Final Report (Renata Limited) RYA FIN440

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FIN440 (Corporate Finance)

Section: 02

Submitted To:

Riyashad Ahmed (RYA)

Course Instructor

School of Business

Prepared By:

Tanvir Rahman Anik 1030413530

Adiba Azad 1030623030

Abdullah Al Rafi 1110129530

Md. Nasimul Islam 1110153030

Saadman Mahmud Khan 1110308030

Md. Azharul Haque 1030048030

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Date of Submission: 12th

December, 2012

Letter of Transmittal

December 12, 2012

Riyashad Ahmed

Lecturer North South University

Dear Sir,

We are submitting to you the term paper entitled „Financial Report Analysis of Renata Limited’

due on December 12, 2012.The term paper consists of an in-depth analysis of the financial report

of Renata Limited which consists of concepts such as ratio analysis, forecasting, market return,

company return and intrinsic share price along with notes thereon for your record/necessary

measures.

Sincerely,

Tanvir Rahman Anik 1030413530

Adiba Azad 1030623030

Abdullah Al Rafi 1110129530

Md. Nasimul Islam 1110153030

Saadman Mahmud Khan 1110308030

Md. Azharul Haque 1030048030

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Executive Summary

The term paper provides a complete in-depth financial analysis of Renata Limited. The term

paper starts by providing the Vertical and Horizontal Balance Sheet and Income Statements so

that a clear idea about the company‟s growth is seen. Pro-forma Balance Sheet and Income

Statements for 2011 and 2012 are provided to give a slight insight about Renata Limited's future

prospects. Along with it complete ratio analysis with both time series and cross-sectional analysis

has been provided. The Standard risk is provided to understand the probability of any

unfavorable condition that share holders‟ can face. The market returns and Renata Limited‟s

returns are analyzed for the same period to find the market Beta (β) and the Risk free rate of

return is taken from the website of Bangladesh Bank. A detailed calculation of the company‟s

Cost of capital and weighted average cost of capital (WACC) is provided to understand the

company‟s cost of financing and the return it requires to maintain its share price. Furthermore,

the Company‟s Optimum Capital Structure, Intrinsic price of shares is calculated and analyzed.

Lastly Renata Limiteds Dividend policy is shortly briefed.

The complete report gives a thorough analysis of Renata Limited's financial performance over

the years.

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CONTENTS

Page Number

Introduction 05

Common size statements 06

Ratio analysis:

o Liquidity ratios

o Asset management ratios

o Profitability ratios

o Debt ratios

o Stock market ratios

o Du-Pont equation

17

Risk and return analysis 35

Beta calculation 38

Cost of debt financing 43

Calculation of Weighted Average Cost of Capital 43

Optimum capital structure 44

Calculation of intrinsic value of share 46

Dividend policy analysis 49

Appendix

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INTRODUCTION

Renata Limited (formerly Pfizer Limited) is one of the leading and fastest growing

pharmaceutical and animal health product companies in Bangladesh. The company started its

operations in 1972 as Pfizer (Bangladesh) Limited. In 1993, Pfizer transferred the ownership of

its Bangladesh operations to local shareholders and the name of the company was changed to

Renata Limited. Renata has five manufacturing facilities on two separate sites. The original 12-

acre site is located in Mirpur, Dhaka, while the new 19-acre site located in Rajendrapur, Gazipur

began operations in 2009 currently employs about 2300 people in its head office in Mirpur,

Dhaka.

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Common sized Statements:

2.(a)

Renata Limited

Vertical Balance Sheet (all figures divided by Total Assets & expressed as %)

As at 31st December

Balance Sheet 2007 2008 2009 2010 2011 Average Standard

Deviation

Assets

Non-current Assets

Property, plant and

equipment 36.98% 32.08% 36.26% 49.97% 49.18% 40.89% 8.15%

Capital work-in-progress 14.20% 18.03% 19.14% 7.09% 17.82% 15.26% 4.93%

Investment in

subsidiaries 2.93% 1.99% 1.64% 1.23% 0.82% 1.72% 0.81%

Other investment 0.046% 0.27% 0.31% 1.15% 0.15% 0.39% 0.44%

Total non-current assets 54.15% 52.37% 57.34% 59.44% 67.97% 58.25% 6.08%

Current Assets

Inventories 30.72% 30.34% 27.92% 25.40% 20.61% 27% 4.16%

Trade and other

receivables 9.04% 10.90% 8.93% 9.53% 8.32% 9.34% 0.97%

Advance deposits &

prepayments 3.86% 2.51% 2.10% 2.16% 1.27% 2.38% 0.94%

Cash and cash

equivalents 2.24% 3.89% 3.72% 3.48% 1.84% 3.03% 0.93%

Total current assets 45.85% 47.63% 42.66% 40.56% 32.04% 41.75% 6.08%

Total Assets 100% 100% 100% 100% 100% 100% 0.00%

Equity and Liabilities

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Equity attributable to

the equity holders of

the company

Share capital 4.47% 3.66% 3.75% 3.52% 2.94% 3.67% 0.55%

Revaluation surplus 7.22% 4.90% 4.01% 3.00% 2.06% 4.24% 1.98%

Tax holiday reserve 2.18% 1.67% 2.16% 2.42% 44.76% 10.64% 19.08%

Retained earnings 45.42% 42.33% 47.38% 48.95% 44.76% 45.77% 2.54%

Total equity attributable

to the equity holders 59.29% 52.56% 57.31% 57.90% 51.47% 55.70% 3.47%

Liabilities

Non-current liabilities

Deferred liability-staff

gratuity 4.13% 3.33% 3.22% 2.70% 1.94% 3.06% 0.81%

Deferred tax liabilities 3.31% 2.58% 2.86% 2.98% 2.57% 2.86% 0.31%

Total non-current

liabilities 7.44% 5.91% 6.09% 5.68% 4.51% 5.92% 1.05%

Current liabilities

Bank overdraft and short

term loan 16.77% 26.03% 20.63% 22.01% 31.24% 23.34% 5.52%

Creditors for goods 1.76% 4.02% 0.72% 0.62% 0.65% 1.56% 1.46%

Accrued expenses 4.55% 4.21% 4.46% 4.30% 4.25% 4.36% 0.15%

Other liabilities 5.72% 2.53% 6.16% 5.80% 4.47% 4.93% 1.49%

Unclaimed dividend 0.12% 0.10% 0.10% 0.10% 0.09% 0.10% 0.01%

Provision for taxation 4.36% 4.65% 4.52% 3.61% 3.32% 4.09% 0.59%

Total current liabilities 33.28% 41.53% 36.60% 36.43% 44.02% 38.37% 4.32%

Total liabilities 40.71% 47.44% 42.69% 42.12% 48.53% 44.30% 3.47%

Total equity and 100% 100% 100% 100% 100% 100% 0.00%

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Renata Limited

Vertical Income Statement (All figures divided by Sales & expressed as %)

For the year ended 31st December

liabilities

Income Statement 2007 2008 2009 2010 2011 Average Standard

Deviation

Turnover 100.00% 100.00% 100.00% 100.00% 100.00% 100% 0%

Cost of Sales (51.26%) (49.41%) (46.67%) (47.25%) (47.54%) (48.4%) 1.89%

Gross Profit 48.74% 50.59% 53.33% 52.72% 52.46% 51.6% 1.89%

Operating

expenses

Administrative,

selling and

distribution

expenses

(27.50%) (27.35%) (28.68%) (27.07%) (26.12%) (27.3%) 0.92%

Operating profit 21.71% 23.74% 24.86% 25.65% 26.34% 24.5% 1.82%

Other income 0.46% 0.499% 0.206% 0.118% 0.329% 0.32% 0.16%

Gain/(loss) on

disposal of

property, plant and

equipment

0.02% 0.004% 0.024% 0.0117% 0.054% 0.02% 0.02%

Interest on overdraft (2.27%) (2.825%) (2.551%) (2.307%) (3.303%) (2.7%) 0.43%

Other expenses (0.13%) (0.191%) (0.173%) (0.161%) (0.142%) (0.16%) 0.02%

Contribution to

WPPF (0.92%) (0.987%) (1.055%) (1.109%) (1.103%) (1.03%) 0.08%

Profit before tax 18.41% 19.74% 21.099% 22.202% 22.069% 20.7% 1.62%

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Tax expenses

Current tax (4.81%) (5.387%) (4.889%) (4.624%) (4.615%) (4.9%) 0.31%

Deferred tax (0.35%) (0.334%) (0.738%) (0.838%) (0.771%) (0.6%) 0.24%

Net Profit after tax

for the year 13.26% 14.019% 15.472% 16.74% 16.683% 15.2% 1.57%

Other

Comprehensive

Income

Gain/(Loss) on

Marketable

Securities

(unrealized)

- - - (0.023%) (0.000099%

) (0.01%) 0.02%

Exchange

differences arising

on transaction

(unrealized)

- - - - (0.448%) (0.45) -

Total

Comprehensive

Income for the

Year

- - - 16.718% 16.728% 16.7% 0.01%

Basic Earning per

share 0.0000115% 0.0000097% 0.0000086% 0.00000074% 0.00000074%

0.000006%

0.000005%

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2. (b)

Renata Limited

Horizontal Balance Sheet (2007 as Base Year)

As at 31 December

Balance Sheet 2007 2008 2009 2010 2011

Assets

Non-current Assets

Property, plant and equipment 100% 127.31% 175.23% 321.84% 474.73%

Capital work-in-progress 100% 186.38% 240.85% 118.96% 447.81%

Investment in subsidiaries 100% 100.00% 100.00% 100.00% 100.00%

Other investment 100% 837.78% 1193.10% 5896.51% 1133.39%

Total non-current assets 100% 141.93% 189.24% 261.43% 447.98%

Current Assets

Inventories 100% 144.05% 162.43% 196.92% 239.44%

Trade and other receivables 100% 176.77% 176.59% 251.09% 328.76%

Advance deposits & prepayments 100% 95.41% 96.36% 133.25% 117.41%

Cash and cash equivalents 100% 255.19% 296.84% 369.65% 292.74%

Total current assets 100% 152.42% 166.29% 210.68% 249.38%

Total Assets 100% 146.74% 178.72% 238.16% 356.92%


Equity attributable to the equity

holders of the company

Share capital 100% 120.00% 150.00% 187.50% 234.38%

Revaluation surplus 100% 99.69% 99.38% 99.08% 101.85%

Tax holiday reserve 100% 112.80% 177.85% 264.96% 280.49%

Retained earnings 100% 136.75% 186.43% 256.69% 351.74%

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Total equity attributable to the equity

holders 100% 130.09% 172.77% 232.58% 309.85%

Liabilities


Deferred liability-staff gratuity 100% 118.30% 139.61% 155.75% 167.67%

Deferred tax liabilities 100% 114.25% 154.38% 213.98% 277.43%

Total non-current liabilities 100% 116.50% 146.19% 181.67% 216.54%

Current liabilities

Bank overdraft and short term loan 100% 227.72% 219.77% 312.45% 664.77%

Creditors for goods 100% 335.12% 73.55% 83.72% 132.27%

Accrued expenses 100% 135.64% 175.32% 225.23% 861.98%

Other liabilities 100% 64.88% 192.68% 241.38% 906.75%

Unclaimed dividend 100% 127.68% 159.39% 207.80% 263.59%

Provision for taxation 100% 156.49% 185.41% 196.98% 271.70%

Total current liabilities 100% 183.16% 196.60% 260.72% 472.18%

Total liabilities 100% 170.98% 187.38% 246.28% 425.47%

Total equity and liabilities 100% 146.74% 178.72% 238.16% 356.92%

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Renata Limited

Horizontal Income Statement (2007 as Base Year)

For the year ended 31 December

Income Statement 2007 2008 2009 2010 2011

Turnover 100% 121.92% 153.93% 200.87% 257.27%

Cost of Sales 100% 117.52% 140.16% 185.18% 238.61%

Gross Profit 100% 123.55% 168.40% 217.36% 276.89%

Operating expenses

Administrative, selling and

distribution expenses 100% 121.30% 160.56% 197.86% 244.40%

Operating profit 100% 133.31% 176.21% 237.42% 312.13%

Other income 100% 131.41% 68.61% 51.06% 183.03%

Gain/(loss) on disposal of property,

plant and equipment 100% 23.75% 187.30% 119.55% 708.17%

Interest on overdraft 100% 151.83% 173.13% 204.37% 374.59%

Other expenses 100% 180.71% 206.34% 250.45% 282.20%

Contribution to WPPF 100% 130.65% 176.30% 241.97% 308.22%

Profit before tax 100% 130.71% 176.38% 242.33% 308.35%

Tax expenses

Current tax 100% 136.64% 156.56% 193.31% 247.00%

Deferred tax 100% 116.31% 324.23% 480.76% 565.73%

Net Profit after tax for the year 100% 128.94% 179.66% 253.80% 323.80%

Other Comprehensive Income

Gain/(Loss) on Marketable - - - 100% 0.599%

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Securities (unrealized)

Exchange differences arising on

transaction (unrealized) - - - - 100%

Total Comprehensive Income for

the Year - - - 100% 128.09%

Basic Earning per share 100% 103.15% 114.98% 13.00% 16.58%

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2.(c) To forecast the income statement of 2012 and 2013, we used the percentage of

sales method. The sales growth rate and current tax rate & deferred tax rate has been determined

to be 24%, 24% and 3% respectively. The calculations are shown in the Appendix part.

Renata Limited

Forecasted Income Statement

For the year ended 31 December

Income Statement 2012 2013

Turnover 8,084,352,650 10,024,597,286

Cost of Sales (3,880,489,272) (4,811,806,697)

Gross Profit 4,203,863,378 5,212,790,589

Operating expenses

Administrative, selling and distribution expenses (2,111,632,912) (2,618,424,811)

Operating profit 2,092,230,466 2,594,365,778

Other income 26,678,364 33,081,171

Gain/(loss) on disposal of property, plant and

equipment (4,042,176) (5,012,299)

Interest on overdraft (266,783,637) (330,811,710)

Other expenses (11,318,094) (14,034,436)

Contribution to WPPF (88,927,879) (110,270,570)

Profit before tax 1,747,837,043 2,167,317,933

Tax expenses

Current tax (419,480,890) (520,156,304)

Deferred tax (52,435,111) (65,019,538)

Net Profit after tax for the year 1,275,921,041 1,582,142,091

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To forecast the balance sheet of 2012 and 2013, we used the percentage of sales method as well.

All the calculations are shown in the appendix. The calculation of retained earnings is shown

separately in the appendix. Investment subsidiaries under non-current asset are kept as it is

because it is constant over the past 5years.

Renata Limited

Forecasted Balance Sheet

As at 31 December

Basic Earning per share 59.66 70.17

Balance Sheet 2012 2013

Assets

Non-current Assets

Property, plant and equipment 4,688,924,537 5,814,266,426

Capital work-in-progress 1,697,714,057 2,105,165,430

Investment in subsidiaries 63,070,376 63,070,376

Other investment 13,743,400 17,041,815

Total non-current assets 6,463,452,369 7,999,544,047

Current Assets

Inventories 1,940,244,636 2,405,903,349

Trade and other receivables 808,435,265 1,002,459,729

Advance deposits & prepayments 121,265,290 150,368,959

Cash and cash equivalents 177,855,758 220,541,140

Total current assets 3,047,800,949 3,779,273,177

Total Assets 9,511,253,318 11,778,871,224


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Equity attributable to the equity holders of the

company

Share capital 282,952,343 350,860,905

Revaluation surplus 194,024,464 240,590,335

Tax holiday reserve 161,687,053 200,491,946

Retained earnings 4,526,671,327 5,868,757,480

Total equity attributable to the equity holders 5,165,335,186 6,660,700,666

Liabilities


Deferred liability-staff gratuity 185,940,111 230,565,738

Deferred tax liabilities 242,530,580 300,737,919

Total non-current liabilities 428,470,690 531,303,656

Current liabilities

Bank overdraft and short term loan 2,991,210,481 3,709,100,996

Creditors for goods 62,249,515 77,189,399

Accrued expenses 404,217,633 501,299,864

Other liabilities 428,470,690 531,303,656

Unclaimed dividend 8,084,353 10,024,597

Provision for taxation 323,374,106 400,983,891

Total current liabilities 4,217,606,778 5,229,832,404

Total liabilities 4,646,077,468 5,761,136,060

Total equity and liabilities 9,811,412,654 12,421,836,726

Proposed Dividend (300,159,336) (643,019,502)

Total equity and liabilities 9,511,253,318 11,778,817,224

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3. Ratio Analysis

Industry Average

Ratio Renata

Limited

Beximco

Pharma

Ambee

Pharma

Pharma

Aid

GlaxoSmith

Kline

Pharma

Square

Pharma

Industry

Average

Liquidity

Current Ratio 0.73

times

2.70

times

1.12

times

1.69

times 2.05 times

1.50

times

1.63

times

Quick Ratio 0.26

times

1.83

imtes

0.53

times

1.49

times 0.95 times

0.96

times

1.003

times

Working Capital (BDT

921.7

Million)

BDT

4,500.3

Million

BDT

4.89

Million

BDT

26.8

Million

BDT

1,086.6

Million

BDT

2,354.0

Million

BDT

1,175.16

Million

Cash Conversion

Cycle 214 days 193 days 402 days 167 days 32 days

107

days 186 days

Asset

Management

Inventory

Turnover

1.95

times

1.79

times

1.03

times

8.62

times 2.97 times

3.03

times

1.80

times

Days in

Inventory 187 days 204 days 354 days 42 days 123 days

121

days 172 days

Total Asset

Turnover

0.85

times

0.34

times

0.96

times

0.86

times 1.82 times

0.69

times

0.92

times

Fixed Asset

Turnover

1.25

times

0.50

times

4.98

times

2.07

times 9.85 times

1.08

times

3.29

times

Average

Collection Period 36 days 45days 63 days 141 days 16 days 21 days 54 days

Average

Payment Period 8 days 56 days 15 days 17 days 107 days 35 days 40 days

Debt

Management

Debt to Asset 0.49

times

0.26

times

0.78

times

0.34

times 0.45 times

0.29

times

0.44

times

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Times Interest

Earned

7.98

times

3.50

times

1.86

times

11.15

times

110.91

times

11.23

times

24.43

times

Profitability

Gross Profit

Margin 52.46% 47.90% 54.20% 32.52% 28.47% 42.80% 43.06%

Operating Profit

Margin 26.34% 25.20% 3.93% 21.7% 9.91% 22.42% 18.25%

Net Profit

Margin 16.68% 15.10% 2.80% 14.23% 5.96% 18.80% 12.26%

Return on Asset

(ROA) 14.14% 5.20% 2.69% 12.29% 10.84% 13.02% 9.70%

Operating Return

on Asset 22.33% 8.63% 3.77% 18.73% 18.03% 15.53% 14.50%

Return on Equity 27.48% 6.70% 15.1% 18.75% 1.98% 18.32% 14.72%

Stock Market

Earnings Per

Share

BDT

48.14/

share

BDT

4.76/

share

BDT

3.81/

share

BDT

44.51/

share

BDT

23.42/

share

BDT

129.07/

share

BDT

42.29/

share

Price-Earnings

(P/E) 25.03 19.66 111.28 57.34 28.37 25.35 44.51

Market to Book

(M/B)

6.88

times

1.38

times

16.83

times

10.75

times 5.57 times

4.65

times

7.68

times

P a g e | 19

Renata Limited

Liquidity Ratio

Liquidity

Ratio Formula 2007 2008 2009 2010 2011 IA

Current

Ratio

1.37

times

1.15

times

1.17

times

1.11

times

0.73

times

1.63

times

Quick

Ratio

0.45

times

0.40

times

0.41

times

0.42

times

0.26

times

0.1003

times

Working

Capital

Current Assets – Current

Liabilities

BDT

271.02

Million

BDT

192.68

Million

BDT

233.38

Million

BDT

212.12

Million

(BDT

921.72

Million)

BDT

1,175.16

Million

Cash

Conversion

Cycle

Days in Inventory+Average

Collection Period-Average

Payment Period

209

days

240

days

243

days

228

days

214

days

186

days

Current Ratio:

In 2011, Renata Limited‟s current assets were 0.73 times of their current liabilities.

Current ratio of Renata Limited was 1.37 times in 2007 and decreased a little to 1.15 times for

the year 2008. Then it slightly increased to 1.17 times in 2009 and again decreased in 2010 to

1.11 times. And current ratio has continued to decrease by a huge margin in 2011 to 0.73 times

which implies that there has been an decreasing trend in current ration of Renata Limited i.e. the

performance has gone down. The industry average was 1.63 times, which was much higher than

Renata Limited‟s current ratio and therefore, Renata Limited‟s performance was not satisfactory

in 2011.

Renata Limited‟s current ratio was much lower in 2011 than 2010 because, current assets

decreased by a huge margin while current liabilities increased in 2011 from 2010.

Quick Ratio:

In 2011, Renata Limited‟s current assets excluding inventories were 0.26 times of their current

liabilities.

P a g e | 20

Quick ratio of Renata Limited was 0.45 times in 2007, and then it decreased to 0.40 times in

2008. It increased by a small margin to till 2010 and again decreased by a huge margin to 0.26

times in 2011. In general, there had been a decreasing trend in Renata Limited‟s quick ratio from

year 2007 to 2011 implying that Renata Limited‟s performance has been poor. In 2011, industry

average was 1.003 times, which is much higher than Renata Limited‟s, which is not at all

satisfactory for Renata Limited.

Renata Limited‟s quick ratio was much lower in 2011 than 2010 because, current assets

excluding inventories decreased by a huge margin while current liabilities increased in 2011

from 2010.

Working Capital:

In 2011, Renata Limited‟s working capital was 921.72 million BDT.

In 2007, Renata Limited‟s working capital was 271.02 million BDT; in 2008 it has decreased to

192.68 million BDT. We can see a fluctuating trend in Renata Limited‟s working capital later

years. Working Capital of Renata Limited had increased by quite a margin in 2009. But it again

decreased during 2010. In 2011, the Working Capital fell sharply to a negative 921.72 million

BDT. In 2011, industry average was 1,175.16 million BDT while Renata Limited was way below

the average, showing that working capital was really unfavorable.

Renata Limited‟s working capital was much lower in 2011 than 2010 because, proportionate

increase in current assets was much lower than the increase in current liabilities.

Cash Conversion Cycle:

In 2011, on an average, Renata Limited took 214 days to complete the process of converting

their invested capital into cash.

Looking at the past few years‟ performance, we can see that there is a fluctuating trend in the

Cash Conversion Cycle of Renata Limited .In 2007 it was 209 days, and increased to 243 till

2009, but fell slightly in 2010 to 228 days. Renata Limited‟s Cash Conversion Cycle followed its

decreasing trend as it fell to 214 days in 2011, which showed sign of improvement. But it is

P a g e | 21

significantly above the Industry average of 186 days. Therefore, Renata Limited is in a poor

position regarding the cash conversion cycle.

The reason behind Renata Limited‟s improvement from 228 days to 214 days can be attributed to

lower days in inventory period but higher average payment period.

0

0.5

1

1.5

2007 2008 2009 2010 2011

Tim

es

Years

Current Ratio

Current Ratio 0

1

2

3

Tim

es

Current Ratio

CurrentRatio

0

0.1

0.2

0.3

0.4

0.5

2007 2008 2009 2010 2011

Tim

es

Years

Quick Ratio

Quick… 00.5

11.5

2

Tim

es

Quick Ratio

QuickRatio

-1000

-500

0

500

2007 2008 2009 2010 2011

BD

T (i

n M

illio

n)

Years

Working Capital

WorkingCapital

-2000

0

2000

4000

6000

BD

T in

Mill

ion

Working Capital

WorkingCapital

P a g e | 22

Asset Management Ratio

Liquidity

Ratio Formula 2007 2008 2009 2010 2011 IA

Inventory

Turnover

( )

1.96

times

1.59

times

1.69

times

1.85

times

1.96

times

1.80

times

Days in

Inventory

186

days

230

days

216

days

197

days

186

days

172

days

Total

Asset

Turnover

1.17

times

0.98

times

1.01

times

0.99

times

0.85

times

0.92

times

Fixed

Asset

Turnover

2.17

times

1.87

times

1.77

times

1.66

times

1.25

times

3.29

times

Average

Collection

Period

28 days 41 days 33 days 36 days 36 days 54 days

Average

Payment

Period

6 days 31 days 6 days 5 days 8 days 40 days

Inventory Turnover:

Renata Limited sold out and re-stocked 1.96 times in 2011.

In 2007 the Inventory Turnover Ratio was 1.96 times, but in the following year, 2008, it fell

sharply. After that there has been an increasing trend in the Inventory Turnover Ratio of Renata

Limited. In 2011, it came back to 1.96 times continuing its increasing trend, and that was also

180

200

220

240

260

Day

s

Years

Cash Conversion Cycle

CashConversion Cycle

0100200300400500

Day

s

Cash Conversion Cycle

CashConversion Cycle

P a g e | 23

above Industry Average of 1.80 times. This shows an excellent performance of Renata Limited

in 2011.

Renata Limited‟s Inventory Turnover Ratio has climbed up in 2011 because relative change in

COGS was more than relative change in inventory.

Days in Inventory:

On an average, it took 186 days to sell out the inventory of Renata Limited.

Days in inventory increased in 2008, then continued to decreased till 2011. But it is still above

the industry average. So the performance is not satisfactory.

Total Asset Turnover:

Every one taka worth of total asset of Renata Limited generated around 0.85 taka in sales in

2011.

This ratio has followed a decreasing trend from 2007-2011, although it has slightly increased

during 2008. The performance is not satisfactory as Renata Limited‟s ratio is below industry

average of 0.92 times, during 2011..

Renata Limited‟s Total Asset Turnover ratio has decreased in 2011 because relative increase in

sales was less than relative increase in total assets.

Fixed Asset Turnover:

Every one taka worth of total fixed asset of Renata Limited generated around 1.25 taka in sales

in 2011.

This ratio experienced a steady decrease between 2007 and 2011. In 2007 Fixed Asset Turnover

Ratio of Renata Limited was 2.17 times. In 2008 it fell to 1.87 times, and continued its

decreasing trend. In 2011 it fell sharply to 1.25 times, and was also below the Industry Average

of 3.29 times, for the same year. This shows poor performance of Renata Limited in 2011.

P a g e | 24

Renata Limited‟s Fixed Asset Turnover ratio decreased in 2011 because relative increase in sales

was less than relative increase in total fixed assets.

Average Collection Period:

Renata Limited took on an average 36 days to collect their dues from debtors.

Average Collection Period of Renata Limited fluctuated between the years, 2007 and 2011. The

period increased during 2007-2008, then again fell in 2009. In 2010 it climbed slightly to 36 days

and remained same for the following year, 2011. This value is below the industry average of 54

days, for the same year, indicating the Renata Limited‟s efficiency in 2011.

Average Collection Period of Renata Limited remained same for the last two years.

Average Payment Period:

On an average Renata Limited took 8 days to pay its creditors in 2011.

This number also fluctuated between 5 days and 31 days from 2007 to 2011. Renata Limited‟s

average payment period lies below that of the Industry Average of 40 days indicating

inefficiency and poor performance.

0

0.5

1

1.5

2

2.5

2007 2008 2009 2010 2011

Tim

es

Years

Inventory Turnover Ratio

InventoryTurnover Ratio

02468

10

Tim

es

Inventory Turnover Ratio

InventoryTurnoverRatio

P a g e | 25

0

50

100

150

200

250

2007 2008 2009 2010 2011

Day

s

Years

Days in Inventory

Days inInventory

0100200300400

Day

s

Days in Inventory

Days inInventory

0

0.5

1

1.5

2007 2008 2009 2010 2011

Tim

es

Years

Total Asset Turnover

Total AssetTurnover

00.5

11.5

2

Tim

es

Total Asset Turnover

TotalAssetTurnover

0

0.5

1

1.5

2

2.5

2007 2008 2009 2010 2011

Tim

es

Years

Fixed Asset Turnover

Fixed AssetTurnover

0

5

10

15

Tim

es

Fixed Asset Turnover

FixedAssetTurnover

0

10

20

30

40

50

2007 2008 2009 2010 2011

Day

s

Years

Average Collection Period

AverageCollectionPeriod

0

50

100

150

Day

s



P a g e | 26

Debt Management Raio

Liquidity

Ratio Formula 2007 2008 2009 2010 2011 IA

Debt Ratio (

)

0.41

times

0.47

times

0.42

times

0.42

times

0.49

times

0.44

times

Times

Interest

Earned

( )

9.75

times

8.40

times

9.74

times

11.12

times

7.98

times

24.43

times

Debt Ratio:

In the year 2011, 49% of Renata Limited‟s total assets were financed by debt.

There is a fluctuating trend in using debt to finance the assets of the company all throughout

years, 2007 to 2011. The ratio increased from 2007 to 2008. The company had stable Debt Ratio

for the next two years i.e. 2009 and 2010. In 2011 it again jumped to 0.49, which is above

Industry Average in 2011. This shows that Renata Limited‟s recent performance is poor.

In 2011 49% of Renata Limited‟s total assets were financed by debt, while in 2010 it was 42%..

The reason for this is, debts contributed more to Renata Limited‟s total assets, while total assets

did not increase proportionately.

Times Interest Earned:

In 2011, the Renata Limited‟s EBIT was 7.98 times of their interest expense.

0

10

20

30

40

2007 2008 2009 2010 2011

Day

s

Years

Average Payment Period


0

50

100

150

Day

s



P a g e | 27

We can see a fluctuating trend in this ratio and it has both increased and decreased during years

2007 and 2011. In 2007 it was 9.75 times, then it fell slightly to 8.40 times. In 2009 it again

jumped to 9.74 times, and contiued to increasing to 11.12 times in 2010. In 2011 it fell again to

7.98 times, and was way below the industry average of 24.43 times. So Renata Limited is in a

healthy position. It had a poor performance.

In 2011, Renata Limited‟s Times Interest Earned Ratio was only 7.98 times, while in 2010 it was

11.12 times. The reason for this is Renata Limited‟s interest expense increased; while it‟s EBIT

(Operating Profit) did not increase proportionately.

Profitability Ratio

Liquidity

Ratio Formula 2007 2008 2009 2010 2011 IA

Gross

Profit

Margin

(

) 48.7% 50.6% 53.33% 52.75% 52.46% 43.06%

0.35

0.4

0.45

0.5

2007 2008 2009 2010 2011

Tim

es

Years

Debt to Asset Ratio

Debt to AssetRatio

00.20.40.60.8

1

Tim

es

Debt to Asset Ratio

Debt toAssetRatio

0

2

4

6

8

10

12

2007 2008 2009 2010 2011

Tim

es

Years

Times Interest Earned

Times InterestEarned

0

50

100

150

Tim

es

Times Intereset Earned

TimesInteresetEarned

P a g e | 28

Operating

Profit

Margin

(

) 21.71% 23.73% 24.85% 25.66% 26.34% 18.25%

Net Profit

Margin (

) 13.25% 14.02% 15.47% 16.75% 16.68% 12.26%

Return on

Assets (

) 15.58% 13.70% 15.67% 16.61% 14.14% 9.70%

Operating

Return on

Assets

(

) 25.53% 23.2% 25.17% 25.45% 22.33% 14.50%

Return on

Equity (

)

26.29% 26.06% 27.34% 28.69% 27.48% 14.72%

Gross Profit Margin

In 2011, Renata Limited‟s gorss profit margin was 52.46%. This infers that for every BDT100 of

sales, BDT 52.46 of gross profit was generated.

Throuhout the last five years, 2007 to 2011 Renata Limited has maintained an increasing trend in

Gross Profit Margin. In 2007 it was 48.70%. It maitained a steady growth throughout the

following years, as it rose to 50.60% in 2008. In 2009 it jumped to 53.33%, though after that it

started to decline slightly. In 2010 it fell to 52.75% and fell again in 2011 to 52.46%. Though the

Gross Profit Margin of Renata fell in 2011, it was still above Industry Average of 43.06%, for

the same year, indicating a strong performance.

The reason as to why the gross profit margin increased was because the relative increase in Gross

Profit of Renata Limited was more than its relative rise in net sales.

Operating Profit Margin

In 2011, the Renata Limited‟s operating profit margin was 26.34%. Thus, for every BDT100 of

sales, BDT 26.34 of Operating Profit was generated.

There is an increasing trend in the Operating Profit Margin of Renata Limited between the years

2007 to 2011. In 2007 it was 21.71%. It continued to increase in 2008 to 23.73%, followed by

another slight rise to 24.84% in 2009. In 2010 it rose again to 25.66%, and carried on its steady

P a g e | 29

growth in 2011, as it climbed to 26.34%. This value is placed well above Industry Average of

18.25%, showing a promising performance of Renata Limited in 2011.

In 2011, Operatin Profit Margin of Renata Limited rose to 26.34%, from that of 25.66% in 2010.

The reason for this increase can be expalined by fact that Renata Limited experienced a larger

relative increase in its EBIT, than the relative increase in Net Sales.

Net Profit Margin

Renata Limited‟s Net Profit Margin in 2011 was 16.68%. Thus, for every BDT100 of sales,

BDT 16.68 of net profit was generated.

This has been a steady increase throughout the five years, 2007n to 2011. The Industry average

stands at 12.26% which shows that the company has performed very well compared to its rival

firms in the industry, concerning the Net Profit Margin ratio. Over the 5 years there was an

increasing rate of the Net Profit Margin of Renata Limited.

In 2011 the Net Profit Margin decreased slightly to 16.68%, from that of 16.75% in 2010. This

decrease in Net Profit Margin ratio is due to the relative fall in net profit, followed by a proportionate rise in net

sales.

Return on Asset

In 2011 Renata Limited‟s Return On Assets was 14.14%, thus for every BDT100 worth of total

assets, BDT 14.14 was generated.

This is a little fall from 2010‟s 16.61%. When compared to the industry, Renata Limitrd It is in a

strong state in terms of its Return On Assets; as the average of the rival firms in the industry is

comparatively less at the 9.70%. Trend analysis of Renata Limited shows there were slight

fluctuations (around 15%) from 2007-2009. It then increased to 16.61% in 2010 and fell again

rising to 14.14% in 2011.

The Return On Assets of Renata Limited decreased from 16.61% of 2010 to 14.14% in 2011, as

the relative rise in the net income was significantly lower compared to the proportionate rise in

total assets.

P a g e | 30

Operating Return on Asset

In 2011, Renata Limited‟s Operating Return on Assets was 22.33%. This infers that for every

BDT100 of sales, BDT 22.33 of operating income (EBIT) was generated.

This was a fall from2007‟s 25.53%. The Industry average stands at 14.50% which shows that

Renata Limited is in a satisfactory position with what the average company in the industry has

achieved in terms of the operating return on assets ratio.

The trends over the last 5 years show that the Operating ROE was constant from 2007-2010

(about 25%). It then fell in 2011 to 22.33%. Over the 5 years there was a slight decrease in the

rate.

The operating return on assets decreased as the relative rise in operating income was relatively

less compared to the increase in the total assets from 2010 to 2011.

Return on Equity

In 2011, the shareholder‟s return on equity 0f Renata Limited was 27.48%. Thus, shareholders

have earned BDT 27.48 for every BDT 100 investment in the company.

This was a slight increase from 2007‟s 26.29%. The Industry average stands at 14.72% which

shows that the shareholders are getting a fruitful return on their investments in comparison of the

shareholders of Renata Limited‟s rival firms in the industry which the Return on Equity ratio

shows. The 5 year trend from 2007 to 2011 shows that, the Return on Equity was constant at

around 27%. It rose slightly in 2008 to 28.69% in 2010 before finally reaching the 27.48% mark

in 2011.

The decrease in the ROE of Renata Limited in 2011 from that of 2010 was due to the fact that

the relative increase in net income was less than the relative increase in the total assets.

P a g e | 31

46

48

50

52

54

2007 2008 2009 2010 2011

%

Years

Gross Profit Margin

Gross ProfitMargin

0

20

40

60

%

Gross Profit Margin

GrossProfitMargin

0

5

10

15

20

25

30

2007 2008 2009 2010 2011

%

Years


OperatingProfit Margin

0

10

20

30

%


OperatingProfitMargin

0

5

10

15

20

2007 2008 2009 2010 2011

%

Years

Net Profit Margin

Net ProfitMargin

05

101520

%

Net Profit Margin

Net ProfitMargin

0

5

10

15

20

2007 2008 2009 2010 2011

%

Years

Return on Asset

Return onAsset

0

5

10

15

%

Return on Asset

Return onAsset

P a g e | 32

Stock Market Ratio

Liquidity

Ratio Formula 2007 2008 2009 2010 2011 IA

Earnings

Per Share

(

)

BDT

290.39/

share

BDT

299.55/

share

BDT

333.90/

share

BDT

37.74/

share

BDT

48.14/

share

BDT

42.29/

share

Price-

Earning

Ratio

(

) 25.83 20.83 36.09 34.29 25.03 44.51

Market

to Book

Ratio

(

)

6.78

times

6.80

times

9.90

times

9.84

times

6.68

times

7.68

times

Earnings per Share

20

21

22

23

24

25

26

2007 2008 2009 2010 2011

%

Years


OperatingReturn onAsset

05

10152025

%


OperatingReturn onAsset

24

25

26

27

28

29

2007 2008 2009 2010 2011

%

Years

Return on Equity

Return onEquity

0

10

20

30

%

Return on Equity

Return onEquity

P a g e | 33

In 2011, the shareholders of Renata Limited earned BDT 48.14 for each share they hold.

Renata Limited‟s EPS has been fluctuating over the year. It increased during 2007 to 2009, in

2010 the EPS dropped significantly to BDT37.74/share due to the share price correction during

the period. In 2011, it‟s EPS increased again. Overall, it‟s EPS is quite satisfactory and above the

industry average.

Their number went up due to their increase in their bottom line.

P/E ratio

In 2011 the shareholders of Renata Limited was willing to pay BDT 25.03 for every TK of

reported earnings.

From 2008, shareholders tend to become less confident about Renata Limited. As a result the

numbers came down. It is also noticeable that they also have lower confidence form shareholders

in terms of the industry average, which is BDT 44.51. So performance of Renata Limited in 2011

was poor.

Renata Limited‟s P/E ratio has significantly decreased in 2011 (BDT 25.03) from that of 2010

(34.09) because relative increase in market price per share was much less than relative increase

in EPS.

Market to Book Value Ratio

In 2011, the market to book ratio of Renata Limited was 6.88 times, whereas it was 9.84, 9.90,

6.80 & 6.78 times for the year 2010, 2009, 2008, and 2007 respectively.

From 2007 to 2011, their market to book ratio fluctuated unsteadily. Overall, a decreasing trend

has been observed in Renata Limited‟s market-to-book value ratio. Besides, Renata Limited‟s

M/B ratio is slightly less than the Industry Average i.e. overall performance of Renata Limited

was not quite satisfactory in the year 2011.

The market value of Renata Limited shares in 2011 has decreased significantly from that of

2010, which results lower value in terms of their market value of shares to book value of share.

P a g e | 34

Du- Pont Analysis

Return on Asset (ROA) = Net Profit Margin*Total Asset Turnover

ROA = ((

)) (

)

0

100

200

300

400

2007 2008 2009 2010 2011

BD

T p

er

shar

e

Years

Earnings per share

EPS 0

50

100

150

BD

T p

er

shar

e

Earnings per Share

Earningsper Share

0

10

20

30

40

2007 2008 2009 2010 2011Years

P/E Ratio

P/E Ratio 0

50

100

150

P/E Ratio

P/E Ratio

0

2

4

6

8

10

12

2007 2008 2009 2010 2011

Tim

es

Years

M/B Ratio

M/B Ratio 05

101520

Tim

es

M/B Ratio

M/BRatio

P a g e | 35

2010 16.61 % = 16.75% * 0.99%

2011 14.14 % = 16.68% * 0.85%

From 2010 to 2011, both net profit margin and total asset turnover decreased. This resulted in a

decrease in Return on Asset. The net profit couldn‟t increase to the proportionate increase to

sales. Again, the sales couldn‟t increase to the proportionate increase to total assets. This two

scenario is responsible for bring down the return on asset.

Modified Du- Pont Analysis

Return on Equity (ROE) = Net Profit Margin*Total Asset Turnover*Equity Multiplier

= (

) (

) (

)

2010 28.69% = 16.75% * 0.99% * 1.73

2011 27.48% = 16.68% * 0.85% * 1.94

The Extended Du Pont analysis was similar to the Du Pont analysis as in this case both the total

assets turnover and net profit margin both fell, whereas, equity multiplier was slightly increased

but not to any significant amount to increase the ROE. As a result, ROE has decreased.

4. Risk & Return Analysis

Here, we have calculated the monthly returns from January, 2007 till December, 2011. Based on

the monthly returns, average monthly return is calculated for both DSE General Index & Renata

Limited. We used Microsoft Excel to calculate the monthly returns which is attached in the

appendix section.

ROE

P a g e | 36

Year DSE (market) Renata Limited

2007- 2011 Monthly Returns Monthly Returns

January'07 14.03% 9.34%

February'07 -1.92% -1.75%

March'07 -1.85% 1.24%

April'07 0.34% 9.57%

May'07 13.69% -1.52%

June'07 7.09% 5.17%

July'07 8.84% 24.10%

August'07 2.55% 1.26%

September'07 1.26% 3.76%

October'07 8.52% 4.12%

November'07 4.75% 12.09%

December'07 4.81% 20.11%

January'08 -3.38% -13.57%

February'08 1.42% 4.15%

March'08 3.44% 17.00%

April'08 1.56% -1.14%

May'08 2.13% -12.94%

June'08 -6.47% -8.97%

July'08 -8.85% -2.52%

August'08 3.76% 1.78%

September'08 5.18% 7.01%

October'08 -8.42% -3.86%

November'08 -8.04% 1.98%

December'08 11.06% 2.81%

January'09 -5.63% 1.51%

February'09 -3.41% -5.83%

March'09 -6.83% 0.94%

April'09 4.55% 1.50%

May'09 1.30% -17.62%

June'09 15.91% 5.42%

July'09 -5.06% -2.77%

August'09 0.01% 5.99%

September'09 4.53% 7.12%

October'09 7.72% 12.82%

November'09 29.15% 8.10%

December'09 2.52% 22.43%

P a g e | 37

January'10 17.48% 10.10%

February'10 2.01% -9.91%

March'10 0.27% 6.25%

April'10 1.08% 6.49%

May'10 8.46% -2.25%

June'10 0.02% -13.29%

July'10 2.02% 9.52%

August'10 3.44% -1.56%

September'10 4.76% -1.24%

October'10 10.16% 11.89%

November'10 8.24% 0.71%

December'10 -4.96% -3.20%

January'11 -9.88% -4.81%

February'11 -28.54% -15.67%

March'11 13.40% 21.45%

April'11 -6.14% -6.64%

May'11 -3.89% -16.70%

June'11 7.91% 0.53%

July'11 4.91% 8.24%

August'11 -2.44% 3.94%

September'11 -4.57% 10.42%

October'11 -14.66% -2.77%

November'11 1.22% 2.24%

December'11 0.40% -6.88%

Average Return 1.85% 2.09%

Standard Deviation 8.55% 9.35%

Coefficient Variance 4.62 4.46

The average monthly return for Renata Limited is 2.09% whereas it is 1.85% in the market. In

comparisons, the average return is favorable for the company. But, the variability of Renata‟s

return is higher than the market return, which satisfies that investors has to take higher risk to

take advantage of its higher return from that of the market risk. However, Renata Limited has

P a g e | 38

lower risk per unit than that of other companies in the market. So, Renata Limited is considered

to be a better investment than that of other companies in the market.

5. (a)

The beta for Renata Limited is,

= 0.535

The monthly risk free return, RF is determined to be 0.833%.

Justification: We have taken the latest 91 Days T-Bill rate on December, 2011 which is 10%.

Dividing this value by 12, we got the monthly risk free rate for the period.

Now,

RM (monthly) = 1.85%

RF (monthly) = 0.833%

y = 0.535x + 0.0111 R² = 0.2392

-20.00%

-15.00%

-10.00%

-5.00%

0.00%

5.00%

10.00%

15.00%

20.00%

25.00%

30.00%

-40.00% -20.00% 0.00% 20.00% 40.00%

Re

nat

a Li

mit

ed

DSE General Index

Scatter Diagram for Renata Limited And DSE General Index

Renata Limited

Linear (Renata Limited)

P a g e | 39

= 0.535

So the monthly Required Rate of Return, Ke would be

KE = RM + (RM – RF) *

= 0.0185 + (0.0185 – 0.00833) * 0.535

= 0.023957

= 2.396%

So the annual KE would be

KE = 2.396% * 12

= 28.75%

So the Required Rate of Return, KE is 28.75%

P a g e | 40

SUMMARY OUTPUT

Regression Statistics

Multiple R 0.4890668

R Square 0.2391864

Adjusted R

Square 0.2260689

Standard

Error 0.0822586

Observation

s 60

ANOVA

df SS MS F

Significance

F

Regression 1 0.123381

0.1233

8

18.2341

7

7.33543E-

05

Residual 58 0.392456

0.0067

7

Total 59 0.515837

Coefficient

s

Standard

Error t Stat P-value Lower 95%

Upper

95%

Lower

95.0%

Upper

95.0%

Intercept 0.011056 0.010869

1.0171

7

0.31329

7 -0.01070139

0.0328

1

-

0.010

7

0.032

8

X Variable

1 0.5349811 0.125284

4.2701

5

7.34E-

05

0.28419807

5

0.7857

6

0.284

2

0.785

8

RESIDUAL OUTPUT

Observation

Predicted

Y

Residual

s

1 0.0861138 0.00728

2 0.0007843

-

0.018285

3 0.0011588 0.011244

4 0.0128749 0.082817

5 0.0842949

-

0.099446

6 0.0489861 0.002684

P a g e | 41

7 0.0583483 0.182619

8 0.024698

-

0.012094

9 0.0177967 0.019763

10 0.0566364

-

0.015465

11 0.0364676 0.084445

12 0.0367886 0.164262

13 -0.0070264

-

0.128659

14 0.0186527 0.022865

15 0.0294593 0.140562

16 0.0194017

-

0.030771

17 0.0224511 -0.15184

18 -0.0235573

-

0.066105

19 -0.0362899 0.011119

20 0.0311713

-

0.013382

21 0.038768 0.031366

22 -0.0339894 -0.00462

23 -0.0319565 0.051783

24 0.0702249

-

0.042077

25 -0.0190635 0.034196

26 -0.0071869

-

0.051152

27 -0.0254832 0.034879

28 0.0353976

-

0.020396

29 0.0180107

-

0.194212

30 0.0961715

-

0.041978

31 -0.0160141

-

0.011677

32 0.0111095 0.048823

33 0.0352906 0.035925

34 0.0523565 0.075835

35 0.167003

-

0.086039

36 0.0245375 0.199773

37 0.1045707

-

0.003569

P a g e | 42

38 0.0218091

-

0.120932

39 0.0125004 0.049989

40 0.0168338 0.048085

41 0.0563154

-

0.078851

42 0.011163 -0.14406

43 0.0218626 0.073303

44 0.0294593

-

0.045066

45 0.0365211

-

0.048876

46 0.0654101 0.053525

47 0.0551384 -0.04801

48 -0.0154791

-

0.016567

49 -0.0418002

-

0.006338

50 -0.1416276

-

0.015032

51 0.0827434 0.131781

52 -0.0217919

-

0.044601

53 -0.0097548

-

0.157286

54 0.053373

-

0.048062

55 0.0373235 0.045056

56 -0.0019976 0.041433

57 -0.0133927 0.117558

58 -0.0673723 0.039672

59 0.0175827 0.004784

60 0.0131959

-

0.081975

P a g e | 43

5. (b) Cost of Financing of Debt:

Interest on overdraft in the year 2011 = BDT 215,315,416

Bank Overdraft and Short-term Loan in the year 2011 = BDT 2,402,992,758

So, Before-Tax Cost of Debt =

=

= 0.0896

So, KD = 8.96%

After-Tax Cost of Debt, KD = 0.0896 * (1 - 0.24) = 6.81%

5. (c) Weighted Average Cost of Capital (WACC):

Price of Share as at 31st December, 201 = 1205.00

Market Value of Share Capital,

(225935000 * 1205.00) = BDT 27,225,167,500

Retained Earnings = BDT 3,442,795,036

Bank Overdraft and Short Term Loan = BDT 2,402,992,758

Total Capital = BDT 33,070,955,294

Now,

Weight of Share Capital, WCS =

= 82.32%

Weight of Retained Earnings, WR/E =

= 10.41%

Weight of Bank Overdraft and

Short Term Load, WD =

= 7.27%

Tax Rate = 24%

P a g e | 44

Since the flotation cost is unknown, the required rate of return, KE is equivalent to the cost of

issuing share capital.

Market Value for the Retained Earnings and Debt is equivalent to their Book Value.

WACC = (Weight of Debt * After-Tax Cost of Debt) + (Weight of Share Capital * Cost of

Issuing Share Capital) + (Weight of Retained Earnings * Cost of Retained Earnings)

= (WD * KD) + (WCS * KE) + (WR/E * KE)

= (0.0727 * 0.0681) + (0.8232 * 0.2875) + (0.1041 * 0.2875)

= 0.005 + 0.237 + 0.030

= 0.272

WACC = 27.20%

6. Optimal Capital Structure

A Firm‟s Value, V* = EBIT (1-T) / WACC

As at 31st December, 2011,

Renata‟s EBIT = BDT 1,717,370,007

WACC = 27.20%

Tax Rate = 24%

So, Renata‟s Value = 1717370007*(1-0.24) / 0.2720

= BDT 4,798,533,843

As at 31st December, 2011, Renata‟s Capital Structure consists of 7.27% Debt and (1-0.0727) or

92.73% Equity.

P a g e | 45

Now, we‟ll assume another 4 different combination of Debt and Equity portion of the company

and calculate the WACC for those different combinations. The after-tax cost of Debt and the cost

of Equity will remain the same, (6.81% and 28.75% respectively) as the previous WACC

calculation. With those 4 different WACC for 4 different combinations, we‟ll analyze the best

combination for which the firm‟s value is maximized. The analysis is shown below.

Combination WACC

Firm's Value

Debt Equity

%

BDT

2% 98% (0.02*0.0681)+(0.98*0.2875) 28.31%

1717370007*(1-0.24) /

0.2831 4,610,389,281

5% 95% (0.05*0.0681)+(0.95*0.2875) 27.65%

1717370007*(1-0.24) /

0.2765 4,720,438,356

15% 85% (0.15*0.0681)+(0.85*0.2875) 25.46%

1717370007*(1-0.24) /

0.2546 5,126,477,633

25% 75% (0.25*0.0681)+(0.75*0.2875) 23.27%

1717370007*(1-0.24) /

0.2327 5,608,943,727

Here, we can observe that the cost of financing debt is much lower than the cost of equity. So,

the more the debt portion of the capital structure, the less the WACC. But too much debt can also

incur addition interest expense. So it‟s better for the firm not to rely too much on debt.

From our assumed combination of Debt and Equity, we can see that for the combination of 25%

Debt and 75% equity, the firm‟s value is maximized.

So we can conclude that, 25% of Debt and 75% of Equity is the optimal capital structure for

Renata Limited.

P a g e | 46

7. Intrinsic Value

Non-Constant Model

We assumed that Renata Limited will follow a non-constant super-normal growth till 2013, and

then it will gauge using a 5% constant growth rate.

The super-normal growth rate till 2013 is 25%. (This Dividend Growth Rate calculation is shown

in appendix part.

Given,

D2011 = BDT 8.50 [As given in Renata Limited Annual Report 2011]

Ke = 28.75%

g = 5%

D2012 = 8.50 * (1+0.25) = BDT 10.625

D2013 = 10.625 * (1+0.25) = BDT 13.281

D2014 = 13.281 * (1+0.05) = BDT 13.945

Now,

PV2013 = D2014 / (Ke – g) = 13.945 / (0.2875-0.05) = BDT 58.72

Po = D2012 / (1+Ke) + D2013 / (1+Ke)

2 + PV2013 / (1+Ke)

2

= {10.625 / (1+0.2875)} + {13.281 / (1+0.2875)

2} + {58.72 / (1+0.2875)

2}

= 8.25 + 8.01 + 35.42

Po = BDT 51.69

P a g e | 47

Corporate Value Model

We assumed that Renata Limited will follow a non-constant super-normal growth till 2013, and

then it will gauge using a 5% constant growth rate as well.

Free Cash Flows or FCFs are given below. The calculation and growth rate are shown in

appendix.

The super-normal growth till 2013 is 35%.

FCF2011 = BDT 1,211,135,079

Ke = 28.75%

g = 5%

FCF2012 = 1211135079 * (1+0.35) = BDT 1,635,032,357

FCF2013 = 1635032357 * (1+0.35) = BDT 2,207,293,681

FCF2014 = 2207293681 * (1+0.05) = BDT 2,317,658,366

Now,

PV2013 = FCF2014 / (Ke – g) = 2317658366 / (0.2875-0.05) = BDT 9,758,561,539

Po = FCF2012 / (1+Ke) + FCF2013 / (1+Ke)

2 + PV2013 / (1+Ke)

2

= {1635032357/(1+0.2875)}+{2207293681/(1+0.2875)2}+{9758561539/(1+0.2875)

2}

= 1269928044 + 1331575036 + 5886963319

= BDT 8,488,466,399

So, Total Intrinsic Value of the Corporation = BDT 8,488,466,399

Less: Total Debt = BDT (2,402,992,758)

P a g e | 48

Total Intrinsic Value of Equity = BDT 6,085,473,641

Total Number of Common Stock outstanding = 22,593,500 shares

Intrinsic Value of Stock = (6085473641/22593500)

= BDT 269.35

P/E Multiple Approach

Intrinsic Value of Share = Industry Average P/E Ratio * EPS2012

Industry Average P/E Ratio is 44.51 as calculated in Ratio Analysis section of this report.

EPS2012 is BDT 55.66 as calculated in Forecasted Income Statement section.

So, Intrinsic Value of Share = 44.51 * 55.66

= BDT 2,477.43

Analysis of the Stock price

The market price of Singer Bangladesh was BDT 1205.00 on 31st December, 2011. If the

investors gauge the fair price of the share only considering future expected flow of dividend,

then the fair price is BDT 51.69. As compared, the market price is much higher than that of its

fair value, which is the market price is overvalued.

However, if investors measure the fair value based on the free cash flow that the company is

expected to generate, then the fair value is BDT 269.35. On other hand, the market price was

BDT 1205.00. In comparison, the stock priced is overvalued.

On the contrary, if the investors measure the fair value based on P/E multiple approach, then the

fair value is BDT 2,477.43, which is higher than the market price of BDT 1205.00. In this case,

the market price is undervalued.

P a g e | 49

8. Dividend Policy

Dividend policy is a significant decision taken by the financial managers of any company and is

crucial in deciding keeping shareholders happy along with retaining the required income for

farther investment. For any company to be successful they have to make the right blend of how

much to give as dividend and how much to keep as retained earnings for farther investment. Till

date, researches have not drawn any one just conclusion for dividend policy. However,

researchers tend to follow 3 popular views about this matter.

View 1: “Dividend Policy is Irrelevant”:

Dividend irrelevancy theory asserts that a firm's dividend policy has no effect on its market value

or its cost of capital. When shareholders count their total income, they do not take into account

how much of their total income has come from capital gain yield or from dividend yield as they

only care how much they have received. However, this is on the assumption that

1) Perfect Capital markets exists and that there are no taxes, (corporate or personal), no

transaction costs on securities, investors are rational, information is symmetrical - all investors

have access to the same information and share the same expectations about the firm's future as its

manager.

2) The firm's investment policy is fixed and is independent of its dividend policy

Total Return= Capital Gain Yield +Dividend Yield

View 2: “High Dividend Increases Stock Value”:

This position is based on “bird-in-the-hand theory”, which argues that investors may prefer

“dividend today” as it is less risky compared to uncertain future capital gains. This implies a

higher required rate for discounting a dollar of capital gain than a dollar of dividend. Hence

P a g e | 50

investors are more concerned about the dividend yield of the total return and want to be certain

about it. When a company promises a particular dividend to be paid, then usually the dividend is

actually paid according to the promise. Also, it is possible for the investors to check for the

possibility of the dividends. Therefore, in the market, those shares with more dividend yield are

often the ones with higher prices, as they are more in demand by investors because more value is

put on the return that has more certainty.

View 3: Low Dividends Increase Stock Value:

The first propriety of people in any business is always to maximize their “after tax income”.

Dividend tax rate is quite high compared to that of capital gain. Therefore it is the capital gain

yield that ends up with higher income and is preferred by the investors. Along with it when

dividend is paid to investors it is actually devoid the tax meaning the tax is cut off from the

amount immediately. Whereas in capital gain yield the investor can actually defer the tax until

the yearly taxpaying date. Hence investors who are more concerned about after tax income are

more attracted to companies giving low dividends. This in return creates demand for shares with

higher capital gain and thereby rising the prices as well. So we can conclude that low dividends

increase stock value.

DIVIDEND PAYOUT PLANS

1) Stable Dollar Dividend: Usually companies try to represent their dividend in a partial

basis in a dollar format and also try to maintain a stable and steady dividend each and

every year. For example: $0.5/share,$2/share,$1.5/share.

2) Percentage Dividend Payment: The companies usually give cash dividend payment only.

Such as 20% cash dividends, this is usually converted to dollar value by multiplying the

cash percentage with the face value.

P a g e | 51

3) Stable/small Regular and Year End Extra: Companies usually try to give regular but

small size dividends every year. Any year if companies get higher profit they try to give

some year end extra premium.

Practice in RENATA Limited

From the year 2007 onwards Renata Limited paid a stable and steady sum of dividend to its

stockholders. Renata Limited has provided considerably a high percentage of dividend to its

stockholders of 50% cash dividend in 2007 and 2008 and 60% cash dividend from 2009

onwards. So it can be referred that they followed the stable dollar dividend and percentage

dividend payment. Along with it Renata Limited also gave stock dividends of (4:1) as in for

every 4 shares held they gave one bonus share from 2008 onwards except 2007 when they gave

(5:1).Looking the market to book ratio we can also refer that the market price has increased

continuously through out from 2007 onwards except falling a lit bit in 2011.

Which dividend policy to follow

If observed from 2007 it can be inferred that Renata Limited has been giving quite a high

percentage of dividend to their shareholders and it can be concluded that they have considered

the view of “High dividend increases the share price” as along with the high amount of dividend

paid the share price has also risen throughout the years.

“High dividend increase the share price”

Documents

Final Report (Renata Limited) RYA FIN440