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Business Description
BSRM LTD. is a leading steel manufacturing company in Bangladesh. It mainly
supplies to the construction industry and it is also the exclusive supplier of steel for
the construction of major national infrastructure projects.
Industry Analysis
Industry Overview
Steel is a basic raw material for infrastructural development and multiple other
uses. The demand for steel will inevitably grow in line with the countrys economic
and infrastructural development. Major buyers of mild steel and re-rolled products
include individuals, government and institutional buyers (developers). The
governments infrastructure building activities is an important source of demand.
The demand of MS rod in Bangladesh has been increasing day by day and expected
to increase at the rate by 8% due to the economic and infrastructural development
of the country, expansion of urbanization and booming construction of shopping
mall, market, real estate and other construction for industrial purposes.
Construction of bridge as well as public awareness and preference is increasing for
quality building materials to ensuring safety and better building construction; more
particularly, in recent time to save from earthquake. Due to growing consciousness
among buyers and the generic nature of the products; new manufactures with
efficient and high quality technology will dominate over the existing players using
old technology, because of their quality and price advantage.
There are approximately 300 re-rolling mills in Bangladesh. Except some, most of
the projects use crude technology resulting in production of low quality steel bar.
The domestic consumption of rods/ bars as a whole is met through local production
fully. This steel re-rolling sector continues to be a predominantly fragmented one,
with a few well-known established mills controlling about one third of the entire
market and many more small scale manual operators controls the rest. As the larger
producers expanding their capabilities and take advantage of economies of scale-
smaller mills will find it harder to compete with the larger firms. Under the above
scenario, smaller mills will have have to face serious market competition in future.
Currently, they are questioned in terms of quality. As the larger mills consolidating
their positions, the smaller companies which are already high-cost players, will find
it increasingly difficult to complete. Most steel re-rolling mills in Bangladesh depend
on scrap, leading to lower quality rods used in the market. Very few re-rolling mills
use billets as raw materials. The reasons for this is generally available regularly
locally.
However, the price of scrap and billets during FY 2008 broke the record of the past.
Leaders of the steel and re-rolling industry urged the government to free the import
of old scrap ships and vessels from the control of certain vested groups to reduce
the cost of scraps and building materials. In comparison to the previous records of
import, one must say that the steel industry of the country is passing through one of
its worst times in history. Steel is a basic sector of any industrial economy. Except
re-rolling of the scrap steel, Bangladesh lacks this very basic ingredient of heavy
industry. And without heavy industry, the slogan of industrialization sounds hollow.
The idea of developing a viable steel sector appears implausible seeing that
Bangladesh has no iron ore as one of its mineral resources. But absence of ore does
not disqualify a country from becoming a producer of steel and steel-based
commodities.
Market Share
Bangladesh Steel Re-rolling Mills BSRM
35%
16%
Rahim Steel
10%
12%
GPH Ispat
5%
Anwar Ispat
15%
Others
7%
Government Policy: Steel Industry is one of the key industries of a nation; as such
government policy regarding entry to this industry is usually stringent.
Product Differentiation: Steel manufacturing has very few barriers in terms of
product differentiation does not have any significant price variation. However, BSRM
still enjoy a premium for their products because of its quality and their brand image.
BSRM has introduced brands like BSRM Xtreme 500W, BSRM Grade-75 Wires, BSRM
Angles, BSRM Spring Steel Flats.
Threat of Competitors
Competitors in the industry include KSRM, Rahim Steel, RSRM, GPH Ispat, Anwar
Ispat, etc. Despite healthy competition BSRM Ltd. is by far the market leader.
Bargaining Power of Suppliers
Globally, the top three mining giants BHP Billiton, CVRD and Rio Tinto supply nearly
two-thirds of the processed iron ore to steel mills and command very high
bargaining power. In order to safeguard itself from the high bargaining power of the
suppliers, BSRM has forayed much earlier into the strategy of 'Backward
Integration'.
Threat of Substitutes:
Plastics and composites create a threat to BSRM in one of its biggest market which
is pipes. Steel has already been replaced in some huge number applications: large
diameter water pipes (RCC pipes), railway sleepers (RCC sleepers), small diameter
pipes (PVC pipes), and domestic water tanks (PVC tanks).
Bargaining Power of Buyers:
Some of the major steel consumption fields like construction, ship building, and
power have the advantage of high bargaining power and get great deals.
Valuation Analysis
We have done the valuation of BSRM LTD. stock using both fundamental and
technical analysis. The dividend discount model, and price-to-earnings, and price-to
book value multiples have been used in the fundamental analysis. And the technical
analysis has been done by finding trends and patterns among the historical prices
to relate them with changes in real-life events.
Fundamental Analysis
For the fundamental analysis we have investigated the intrinsic value of stock based
on the dividend discount model and the comparison of multiples.
Beta
BSRMSTEEL
BSRMLTD
Index Return
10 year Treasrury Bond
Rate
Market Premium
Return on Equity
Tax rate
1.02187
32
2.42995
56
17.6%
10.7%
6.9%
17.7%
25.0%
We calculated the required rate of return using the Capital Asset Pricing Model
(CAPM). = + ( )
The cost of equity was found to 17.7%
We have taken the beta of BSRMSTEEL. This exception is made because BSRMLTD
has been listed for only six month and we assume that the long-term beta of
BSRMLTD will be similar to BSRMSTEEL.
We calculated the sustainable growth rate, g to be 8% using the formula:
= (1 )
Using the dividend discount model formula:
= (1 + )
We get the value of the stock = 33.4
Discounted Cash Flow Model
NPV
Net Debt
Shareholder's
$
25,231,645,231.
3
$
9,886,735,246.0
$
Value
15,344,909,985.
3
195097717
Total No. of
Shares
Value per
Share
78.65
2013
Price/Earnings 22.8
Price/BV
EPS(BDT)
DPS(BDT)
2014
2015
25.7
15.2
4.3
3.7
3.1
4.1
3.6
6.1
1.5
1.5
3.0
2016E
8.4
3.1
11.0
N/A
Comparing it to the actual multiple Price/Earnings Ratio and Price/Book Value Ratio
we see that the stock is overvalued.
Peer Group Comparison
We have compared BSRM LTD. to its peers on a certain number of criteria.
Market Capitalization
Particulars
BSRMSTEE
L
BSRMLTD
GPHISPAT
RSRMSTEE
L
MCAP
31,785,075,000.
0
27,469,758,553.
6
9,043,650,000.
0
3,341,520,000.
0
Market Price
Particulars
BSRMSTEE
L
BSRMLTD
GPHISPAT
RSRMSTEE
L
Market
price
93.
0
140.
8
42.
5
29.
0
P/E Ratio
Particulars
BSRMSTEE
L
BSRMLTD
GPHISPAT
RSRMSTEE
L
P/E
25.
5
28.
2
32.
4
21.
6
P/B ratio
Particulars
BSRMSTEE
L
BSRMLTD
GPHISPAT
RSRMSTEE
L
P/B
3.
3
2.
0
3.
3
2.
2
Technical Analysis
We gauge the performance of BSRM LTD. shares from June 2016- October 2016, by
conducting a trend line analysis on the adjusted closing price of the stock. We see
that it was experiencing steady increase in price but that fell drastically in October.
Recommendation
The stock is currently overvalued and the decision should be to sell.
9. REFERENCES
http://lankabd.com/dse/stock-market/BSRMLTD/bangladesh-steel-re-rolling-millslimited/stock-price?stockId=632
http://bsrm.com/wp-content/uploads/2016/03/1.-Annual-Report-2015.pdf
http://asifkhan.info/2014/02/05/aswath-damodaran-on-cost-of-equity-in-frontiermarkets/
Appendix
DATE
OPENP*
CLOSEP*
TRADE
VALUE (mn)
VOLUME
5/24/2016
136.00
134.90
1,788.00
67
495825
5/22/2016
139.00
135.80
2,179.00
83
602541
5/19/2016
137.00
138.70
2,865.00
111
797417
5/18/2016
131.70
136.50
2,784.00
121
897762
5/17/2016
134.00
131.70
2,844.00
97
735817
5/16/2016
133.60
133.30
2,422.00
77
574552
5/15/2016
138.40
133.30
1,967.00
68
503728
5/12/2016
138.00
137.40
2,735.00
112
806581
5/11/2016
140.70
135.80
3,428.00
142
1030582
5/10/2016
143.70
140.40
3,339.00
137
967053
5/9/2016
161.70
142.60
6,831.00
398
2671374
5/8/2016
149.50
147.00
3,880.00
275
1883476
5/5/2016
153.80
149.60
5,750.00
318
2070069
5/4/2016
144.40
150.90
4,643.00
380
2562911
5/3/2016
141.00
142.90
2,250.00
115
804790
5/2/2016
142.10
139.80
1,626.00
61
439339
4/28/2016
133.00
142.00
3,829.00
212
1539747
4/27/2016
141.00
132.20
2,223.00
128
935263
4/26/2016
149.30
141.20
3,673.00
406
2900047
4/25/2016
167.50
151.90
1,928.00
108
686104
4/24/2016
176.00
166.90
1,214.00
49
291119
4/21/2016
171.00
176.70
1,813.00
86
492239
4/20/2016
178.70
171.90
1,791.00
100
572878
4/19/2016
183.70
178.10
1,608.00
63
346955
4/18/2016
178.90
183.50
1,592.00
77
423634
4/17/2016
183.40
178.70
1,704.00
80
445955
4/13/2016
191.80
183.40
1,808.00
98
526081
4/12/2016
186.70
189.90
1,812.00
125
666250
4/11/2016
189.20
186.40
2,176.00
112
592115
4/10/2016
192.00
189.10
2,555.00
229
1199822
4/7/2016
191.00
193.30
2,381.00
141
734909
4/6/2016
181.00
189.50
2,441.00
185
1008799
4/5/2016
185.00
182.20
1,653.00
133
729819
4/4/2016
191.50
186.60
1,581.00
89
470644
4/3/2016
194.70
190.90
1,571.00
92
481718
3/31/2016
192.00
194.70
2,168.00
138
698333
3/30/2016
184.00
191.10
2,372.00
151
808375
3/29/2016
178.00
181.80
1,531.00
127
706828
3/28/2016
182.50
177.00
1,585.00
91
511063
3/27/2016
180.40
181.80
2,349.00
113
621832
3/24/2016
179.00
181.30
2,942.00
213
1153176
3/23/2016
175.20
181.30
2,305.00
137
765222
3/22/2016
173.90
176.90
2,018.00
105
604284
3/21/2016
163.00
173.80
2,332.00
132
775172
3/20/2016
160.00
162.50
1,334.00
52
328627
3/16/2016
162.00
156.40
1,635.00
69
438735
3/15/2016
165.80
162.50
1,168.00
55
332632
3/14/2016
164.00
165.50
1,023.00
43
259793
3/13/2016
172.90
161.20
1,664.00
81
493149
3/10/2016
175.80
172.20
1,673.00
104
598119
3/9/2016
180.00
175.80
1,357.00
65
369366
3/8/2016
178.50
178.00
2,194.00
165
928462
3/7/2016
169.00
178.50
2,459.00
186
1059357
3/6/2016
187.30
167.40
3,590.00
320
1844601
3/3/2016
204.00
3/2/2016
204.80
204.00
1,591.00
90
444632
3/1/2016
204.50
201.70
1,539.00
85
422498
2/29/2016
197.90
204.30
2,012.00
127
633176
2/28/2016
180.30
195.20
3,063.00
264
1405093
2/25/2016
187.80
178.30
1,831.00
135
745023
2/24/2016
184.80
183.40
2,896.00
280
1503004
2/23/2016
178.40
182.30
3,657.00
377
2035067
2/22/2016
177.00
177.30
3,750.00
387
2178026
2/18/2016
170.00
176.50
3,045.00
207
1193870
2/17/2016
162.60
167.60
3,237.00
220
1328963
2/16/2016
168.70
162.60
3,939.00
357
2142809
2/15/2016
153.00
168.70
3,861.00
430
2658649
2/14/2016
150.00
154.50
2,587.00
334
2096712
2/11/2016
125.00
146.30
6,384.00
566
4056453
2/10/2016
116.30
116.40
406.00
15
132057
2/9/2016
118.70
117.60
534.00
15
129487
2/8/2016
116.00
116.80
634.00
19
164124
2/7/2016
118.90
113.80
668.00
22
194765
2/4/2016
118.00
117.00
752.00
20
167382
2/3/2016
121.90
117.80
576.00
21
172299
2/2/2016
121.90
120.50
1,106.00
28
228397
2/1/2016
117.90
120.10
430.00
14
114370
1/31/2016
119.10
116.90
370.00
13
112285
1/28/2016
122.60
119.10
474.00
13
106959
1/27/2016
123.00
120.50
602.00
21
168072
1/26/2016
121.70
122.00
460.00
14
117427
1/25/2016
124.00
121.30
791.00
26
211371
1/24/2016
124.50
123.70
515.00
18
143343
1/21/2016
124.40
124.10
257.00
1/20/2016
125.80
124.40
473.00
18
140240
1/19/2016
125.20
124.60
424.00
17
132926
1/18/2016
124.60
124.60
779.00
36
289339
1/17/2016
125.70
123.80
636.00
31
243683
1/14/2016
126.60
125.20
657.00
28
222785
1/13/2016
129.00
125.30
746.00
29
227727
1/12/2016
129.70
126.60
801.00
31
244327
1/11/2016
129.20
129.00
582.00
30
229966
1/10/2016
137.50
129.70
1,154.00
50
380230
1/7/2016
138.00
134.80
974.00
45
327070
67417
1/6/2016
135.50
137.20
1,808.00
86
629147
1/5/2016
130.70
133.80
1,880.00
81
613540
1/4/2016
132.90
128.20
1,085.00
52
402504