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Brief History of Square Pharmaceuticals

Square Pharmaceuticals Ltd. is a renowned company in Bangladesh. It is a flagship company in the pharmaceutical industry which has reached this mountain of success by fighting many potential competitors like BEXIMCO, INCEPTA, ACME, RENETA, OPSONIN, SK+F, SANOFI-AVENTIS etc. It was initially started as a Partnership in 1958. It was incorporated as a Private Ltd. Company in 1964 and converted into Public Limited Company in 1991. Its initial public offering started in Dhaka and Chittagong stock exchange simultaneously in 1995. The sales turnover of SPL was more than Taka 11.46 Billion (US$ 163.71 million) with about 16.43% market share (April 2009 March 2010) having a growth rate of about 16.72%.

Strategy Analysis
Cost leadership Strategy is being followed by Square pharmaceuticals its objective is to produce quality product, process and services leading to growth of the company but at the same time being cost efficient. Square Pharmaceutical strives to maintain international product quality but at lower prices than other international products. In the national market price differences are limited to some particular products. As most of the drugs that are used daily or frequently are produced by majority of the companies the cost leadership approach is basically seen for costly and infrequent products. For the rest of the products Square Pharmaceuticals tries to maintain good quality with competitive prices as the prior goals and objective of the pharmaceuticals are common and almost similar- to produce quality & innovative healthcare relief for people, maintain ethical standard in the business, to meet the shareholders demand, and to ensure transparent business operations. Heres a list of products and comparison of its prices with other companies: Square Seclo Comel Trevox Ace Ciprocin Trupen Troy Trox Motigut Cenid Price (tk.) 5 30 15 8 14 4 14 10 2.50 32 Other Loscetil Metfo Levox Napa Niofloxion Pantonex Etorix Rolce Dumer Cecnidel ds Price (tk.) 4 40 15 8 14 4 14 10 3 52

So Square Pharmaceuticals basically strives for cost leadership but at the same time there is also a little hint of differentiation but this level of differentiation is necessary as it is required by the very nature of the pharmaceutical industry.

Industry Analysis
Industry Analysis is a vital part of the decision making process in business. Industry Analysis helps investor to take decision. It also helps entrepreneurs to iron out the wrinkles in their business plans. Michael Porter has identified five forces that are widely used in any industry. Porters five forces Model are: 1. Rivalry among existing firms: SQUARE Pharmaceuticals limited is one of the largest Pharmaceuticals companies in Bangladesh and owns a large portion of the market share. The product price of SQUARE Pharmaceuticals is competitive and as it is a well established company; the competition is low. The brand name of SQUARE Pharmaceuticals act as the product differential tool and it lowers the degree of competitiveness. Also the rivalry among the existing firms exists as SQUARE Pharmaceuticals or other firms cannot use the machineries in other purposes or because of some exit barriers. Moreover Square Pharmaceuticals enjoys comparative advantage over the other firms because of strong distribution channel, skilled sales personnel, categorical expansion and business diversification, which is a core competency of the SQUARE Pharmaceuticals limited. 2. Threat of new Entrants: Pharmaceutical industry is not an easily accessible industry for an entrepreneur in Bangladesh. SQUARE Pharmaceuticals can easily produce based on economies of scale which is quite difficult for the new entrants. Also the First Mover advantage supports SQUARE Pharmaceuticals as it was established in 1958 and converted into public limited company in 1991. Being a large pharmaceutical company, SQUARE Pharmaceuticals has a large distribution Channel and good relationship with the retailers. As a result the risk level is Low. 3. Threat of Substitute product: The firms in the pharmaceutical industry produce the same core value product with differentiation in auxiliary product. There are more than 8 leading pharmaceutical firms operating in the industry. So there is high threat of substitute product. However, in recent times, the advances made in the field of biotechnology, can prove to be a threat to the synthetic Pharmaceuticals industry. One of the great advantages of the Square Pharmaceuticals limited is that it has some highly differentiated products which make it to face comparatively less risk of substitute product. 4. Bargaining power of buyers: In Pharmaceuticals industry, the buyers are scattered and they as such does not wield much power in the pricing of the products. However, government with its policies plays an important role in regulating pricing through the National Pharmaceutical Pricing Authority. In case of SQUARE Pharmaceuticals, it produces the products which are undifferentiated in the core value and there is few

switching cost. Also, the number of buyer of SQUARE Pharmaceuticals is a single buyer with several alternative suppliers which makes the risk level moderate. 5. Bargaining power of Suppliers: The Pharmaceutical industry depends upon the chemicals which is again a very competitive and fragmented industry. The suppliers have very low bargaining power and the companies in the Pharmaceuticals industry can switch from their suppliers without incurring a very high cost. However, a situation can arise where the suppliers can go for forward integration to become a Pharmaceuticals company. Despite all these possibilities the level of risk regarding bargaining power of suppliers for SQUARE Pharmaceuticals limited is moderate.

Ratio Analysis

Ratios Current Ratio

2009-2010
4,774,311,194/2,216,744,401

2010-2011
7,022,213,840/4,668,189,426 =1.50:1

2011-2012
6,745,507,008/4,252,934,845 =1.59:1

=2.15:1

The current ratio of the company is quite satisfactory throughout the historical years. However the rate was quite high during 2009-10 but still the rate is reasonable compared to the industry ratio of 0.94:1

(4774311194Quick ratio
2,207,078,082)/2,216,744,4 01 =1.16:1

(7,022,213,8402,541,688,329) /4,668,189,426 =.96:1

(6,745,507,0082,687,818,472)/ 4,252,934,845 =0.95:1

The quick ratio of the firm is decreasing over time but still it is quite healthy compared to the industry average of 0.512:1

Total Debt ratio

(1,258,376,052+2,216,744, 401)/ 15,029,500,278 =.23

(958,511,238+4,668,189,426) /19,444,409,654 =.29

(933,965,662+4,252,934,845) /21,453,784,762 =.24

The Debt ratio throughout the historical year were healthy that proves the firms being in a less risky position. The average industry debt ratio is 53.81%.

DebtEquity Ratio

(1,258,376,052+2,216,744, 401)/ 11,554,379,825

(958,511,238+4,668,189,426) / 13,817,708,990 =.41

(933,965,662+4,252,934,845) / 16,266,884,255 =.32

=.30

The lower Debt-equity ratio implies that the firm has a strong financial backbone as it relies more on its own equity rather than on debt.

Fixedasset turn over

13,279,141,757/10,255,189, 084 =1.29

15,576,487,536/12,422,195,8 14 =1.25

18,592,856,236/14,708,277,7 54 =1.26

Fixed asset turnover shows how much the firm is earning from investing its fixed assets. The fixed asset turnover ratio of this firm is well above the industrial average 1.02 times, which signals that the firm is utilizing its asset relatively well compared to other firms.

Profit margin

(2,087,871,791/13,279,141, 757)*100 =15.72%

(2,532,054,550/15,576,487,5 36)*100 =16.26%

(2,897,710,641/18,592,856,2 36)*100 =15.59%

The profit margin of this firm is also well above the industry average 8.158% which implies the firm to be in a highly profitable position compared to other firms of the same industry.

Return On Asset

(2,087,871,791/15,029,50 0,278) =13.89%

(2,532,054,550/19,444,409,65 4)*100 =13.02%

(2,897,710,641/21,453,784,76 2)*100 =13.51%

Return on asset is more than double of industry average 6.208% that refers a very good position of the firm in the industry.

Return On Equity

(2,087,871,791/11,554,37 9,825) =18.07%

(2,532,054,550/13,817,708,99 0)*100

(2,897,710,641/16,266,884,25 5)*100 =17.81%

=18.32%

Return on equity is very high compared to the overall industry average of 13.26%

Price Earning 25.88 times s RatioDSE

25.35 times

21.69 times

P/E ratio is very close to the industry average of 24.33 times.

Earning 138.36 s per 129.07 Share Square Pharma earns It earns 129 taka per share. 138 taka per share. (SPL)

10.94 It earns 11 taka per share.

It can be seen that the shareholders still have a positive earning against each share outstanding i.e. the company is still profitable to invest

Valuation (Fundamental Analysis)


The fundamental analysis is conducted on square pharmaceutical for the year 2013-2015. We have forecasted the income statements and the balance sheets for the year 2013-2015 based on the historical data/ balance sheets and income statements for the year 2007-2012. We collected these data from the annual reports and DSE. For simplicity of the analysis we made several assumptions which are also provided along the analysis. The important points of the analysis are focused here; the whole analysis is given in the appendix part. The main focus of such analysis is to derive the intrinsic value of the firm, and value of par share according to the analysis that ought to be. First, several assumptions were made for simplicity of conducting such analysis, these are: 1. the firm has shift its investment in marketable securities to noncurrent assets from current asset in the last 2010-11 year so for the easiness of calculation we assumed this as the noncurrent asset for all the year 2. the firm also shifted its financing cost to operating expense portion in the last 2010-2011 year so for the easiness of calculation we assumed it as the operating expense portion 3. capital work in process is calculated in proportion to sales 4. average growth rate of marketable securities are calculated from last 3 years bacuse of change in strategy of the firm 5. Liabilities for Other Finance are calculated in proportion to sales 6. The company makes a regular allocation of 5% on net profit before tax to this fund and payment is made to the workers as per provisions of the Companies Profit under Labour Law 2006 7. as there is no information on new share issuance in the last annual report so we assumed that no additional shares have been issued for the forecasting years; this also means that there is also

no additional share premiums 8. tax holiday is assumed to be constant as last historical year; the amount was transferred to retained earnings 9. general reserve is constant for the forecasted years as seen in the historical data 10. we assumed that new capital expenditures have been financed through long term debt 11. the current portion of LTD is assumed to be paid out 12. the income tax is 27.5% as seen in the historical data 13. to comply with conservatism principle we assumed the unrealized gain on marketable securities to be constant to last historical year 14. deferred tax liability (proforma balance sheet) equals previous deferred tax liability + new calculated provision 15. the firm decided 25% cash, 40% stock dividend for simplification we only included 25% cash dividend 16. Risk free rate is kept equal to current 30days treasury bill rate provided by Bangladesh Bank 17. amount of depreciation for the year 2007-2012 are derived from annual reports, PPE value at cost is used for depreciation calculation 18. the industry growth rate reduced 1.5% in the last historical year but the company growth rate increased 1.64%; so we assumed the industry growth rate to be .5% for the forecasted years Now from the historical income statements and balance sheets of the year 2007-2012, the forecasted/ proforma income statements and balance sheets for the year 2012-2015were prepared. The focal points of these statements are Proforma Income Statement: Particulars GROSS TURNOVER GROSS PROFIT Operating Expenses NET PROFIT BEFORE TAX NET PROFIT AFTER TAX Transfer to retained earnings 2012-13 21646888731 7942389991 4323046677 4618450887 4346759176 3260069382 2013-14 25202571664 9246994126 5243447647 5494775529 5171531870 3878648902 2014-15 29342305325 10765890426 6324223944 6644843806 6253944557 4690458418

Proforma Balance Sheet: Particulars Non-Current Assets: Current Assets: Shareholders' Equity Non-Current Liabilities Current Liabilities 2012-13 17,475,956,860 9478262157 19,127,532,198 2,146,211,808 5777169228 2013-14 22,197,124,942 11726194402 23,006,181,100 3,782,982,056 7246733239 2014-15 30,100,863,578 12194126544 27,696,639,518 5,748,979,424 8980439957

After this we calculated the value of beta and market return which are necessary for calculating WACC. For this we used the monthly share prices and DSE General Index values of the year 2006-2012.
Covariance Variance of market return Beta Market return Market return (yearly)

0.005725265 0.00771023 0.742554407 0.015273907 0.183286887

WACC and the necessary information for WACC calculation are shown below Risk-free rate Market return Beta Cost of equity Cost of debt After tax cost of debt Total market value of equity Book value of debt Weight of equity Weight of debt WACC

0.09 0.183286887 0.742554407 0.159270589 0.121185961 0.087859822 43221032832 3,002,470,665 0.935044503 0.064955497 0.154632067

Risk free rate is kept equal to current 30days Treasury bill rate provided by Bangladesh Bank.

After this we calculated the change in working capital. In this case we categorized inventory, trade debtors, short term loan, advances, deposits and prepayments as non-cash current asset and trade creditors, liabilities for expenses, liabilities for other finance as non- STD Current liabilities.
Working capital Change in WC

4,399,344,501 6,409,950,312 7,462,838,383 8,688,672,147 2,010,605,811 1,052,888,071 1,225,833,763

Finally, with all the above information we calculated the enterprise value, equity value and finally value per share. Number of outstanding share at last historical annual report was 264,834,760.
Enterprise value Equity value Value per share

63993271133 61,577,720,735 232.5137408

The last observed share price of square pharmaceuticals is tk. 163.2 (31/12/12) and our fundamental analysis shows that the market share price should be close to tk. 232.51. So the share is undervalued in the market, there is a potentiality that market price of the share will increase in near future; provided all other market mechanisms are working perfectly.

Appendix