleak

State-owned commercial banks continue to be plagued by poor
capitalisation, weak asset quality and substandard management
quality despite several attempts by the government to reform the
sector, according to a recent analysis. They are also burdened by
obligatory lending towards priority sectors and other state-owned
enterprises as well as corruption and political patronage, said BMI
Research, a London-based research firm.
Source: http://www.thedailystar.net/business/banking-outlookbleak-1196629
State Banks Miss Out on WBs low-cost Funds
State banks plagued with bad loans are not eligible to disburse the
World Bank's low-cost foreign currency long-term funds among
manufacturers.
The loan will cost a bank 3.25-3.5 percent, which, in turn, will
charge its clients a maximum of 6.5 percent interest rate. The tenure of the loans will be at least for three years and the highest 10
years.
Source: http://www.thedailystar.net/business/state-banks-miss-outwbs-low-cost-funds-1196626
World Bank to help BB Recover Stolen Money
The World Bank has proposed to help the Bangladesh Bank recover the stolen money and enhance cyber security, according to a
WB letter sent to the central bank yesterday.
If needed, the multilateral lender said, it is ready to extend support
to the BB in resolving any issues with the US Federal Reserve.
Source: http://www.thedailystar.net/business/world-bank-help-bbrecover-stolen-money-1197160

22

SBL Monthly BD Market Update of March16

April 17th, 2016

Economists Requests Government Not to Cut Interest Rates
The government should keep interest rates on savings instruments
unchanged to safeguard the future of middle-income people, economists said at a pre-budget discussion with Finance Minister
AMA Muhith.
A leading economist also suggested privatisation of the ailing state
-owned banks in phases, according to an official who was present
at the meeting convened by Muhith at state guesthouse Padma on
Monday night.
Unlike past years, reporters had no access to the pre-budget discussion.
Source: http://www.thedailystar.net/business/dont-cut-interestrates-savings-tools-economists-1198276

Tax Receipts Rise as Export, Import Get a Boost

Tax collection rose 14 percent year-on-year to Tk 11,387 crore in
February, on the back of increased exports and imports in recent
months, according to provisional data of the National Board of
Revenue.
Overall, the tax authority collected Tk 91,355 crore in JulyFebruary this fiscal year, registering 14.42 percent growth over the
same period a year ago.
However, the amount fell Tk 12,810 crore short of the target at Tk
104,165.66 crore for the eight-month period.
Source: http://www.thedailystar.net/business/tax-receipts-riseexport-import-get-boost-1198651

Economists Urge to Cut Fuel Price in Order to Benefit the

Private Sector
Fuel prices fell drastically in the international market, but Bangladesh's private sector is not getting its benefit, economist Prof Wahiduddin Mahmud said yesterday.
The fuel price drop has saved the government around Tk 25,000
crore and the amount might be spent on paying the additional
salaries and allowances of the government employees, he said.
He spoke at a pre-budget discussion at the office of the National
Board of Revenue in the capital.
India channelled one third of the money saved from global fuel
price cuts to the private sector, he said.
The prices of garmentBangla-desh's main export itemdid not
fall in international markets, but the prices of thread and fuel have
come down, Mahmud said.
Source: http://www.thedailystar.net/business/private-sectorshould-benefit-global-fuel-price-cuts-economist-1200577

BoP Surplus Widens by 58 Percent

The officials said the customers made less deferred payment
against imports, as a result of which the negative trade credit
dropped this year.
Another reason for the increase in surplus is that the net foreign
direct investment increased significantly.
During the July-January period, FDI swelled 30.6 percent to $1.23
billion.
As the overall balance increased, so did the foreign currency reserves.
Reserves crossed the $28 billion-mark last year, but it dropped
slightly this month. On March 15, it stood at $27.84 billion,
enough to honour 7.84 months' import bills.
Source: http://www.thedailystar.net/business/bop-surplus-widens58pc-1200259

23

Disclaimer
This document (the Report) is published by Sheltech Brokerage Limited (SBL) for information only of its clients. All information and analysis in this Report have been compiled from and analyzed on the basis of SBL's own research of publicly available documentation and information. SBL has prepared the
Report solely for informational purposes and consistent with Rules and regulations of SEC. The information provided in the Report is not intended to, and
does not encompass all the factors to be considered in a best execution analysis and related order routing determinations. SBL does not represent, warrant,
or guarantee that the Report is accurate. SBL disclaims liability for any direct, indirect, punitive, special, consequential, or incidental damages related to the
Reports or the use of the Report. The information and analysis provided in the Report may be impacted by market data system outages or errors, both internal and external, and affected by frequent movement of market and events. Certain assumptions have been made in preparing the Report, and changes to the
assumptions may have a material impact on results. The Report does not endorse or recommend any particular security or market participant. SBL, its analysts and officers confirm that they have not received and will not receive any direct or indirect compensation in exchange for expressing any specific recommendation, opinion or views in its Report. The information and data provided herein is the exclusive property of SBL and cannot be redistributed in any
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Contact Us
Research Team
Moin Uddin
Chief Executive Officer
Email: moin@sheltechbrokerage.com
Phone: +8801730320894

N.M. Al-Hossain

Md. Aslam Hossain

Head of Research & Investment

Email: hossain@sheltechbrokerage.com
Phone: +8801777764942

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Email: aslam@sheltechbrokerage.com
Phone: +8801777764949

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already joined the ranks of the top brokers of the industry. The company has a heavy focus on high net worth and institutional
client servicing with its fundamental and quantitative research offerings.

24