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Letter of Transmittal
25 May 2019
Ms. Pallabi Siddiqua
Associate Professor
Analysis of Financial Investments
University of Dhaka
Dear ma’am,
It feels immense pleasure in presenting to your goof self, assignment on “Financial Statement
Analysis and stock Valuation of HeidelbergCement Bangladesh Limited.’’ I found this report to
be truly challenging in many aspects, indeed very interesting in relation to the various
interpretational and engrossing exercises. Writing this report itself was truly comprehensive
learning experience. This Assignment is assigned to us as a compulsory requirement for the
completion of the course of Analysis of Financial Investment.
During the process of preparing the Assignment on “Financial Statement Analysis and Valuation
of HeidelbergCement Bangladesh Limited” we had the chance of experiencing and
rediscovering our potentials. This paper gave us an opportunity to apply our theoretical and
analytical expertise, sharpen our views, ideas and bridge them with the real world of practical
experience.
We have tried our level best to complete the report with respect to the desired requirements.
However, if any explaining is required, we would be honored to oblige. Kindly accept this
humble effort of bringing forward our research and findings on the subject matter.
Yours Sincerely,
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Acknowledgement
The accomplishment of this assignment benefits of the help and direction from my respected
supervisor Ms. Pallabi Siddiqua, Associate Professor, Department of Finance, University of
Dhaka is always happy and willing to help me solve the confusions and direct me approach to
the final result of the assignment
Her supervision, guidance, helpful criticism, suggestions and encouragement throughout the
course helped me a lot to reach a successful completion of the report.
We would also like to thank those who have already completed the course, helped us a lot by
giving their valuable suggestions.
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Table of contents
Chapter 1- Introduction
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Chapter-1
Introduction
Requisite of the study:
This report has been prepared as a requirement of the course “Financial Statement Analysis
and Valuation”. By working on this report, we have the opportunity to know the fact of how to
reformulate firm’s financial statements and to able to know how to take decision as a finance
manager and to derive the intrinsic value of share and value of firm as a whole. In this report
i have followed the guidelines provided by our honorable teacher.
Data Source:
This report is mostly based on the secondary data which were available on the web. My main
source of secondary data was the DSE (web), company’s web sites and Bangladesh Bank.
Cut off :
This report is based on 3 years’ data for HeidelbergCement Bangladesh Limited. (2016 to 2018).
Limitations:
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Chapter-2
Company Analysis
Company Overview:
The Company commenced commercial production of its second unit with effect from 1
November 1999. The production capacity of the second unit is 600,000 MT. On 10 April 2008,
Kanchpur plant installed new mill with capacity of 450,000 MT per annum.
The total production capacity of Dhaka and Chittagong plant currently stands at 2,378,000 MT
per annum. The Company in its 5th Extraordinary General Meeting of shareholders held on 3
October 2002 approved the scheme of Amalgamation of Scancement International Limited and
Scancement Bangladesh Limited with Chittagong Cement Clinker Grinding Co. Limited,
presently HeidelbergCement Bangladesh Limited (HCBL/the Company). The Hon'ble High Court
Division of the Supreme Court of Bangladesh sanctioned the approval of the above Scheme of
Amalgamation by an order dated 11 January 2003.
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Vission and mission:
Corporate image: Building worldwide growth by building a better world,
Business Culture: Building on local responsibility for international success.
Employee Policy: Building our business on the knowledge of our people.
Market Strategy: Building our growth on a solid base of earnings
Customer Philosophy: Building customer satisfaction, because their success is our success
Quality Standard: Building on quality products to build our reputation
Industry Analysis
Bangladesh is currently well known as one of the developing countries where cement industry
is considered a part and parcel of its raising economy (IDLC Finance Limited, 2011). Cement
market is also growing everyday with the country’s economy where top 10 firms are holding
81% of market share and Heidelberg Cement is one of the market leaders here. In 2012, they
were positioned second for their market share (9.8%) in Bangladesh (Bangladesh Cement
Manufacturers Association, 2012 cited in International Leasing Securities Limited, 2014).
Market Share
15.9%
9.8%
51.8%
8.1%
7.4%
7.0%
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But despite being a star of the market, their revenue decreased by 8.53% in 2013 which the
chairman of the company addressed as an uncertain seasonal variation (HeidelbergCement
Bangladesh Limited, 2013). Surprisingly they still kept their profit up and earnings per share
(EPS) increased from BDT 22.85 to BDT 26.09 (Appendix 2). This dynamic nature of the market
and the financial return making ability of HeidelbergCement was enough to attract attention
and make the author of this Research and Analysis Project interested to work on this company’s
financial and non-financial data.
This project will also evaluate business and financial performances of Lafarge Surma Cement
Limited, one of the competitors of HeidelbergCement Bangladesh Limited, and compare them
with HeidelbergCement’s own performances. This will enable getting a realistic picture of the
cement market of Bangladesh.
Lafarge Surma cement Limited is a manufacturer and marketer of both cement and clinker, the
most important raw material to produce cement. They are operating in Bangladesh since 1997
and enlisted in Dhaka Stock Exchange and Chittagong Stock Exchange since 2003. Within
seventeen years of operation, they attained 7% of market share. Both HeidelbergCement and
Lafarge Surma are well known multinational cement companies in Bangladesh, therefore, a
proper comparison could be performed between the performances of these companies from
2011 to 2013.
CHAPTER -4
Market Analysis
Threat of substitutes
There is no apparent ‘substitute’ which could be a threat for the existing cement industry. Steel
might be a possible substitute but it is used in limited extent because of its high cost. (IDLC
Finance Limited, 2013). “Alternative Cement” has already been introduced in some countries
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but it is not suitable for structural applications hence not a major threat to cement (Ruskulis,
Otto, 2005).
Competitive rivalry
Currently there are 29 local companies who have almost 75% market share and 5 foreign
companies including HeidelbergCement hold rest 25% (International Leasing Securities
Limited, 2014). The top ten companies are holding almost 81% of market share with second
leading position seized by HeidelbergCement (9.8%) (Bangladesh Cement Manufacturers
Association, 2012). An intense competition is going on while local dominance prevails in the
cement industry which leads to a price war (IDLC Investments Limited, 2013). Decreasing
revenue of HeidelbergCement and downturn in the sales growth of Lafarge Surma in 2013 are
the reflection of the high competition.
The SWOT analysis is a combination of the environmental analysis and the internal
appraisal in a single framework for assessing the firm’s current strategic fit, or lack of it,
with the environment. It analyses organization’s strengths and weaknesses, and the
opportunities and threats offered by the environment
Strengths
HeidelbergCement have two brands, “Scan Cement” and “Ruby Cement”, which are well known
to the customers for their quality (IDLC Investments Limited, 2014). Their products were
considered “High Sulphate Resistant” in a recent test which is likely to strengthen their brand
image hence increase revenue in turn (International Leasing and Securities Limited, 2014).
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• Involvements in big projects
HeidelbergCement’s involvement with some ongoing and upcoming big development projects
such as Gulshan Jatrabari Flyover, Karnaphuli Water Supply Project and accomplishment of
several prestigious projects like Third Karnaphuli Bridge, Mohakhali Flyover indicate their
enhanced goodwill and guaranteed future revenue and cash inflows (HeidelbergCement
Bangladesh Limited, 2013).
• Technological know-how
HeidelbergCement Bangladesh Limited has adopted the updated technology of production from
their parent from Germany (LankaBangla Securities Limited, 2014). This competitive advantage
might benefit them in competing.
Weaknesses
Unused cash balance suggests that the company might have fewer investment opportunities
which caused them opportunity cost of losing interest income which might improve their
profitability (International Leasing Securities Limited, 2014).
Opportunities
• Market Growth
The cement market of Bangladesh is in the growth stage of its life cycle which is expected to
grow by 5% - 10% every year so is the demand (IDLC Investments Limited, 2013). It is an
opportunity for HeidelbergCement to increase their market share (which is 9.8% now) by
utilizing their increased production capacity.
• Growing Economy
Bangladesh has a growing economy with an average GDP growth rate of 5.6% which is
expected to be stronger soon (Bangladesh Bank, 2014 cited in Trading Economics, 2014).
HeidelbergCement can utilize the economic growth by enhancing their operation hence
profitability.
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• Urbanization
The government has undertaken several massive development plans for the urbanization of
the rural areas (IDLC Finance Limited, 2011). HeidelbergCement can utilize their existing
goodwill to get involved in those big projects which are likely to result in increased revenue.
Threats
HeidelbergCement imports almost all of their raw materials whereas their costs of sales are
around 75%-80% of their sales (International Leasing Securities Limited, 2014). Therefore,
the company’s exposure to foreign exchange risk is very high.
• Political instability
The political condition in Bangladesh is not much favorable for operating business activities.
Companies like HeidelbergCement faced a sudden downturn in revenue when the caretaker
government took power in 2007 (IDLC Finance Limited, 2011). Regular strike threatens
operation and development activities hence profitability.
• Price war
As a very stiff and unhealthy competition is going on between the existing companies, a price
war is sometimes inevitable (Mizan, A. N. K. and Hossain, Md. Mahabbat, 2014). Local cement
manufacturer acts as a syndicate against the foreign companies such as HeidelbergCement
and charge lower price for their products to gain market share. (IDLC Finance Limited, 2011).
Chapter-5
Stock Valuation of the firm using Absolute Valuation:
Valuation of stock
For investing decision stock valuation is important for investors. I have used 2 types of valuation
techniques to find the intrinsic value of stock which dividend discount model (DDM and free
cash flow to equity (OFCFE). Two of these approaches are used to determine the present value
of firm.
Dividend Discount Model (DDM)
Dividend Discount Model is a way of valuing a company based on the theory that a stock is
worth the discounted sum of all of its future dividend payments. In other words, it is used to
evaluate stocks based on the net present value of the future dividends. The following formula
is used to determine the cash flow:
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To do this we need to find required rate of return. So we are using CAPM to find this. Which
are:
Here,
R (m)= 5.75% (Dseb index)
R (f) = 4.28% (rate of T.bill)
Beta (B) = 0.582174612
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Forcast of future dividend 2019 2020 2021
Assumed multiple growth 8% 9% 10%
Forcasted DPS 22.57 24.60 26.94
5.13% PV factor 0.951203272 0.904787665 0.860636987
PV of each year 21.47 22.26 23.18
Terminal Value 877.85
Present Value 899.31
CMP of Heidelberg 236
Recommendation: From calculation we found that the estimated intrinsic value of stock is
Tk. 899.31. In contrast the current market value of stock is Tk. 236. So, stock should buy.
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Particular 2016 2017 2018
Net Income 1,507,871,000 803,162,000 711,149,000
Depreciation 309,118,000 304,432,000 316,979,000
Capital expenditure 166,911,000 215,939,000 117,955,000
Change in WC (321,754,000) (747,955,000) (1,167,717,000)
Debt repayment 1,948,000 401,000 2,789,000
New debt issue - - -
Free Cash Flow 1,969,884,000 1,639,209,000 2,075,101,000
Growth Rate 1.75%
Present value 62,397,706,512
Number of Shares 56,503,590
PV/Share 1,104
Recommendation: From calculation we found that the estimated intrinsic value of stock is
Tk. 1104. In contrast the current market value of stock is Tk. 236. So, stock should buy.
Chapter-6
Conclusion
References
Conclusion
HeidelbergCement Bangladesh Limited is now a reliable name to both the investors and
consumers. During last three years they performed better than their competitor,
Lafarge Surma Cement Ltd in many aspects. The cement industry of Bangladesh is
growing day by day and it is a great opportunity for HeidelbergCement to be the market
leader using their capacity, resources and other competitive advantages.
References
• Investment Analysis and Portfolio Management, by_ Reilly/ Brown. (Eight Edition)
• Class lectures
• Annual Reports
• Official Website of Dhaka Stock Exchange Ltd.
• www.bb.org.bd
• www.lankabangla.com
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