LETTER OF TRANSMITTAL
21st December, 2010
Tashfeen Hussain
Faculty School of Business North South University Subject: INDUSTRY AND COMPANY ANALYSIS OF ACI LIMITED AND RECOMMENDATION. Dear Sir, Here is the report regarding the industry and company analysis of ACI Limited and finally the recommendation that to invest in ACI Limited will be whether a good decision or not that you asked us to prepare, as a partial fulfillment of the course, FIN435. We have prepared this report with pleasure and enthusiasm since this has augmented our knowledge regarding the topic. We have provided you with as much information as we were able to gather within the short time span. We have tried our level best to follow your guidelines in every aspects of preparing this report. We sincerely hope that our analysis of the report will help you. We truly appreciate this assignment. It was a great pleasure for working on this report. And should you need any assistance in interpreting our report, we will be glad to furnish you.
Sincerely,
___________________ M Talhatul Islam (072388030) ___________________ ___________________
1.0 Introduction
1.1 Origin of the study
This report has been done as a requirement of Investment Theory course. Report is authorized by honorable course instructor, Mr. Tashfeen Hussain to whom the report is submitted. As part of the course, the report is conducted by M Talhatul Islam,
1.2 Purpose of the study
The purpose of the study is to analyze the industry and company analysis of ACI Limited and finally the recommendation that to invest in ACI Limited will be whether a good decision or not. For achieving this objective, we first analyze the data collected through the use of many news paper, many financial books, journal and internet.
1.3 Scope and Limitations of the study
In creating the report we have faced various obstacles. Such as, time constraints, pressure of the semester and limited knowledge and experience regarding the topic of this report. We specially faced difficulty in gathering all essential data for the project. We couldnt manage industry ratios which were very important for the industry analysis part of the report, that is why we gathered all ratio information of five companies under pharmaceutical industry and then took an average of these and assume that the average is pharmaceutical industry average. In terms of company analysis part we gathered data till November 2010, because financial statement of all companies for 2010 has not been
published so far. We hope that our honorable faculty will consider these constraints and bilge there by.
Company Overview
ACI was established as the subsidiary of Imperial Chemical Industries (ICI) in the then East Pakistan in 1968. After independence the company has been incorporated in Bangladesh on the 24th of January 1973 as ICI Bangladesh Manufacturers Limited and also as Public Limited Company. This Company also obtained listing with Dhaka Stock Exchange on 28 December, 1976 and its first trading of shares took place on 9 March, 1994. Later on 5 May, 1992, ICI plc divested 70% of its shareholding to local management. Subsequently the company was registered in the name of Advanced Chemical Industries Limited. Listing with Chittagong Stock Exchange was made on 22 October 1995. Advanced Chemical Industries (ACI) Limited is one of the leading conglomerates in Bangladesh, with a multinational heritage. The company has diversified into three major businesses. Strategic Business Units: Pharmaceuticals Consumer Brands & Commodity Products Agribusinesses: Crop Care Public Health Livestock & Fisheries Fertilizer Cropex Seeds
ACI has the following subsidiaries:
ACI Formulations Ltd. Apex Leathercrafts Limited ACI Salt Limited ACI Pure Flour Limited ACI Foods Limited Premiaflex Plastics Limited Creative Communication Limited ACI Motors Limited ACI Logistics Limited
Joint Ventures:
ACI Godrej Agrovet Private Limited Tetley ACI (Bangladesh) Limited Asian Consumer Care (Pvt) Limited
Financials (Year Ending December 2009)
Authorized Capital Paid Up Capital Sales Number of Employees Taka 500 Million Taka 194 Million Taka 8094.71 Million 3552
Mission; Vision & Values
ACIs Mission: ACIs mission is to enrich the quality of life of people through
responsible application of knowledge, skills and technology. ACI is committed to the pursuit of excellence through world-class products, innovative processes and empowered employees to provide the highest level of satisfaction to its customers.
ACIs Vision:
To realize the mission ACI will: Endeavor to attain a position of leadership in each category of its businesses. Attain a high level of productivity in all its operations through effective and efficient use of resources, adoption of appropriate technology and alignment with our core competencies. Develop its employees by encouraging empowerment and rewarding innovation. Promote an environment for learning and personal growth of its employees. Provide products and services of high and consistent quality, ensuring value for money to its customers. Encourage and assist in the qualitative improvement of the services of its suppliers and distributors. Establish harmonious relationship with the community and promote greater environmental responsibility within its sphere of influence.
ACIs Values:
Quality Customer Focus Fairness Transparency Continuous Improvement Innovation
Industry analysis
The comparison between two firms at the same point in the same time is called cross sectional analyze. Cross sectional analysis provides companies the opportunity sees how well theyre performing in relation to their competitors. As we have done our project on ACI Limited company, which lies in pharmaceuticals and chemical industry. There are twenty-three companies in the pharmaceuticals and chemical industry, which are traded both in DSE and CSE. Out of those twenty-three companies here we gathered information of five companies and took an average ratio of those five companies as industry ratio for year 2009. Then we did a cross sectional ratio analysis between ACI limited and industry average of those five companies. Given below the preface of those five companies.
Companies ACI Limited Beximco Pharma Square Pharma Renata
Share category A A A A
listing year 1976 1986 1995 1979
Market lot 50 50 01 05
Liquidity ratios:
The liquidity of a firm is measured by its ability to satisfy its short-term obligations as they come due. Liquidity refers to the solvency of the firms overall financial position-
the ease with which it can pay its bills. In this portion we analyze how solvent the companies are in paying their obligations.
Liquidity Ratios Current Ratio Quick Ratio
ACI Ltd
Industry average 1.28 2.26 0.6 0.58
When we compare the ACI Ltd with industry average of liquidity ratios we see that both of them have good liquidity ratios, which tells us that they are solvent in fulfilling their short-term obligations. Although in terms of current ratio industry average is much better than ACI, but ACI is again slightly better than the industry average in terms of quick ratio.
Debt Ratios:
Debt ratios indicate the debt condition of a company that how it can bear its debts. The more a firm has, the greater its risk of being unable to meet its contractual debt payments and becoming bankrupts. Here we analyze the degree of indebtedness of the companies.
Debt Ratios Debt/equity ratio Interest Coverage Ratio
ACI Ltd
Industry average 1.48 0.63 3.63 7.56
In terms of debt/equity ratio of ACI is not in the better position than industry average that means ACIs long-term loan of stock holders equity is higher than the industry average. Also in terms of interest coverage ratio ACI is 3.63 (7.75-3.63) lower than industry average.
Activity Ratios:
Activity ratios measure the speed with which various accounts are converted into sales or cash- inflows or outflows. Total assets turnover ratio which indicates the efficiency with which the firm uses its assets to generate sales and inventory turnover ratio which
indicates the activity or liquidity of a firms inventory are include in activity ratios. Some of other ratios like average collection period average payments period etc. also include in activity ratios.
Activity Ratios Inventory Turnover FA Turnover Ratio
ACI Ltd
Industry average 3.5 4.62 6.5 2.03
Industry average is clearly ahead in terms of the amount of times its inventory is sold over per year. But in terms of FA turnover ACI is in a better position than the industry.
Profitability Ratios:
ACI is 0.03 (0.16-0.13) behind than its industry average in terms of net profit margin. ACI has done better job in utilizing their assets and as far as utilizing equity concern ACI has also done better job than its industry average. But in terms of EPS (earning per share) ACI is very far from its industry average. In terms of EPS the between ACI and its industry is 20.23 (71.08-50.85) which is very high. Profitability Ratios Net Profit Margin Return on TA Return on Equity Earnings per Share ACI Ltd 0.13 0.14 0.32 50.85 Industry average 0.16 0.12 0.118 71.08
Market Ratios:
Here we evaluate the market value of the companies, because market ratios relate the firms market value, as how well the investors in the marketplace feel the firm is doing in terms of risk and return.
Market Ratios Dividend per Share
ACI Ltd 10.5
Industry average 19.15
Dividend pay-out Ratio Dividend yield Ratio P/E Ratio
0.20 0.023 8.8
0.4 0.025 18.01
In terms of the confidence of the investors ACI is in a better position, investors are willing to pay more money to get one taka. But ACI provides lower dividend per share than its industry average. P/E ratio of ACI is also lower than its industry average, which indicates that there is a lesser impact of current market price in its EPS than its industry average. So, after comparing ACIs all ratios with its industry average ratios, we can say that ACI is quit responsive towards its industrys average. But in some ratios like P/E ratio, EPS, interest coverage ratio and DPS ACI is far behind from its industry average.
Given below the overview of 6 years of ACI Limited.(Data of 2009 presented later). Financial of 2010 is not published yet. Particulars Taka in million Authorized capital Issued & paid capital; Current assets Tangible fixed assets (gross) Shareowners' equity Turnover (net) Gross profit Profit before tax Profit after tax Dividend Current ratio (times) Quick ratio (times) 500 162 1,396 668 668 2,240 639 93 85 65 1.2 0.5 500 162 1,342 1,006 861 2,558 740 141 90 69 1.2 0.5 500 162 1,537 1,087 906 3,089 957 169 112 73 1 0.6 500 162 1,755 1,131 974 3,516 1,176 233 154 97 1 0.6 500 162 3,121 1,541 1,255 4,917 1,667 426 308 137 1 0.6 500 162 4,987 1,810 2,205 7,365 2,278 1,184 1,076 194 1.13 0.66 2003 2004 2005 2006 2007 2008
Return on equity (%) Inventory turnover (times) Debtors turnover (times) Fixed assets turnover (times) Net asset per share (Taka) Market price per share (Taka) Earnings per share (Taka) Dividend per share (Taka) Dividend rate ( %) Dividend payout ratio (%) Price earnings ratio (times) Dividend yield (%) Number of employees
12.7 2.3 16 7.3 41.3 66.7 5.25 4 40 76.2 12.7 6 1,883
10.4 2.4 12 3.8 53.3 94.4 5.54 4.25 42.5 76.7 17 4.5 1,931
12.4 3 11 4.2 56 69.6 6.94 4.5 45 64.8 10 6.5 2,000
15.8 3.3 10 5.1 60.2 70.2 9.51 6 60 63.1 7.4 8.5 2,476
24.6 3.6 8 5.7 77.7 181.7 19.03 8.5 85 44.7 9.5 4.7 3,050
48.8 3.2 6.68 6.56 136.34 521.3 66.52 12 120 18.9 7.8 2.3 3,339
From this comparative statistic we can see that there is a upward trend in ACIs gross profit margin, profit before and after tax, which is very good sign for a company within its industry. There is a constant current and quick ratio from 2004 to 2008 from this any investor can easily identify its condition under those ratios, but ACIs industry average of those ratios has not remain constant on those years. There is an upward consistency of return on equity and inventory turnover is also notable here, which increases the popularity of ACI in pharmaceutical industry. ACI is also keeping upward trend in fixed asset turn over, net asset per share and market price per share, which is also a very good sign for ACI Limited which increases the tendency of investors to invest in ACI. There is also a rising trend of its EPS a remarkable regard, but it is somewhat far from the industry average ratio. The trend average dividend giving in per share is also increasing here. In
terms of price earnings ratio, there is a fluctuation is notable, which indicates that there is a lesser impact of current market price in its EPS.
Company Analysis and Stock valuation
ACI limited is one of the market leaders of Bangladeshs pharmaceuticals sector. The company has grown substantially over the year. In evaluation of the companys growth, we have assessed the strengths, weaknesses, opportunities and threats of the company as well as the competitive advantage and favorable attributes of it.
SWOT analysis
Strengths ACI has been able maintain its growth above the market growth as we will see the proof of this in the stock valuation section. Market category of ACI is A as per the DSE categorization. In Bangladesh, ACI introduced the concept of quality management system by being the first company to achieve ISO 9001 certification that reflects its commitment to quality in every aspect of business. EPS, DPS, Market Price per Share has increased in the year 2009. Increase in profit after tax and debtor turnover makes company less volatile in terms of default risk.
Weaknesses Dividend yield has decreased substantially from 2007 to 2009 going down from 4.7% to 2.3%.
Substantial decrease in dividend payout ratio makes the company less attractive.
Opportunities High potentiality in export sector. Bargaining power of suppliers and buyers is low. Growing number of pharmacists in country will bring more professional knowledge, thoughts and innovative ideas.
Threats The industry is highly competitive. Export may be reduced as the world economy is going through a recession. Government may impose more regulations to tackle the global economic pressure.
Firms Competitive Strategies
Endeavor to attain a position of leadership in each category of its businesses. Attain a high level of productivity in all its operations through effective and efficient use of resources, adoption of appropriate technology and alignment with our core competencies. Develop its employees by encouraging empowerment and rewarding innovation. Promote an environment for learning and personal growth of its employees. Provide products and services of high and consistent quality, ensuring value for money to its customers. Encourage and assist in the qualitative improvement of the services of its suppliers and distributors. Establish harmonious relationship with the community and promote greater environmental responsibility within its sphere of influence.
Favorable Attributes of the company
The firms product certainly is in a great shape as it is in the pharmaceutical sector and the demand for this sort of product is ever increasing. The firms industry is highly competitive which help the firm push further and try to gain competitive advantage. Market of this sector is relative stable although innovation is the key loss of technological advantage is less likely. The management or directors of the firm owns about 36.81% of total shares according to the financial statement of 2007 which implies that insiders are inclined toward investing in the company.
Stock Valuation
In order to perform the stock valuation we have monitored the stock of ACI Limited from 31st January, 2001 to 30th November, 2010 and evaluated the percentage change in price of the company. On 31st January, 2001 the closing price of ACI Limited was BDT.55 whereas closing price of the last day of our stock track 30th November, 2010 the closing price was BDT.382.
Holding Period Return (2001-2010) = Ending Value/Beginning Value = BDT.382/BDT.55 = 6.94 Annual Holding Period Return (2001-2010) = 1.21 Holding Period Yield = HPR 1 = 6.94 1 =5.94
Here, we can see the stock was able to perform significantly well over the ten years periods. The stock generated a positive return over the years and the HPR of the company is substantially higher than 1.0 which indicates a phenomenal performance. The Annualized HPR is though a better indicator of return generator. The stock has generated 121% return per year on its stock price which is very good figure. HPY of the stock over the ten years period was 594% and 21% per year. The stocks yield on its stock was very good over the three year period and an investor can realistically hope that the companys share price will continue to yield at approximately the same rate. Over the period of three years the stock had a mean return of .02 with a standard deviation of .1098. Low standard deviation indicates that the firms percentage change in price has not fluctuated a great deal further evidence of this can be found when we evaluate the trimmed mean which is about .0148. This implies the low degree of uncertainty of the firms change in price. Variable Dse Gen. Aci Pric Variable Dse Gen. Aci Pric N Mean Median TrMean StDev SE Mean 118 0.02485 0.01561 0.02243 0.07260 0.00668 118 0.0221 0.0014 0.0148 0.1098 0.0101 Minimum Maximum Q1 -0.19871 0.30220 -0.01447 -0.3271 0.6581 -0.0260 Q3 0.05295 0.0461
We also have evaluated the DSE general index return of which the percentage price per day was found to be 0.024 with a standard deviation of .072. If we compare the mean returns of ACI with the market index, we can evaluate that although ACI stock and market return are in same track with very little fluctuation. ACI highest price change record was .6581 which is more than in contrast to the market maximum change which is
.302. Minimum figure of ACI stock price change is also higher than the market. Further illustration is given below which will clarify the variation of price change of ACI limited.
Histogram of Aci Price change
70 60 50
Frequency
40 30 20 10 0 -0.3 -0.2 -0.1 0.0 0.1 0.2 0.3 0.4 0.5 0.6 0.7
Aci Price
Histogram of the ACI price change is skewed to the right which indicates that some extreme values have affected the companys mean return. The price change has a tendency toward zero and mostly price change was in this portion.
Boxplot of Aci Price
0.6
0.4
Aci Price
0.2
0.0
-0.2
-0.4
The mean rate of change in price was disturbed through some outliers in the data which is shown in Box plot. These outliers basically made the firms share not much uncertain than the market if we evaluate the histogram of the DSE General Index we will find out that it was same stable in terms of percentage change in returns which is illustrated by its symmetric distribution.
Histogram of Dse Gen. Price change
30
Frequency
20
10
0 -0.2 -0.1 0.0 0.1 0.2 0.3 0.4
Dse Gen.
Boxplot of Dse Gen. Price
0.3
0.2
Dse Gen.
0.1
0.0
-0.1
-0.2
Boxplot of the DSE-Gen also implies that the market is somewhat same as the firms stock as the Boxplot is disturbed by only one outlier and centered toward zero which is same as Aci.
Evaluating the data of percentage change in DSE Index and percentage change in price of ACI Limited for ten years we obtained a correlation of 0.312 which implies the two variables have moderate positive correlation. This measurement shows that DSE Index and ACI Limiteds price changes in the same direction moderately, though.
0.3
0.2
Dse Gen.
0.1
0.0
-0.1
-0.2 -0.4 -0.2 0.0 0.2 0.4 0.6
Aci Price
The scatter plot of ACI price change against DSE general-index shows the movement pattern of the data. Plot also demonstrates weak positive correlation.
0.6
0.4
Aci Price
0.2
0.0
-0.2
-0.4 Index 20 40 60 80 100
0.3
0.2
Dse Gen.
0.1
0.0
-0.1
-0.2 Index 20 40 60 80 100
From the individual scatter plot of the two variables we can evaluate that even though the variable has moved in the same direction of each other, one moved a little further ahead than the other. Next we regressed DSE General Indexs price change against ACI Limiteds price change over the three year period and obtained the following equation:
% ACI PRICE = i + i (% DSE General Index) The equation we obtained: Aci Price = 0.0104 + 0.472 Dse Gen.
From this regression line, we can obtain the market risk or the systematic risk of the company which is denoted by . The systematic risk of the ACI Limited is measured to be 0.472. R-square that we obtained of the regression line is 9.2% which indicates only 9.2% of the stocks price change can be explained by DSE Index.
Now we can use the Security Market Line to obtain the required rate of return of the stock. We have used Bangladesh Bank T-Bill rate as the risk-free rate.
Tenure & Name of the Security 3-month T-Bill 6-month T-Bill 1-year T-Bill Avg. Return 7.93% 8.16% 8.6% 8.23%
Average yield
Depending on the investment horizon of an investor the Required Rate of Return will vary. Given are the RRR of the differing range of investment horizon: Security Market Model: ki = RFR+ i(Rm RFR) Where, ki= required rate of return RFR= Risk-free rate of return i= Sytematic risk Rm= Market rate of return [9.83%]
For 3-month investment horizon, ki= 7.93% + 0.472 (9.83%- 7.93%) =8.82%. For 6-month investment horizon, ki= 8.94% For 1-year investment horizon, ki = 9.18%.
For average investment horizon, ki= 8.98%
Here from the calculation of required rate of return we can see that as the investment horizon increases the RRR increases.
Illustration: SML(rf=7.93%)
Illustration: SML (rf=8.16%)
Illustration: SML ( rf= 8.6%)
Illustration: SML rf =8.23%)
Above illustrations plots ACI Limited in the Security market line, given different rates of risk-free rate in accordance to the investment horizon of investors. Graphs showing that the stock price of ACI Limited is been overvalued. Now let evaluate if the firm has done better than the market or not through the use of SML.
We know, i > rf(1- i), the stocks performance is better than expected i< rf(1- i), the stocks performance is worse than expected i= rf(1- i), the stocks performance is even with the expected performance during the period of regression. Here, For RF 7.93%, .0104< 4.18 For RF 8.16%, .0104< 4.30 For RF 8.6%, .0104< 4.5 For RF 8.23%, .0104< 4.34
Based on this calculation, we can conclude that the firm was not been able to perform as better as expected in the ten years period.
Next to obtain the proper value of the stock we need to measure the growth of the company.
Growth rate = Retention Rate * Return on Equity Retention rate = 1- (dividend declared/operating income after tax)
Year 2009 2008 2007 2006
Retention rate 0.794 0.811 0.551 0.369
Return on Equity 32.57 48.80 24.6 15.8
RR*ROE 25.86 39.57 13.55 5.83
2005 2004 2003 2002 2001 Total
0.352 0.232 0.238 0.44 0.34
12.4 10.4 12.7 18.49 16.76
4.57 2.41 3.02 8.13 5.69 108.63
Average Retention Rate = 0.458556 Average Return on Equity = 21.39111% Growth = 108.63/9 = 12.07%
The growth rate of the firm is been calculated to be about 12.07% and the required rate of return is also calculated. Therefore, now we can calculate the fair market value of the companys stock by using the Dividend Discount model:
The Value of Stock, V = D1 / (k-g) Where, D1= D0 (1 + g), D0 = Dividend per share in the current period k = required rate of return g = growth For 3-month investment horizon investor, V = 10.5(1+0.03)/ (.0882-.03) = BDT.186.46. For 6-month investment horizon investor, V= BDT.383.79.
*Growth rate diverted into 3 month horizon. (.03) We have done calculating the fair market value of the share. Stocks price on 30 th November, 2009 was BDT.382.10 and as we calculated the fair value has ranged from
BDT.186.46 to BDT.383.70 given different investors time preference. We can see that the stocks price has been overpriced in the market.
Demonstrated below are some key points that we can trace from our evaluation of the company: The firm has a yielded 21% on its price in the period of ten years. Firms mean rate of percentage change in price was same as markets, 0.02 and 0.02, respectively. Firms uncertainty of return was significantly higher than the market, .07 and .10, respectively which made the firm riskier than the market. Firm has weak positive linear relationship with market demonstrated by its low correlation of 0.312. ACI Limited has a systematic risk of 0.472. Expected risk premium of the firm is about.896, .788 and .580 respectively for 3month, 6-month, 1-year and average time horizon holder. On the contrary, market risk premium is only about 1.9%, 1.67% and 1.23% respectively. The firms stock price is overvalued in the market which makes the stock very volatile and much less attractive. Lower Coefficient of Determination indicates that other economic, industrial and structural influences are affecting the price of the stock. Before taking decision about the investment, we should evaluate some other additional influences which might have stake in our decision. Economic influence may have cut the export of ACI Limited. Global economic recession will cut back ACIs export market. Industry influence might help the company from not being totally effected by the economic recession because pharmaceutical industry is much less vulnerable to economic condition. Market efficiency might be another major variable in ACI Limited share price as Dhaka Stock Exchange is questioned several times in term of its efficiency.
Implication of Buy and Hold Strategy
investment Share price 2001 Number of share Share price 2010 Value of investment 100000 55 1818.18
382.1 694727 ` Total 2001 3.75 2002 3.75 2003
4
2004
4.25
2005
4.5
2006
6
2007
8.5
2008
12
2009
10.5
Dividend Value of dividend
6818.2 6818.18
7272.7 7727.27 8181.8182
10909.1 15454.5 21818.2 19090.9 104090.9
Value of investment in 2010 Bdt.694727 Value of investment in 2010 after adding up the dividends
Bdt.798818
Recommendations
After evaluating the firms performance we may conclude that investor no matter what the investment horizon is they should not invest in the stock of ACI limited because the stock is overvalued by the market and given all market are efficient in the long run, it is expected that the price of the stock will eventually go down. Short selling can be a good alternative in this situation but in Bangladesh, the share market authority doesnt allow short selling. Investors who already own the share of ACI Limited is recommended to sell their share-off unless they are very low in risk aversion because the historical data shows the stock has yielded more than market yield with high degree of uncertainty.
As regards to the macroeconomic situation prevailing in Bangladesh and the global economy, ACI may be reliant on buoyant credit growth to Bangladeshi investors and consumers as part of Bangladesh Banks expansionary monetary policy. The Bangladesh government also encourages private investment through much of their fiscal policies with targeted subsidies, tax benefits and other forms of government aid. ACI is in a position to take advantage of these facilities further to expand industrial investment.
In terms of the industry evaluation of our research work, we have seen that ACI is performing relatively well in the Industry. The firm has been able to generate good profits in past few years. But one concerning factor for the investor is the Earning per Share which has been significantly lower than the industry. Other than that investment in ACI Limited can be a good option as the pharmaceuticals industry is expected to grow in the future and the market for this industry is very sustainable.
From our evaluation we may conclude that although ACI is in a attractive industry and macroeconomic factors of the country showing good trend, the stock has been overvalued by the market. Therefore, it wont be a very good decision to invest in the stock of ACI until the price adjusts to its just level.
