Assignment on:

“Financial Statement Analysis and Stock Valuation of

HeidelbergCement Bangladesh Limited’’

Master of Professional Finance Program

Submitted To:

Ms. Pallabi Siddiqua

Associate Professor
Department of Finance
Faculty of Business Studies
University of Dhaka

Submitted By:

Alamgir Mohammad Tuhin

ID-Fin-08-19-023

Date of Submission: 25th May, 2019

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 Letter of Transmittal

25 May 2019
Ms. Pallabi Siddiqua
Associate Professor
Analysis of Financial Investments
University of Dhaka

Subject: Assignment on “Financial Statement Analysis and stock Valuation of

HeidelbergCement Bangladesh Limited.”

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,

Alamgir Mohammad Tuhin

FIN-08-19-023

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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

Chapter 2- Company analysis

Chapter 3- Industry analysis

Chapter 4- Market analysis

Chapter 5- Valuation of the Company using Absolute Valuation

Chapter 6- Conclusion & reference

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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.

Objective of the study:

▪ To analyze the financial statements
▪ To determine the value of firm though different valuation framework of absolute valuation
▪ To recognize key terms of relative valuation model

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:

• Confusion regarding Authenticity

• Lack of updated information
• Subjectivity

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 Chapter-2

Company Analysis
Company Overview:

HeidelbergCement Bangladesh Limited is a sister concern of HeidelbergCement Group,

Germany. The company is operating in Bangladesh since 1974. With two production plants,
HeidelbergCement manufactures and markets gray cement under two brand names, Scan
Cement and Ruby Cement. They were enlisted in Dhaka Stock Exchange and Chittagong Stock
Exchange respectively in 1989 and 1985 (International Leasing Securities Limited, 2014).
A project named Chittagong Cement Factory was established under Central Ordinance No.
XXXVIII of 1962. The factory started production of Portland cement on 30 June 1974. The
installed production capacity was 300,000 MT per annum. The project was thereafter
incorporated as a private limited company on 30 June 1979 which was placed under Bangladesh
Chemical Industries Corporation (BCIC) with effect from 1 July 1982. This Company was
converted into a public limited company in February 1989 after revaluation of assets as well as
finalisation of net worth.

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.

Tatki, P.O.: Jatramora, Union: Tarabaw, P.S.: Rupganj,

Registered office
Narayanganj
Symphony, Plot: SE (F) 9, Road 142, South Avenue Gulshan 1
Operational headquarters
Dhaka
Production plant Kachpur, Chittagong, Dhaka.
Year of Incorporation 30 June 1979
The principal activities of the Company throughout the year
Business Line continued to be manufacturing and marketing of gray cement
under two brands namely, Ruby and Scan Cement.
Stock Exchange Dhaka Stock Exchange, Chittagong Stock Exchange.
Authorized Capital Tk. 1000 Million
Paid Up Capital Tk. 565.036 Million
Number of Shares 56,503,590

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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

Product Line up by HeidelbergCement Bangladesh Limited:

• Ruby Cement
• Scan Cement
CHAPTER -3

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%

Shah Cement HeidelbergCement Meghna Cement

Holcim Lafarge Surma Others

Figure 1: Market share in the cement industry of Bangladesh

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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

Analysis of Competitive Forces:

Porter’s Five Forces Framework
The nature and degree of competition in an industry hinge on five forces: the threat of new
entrants, the bargaining power of customers, the bargaining power of suppliers, the threat of
substitute products or services (where applicable), and the jockeying among current
contestants (Porter, Micheal E., 1979).
Porter’s Five Forces framework is one of the most important tools to analyze a company’s
competitive environment.

Threat of new entrants

The potential and growth of the cement industry in Bangladesh is likely to attract new players
to compete but some entry barriers which reduce this threat. High capital costs, long gestation
periods and access to cheap sources of supplier are the significant entry barriers (IDLC Finance
Limited, 2011). High levels of competition, high infrastructure requirement and existing excess
capacity are also demotivating factors for the new entrants (LankaBangla Securities Limited,
2014).

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).

Bargaining power of customers

Customers of cements have very limited power since they do not have any suitable alternative.
Companies like HeidelbergCement who have high brand value usually include a premium while
pricing their products (IDLC Finance Limited, 2011). Generally, customers are not that much
loyal to any brands because of availability of other local and international brands and low
switching cost. But switching of a few customers is not likely to affect HeidelbergCement
materially.

Bargaining power of suppliers

The industry depends on raw materials imported from a few countries such as Thailand and
Indonesia. (IDLC Finance Limited, 2011). Therefore, suppliers of these countries have some
power to influence their buyers whose production depends on their supplies. Due to their
purchase agreement with their supplier, Inducement and high switching cost (losing cost
advantages), HeidelbergCement may have to face a reasonable bargaining power of their
supplier (LankaBangla Securities Ltd., 2014).

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.

Environmental Analysis and Internal Appraisal:

SWOT Analysis

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

• Brand image and international quality control

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).

• Stable dividend policy

In 2011 and 2012, HeidelbergCement declared dividend of 45% and 50% of the face value of
the ordinary shares and they declared dividend of 380% of the face value last year which
enhanced their reputation top the investors (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

• Unutilized production capacity

Increased production capacity lead HeidelbergCement to be an inefficient company as well.

Almost 40% of their capacity was remained unutilized whereas the cement industry of
Bangladesh faces 20%-30% of unutilized capacity (International Leasing Securities Limited,
2014).

• Unutilized cash and bank balances

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

• Dependence on imported raw materials

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

So, Required rate of return (R) =5.13%

Growth rate (g) = Retention ratio x ROE

Year 2015-2016 2016-2017 2017-2018

DPS 20 21 21.5
EPS 26.69 27.7 29
Div payout 75% 76% 74%
Retention 25% 24% 26%
ROE 27% 17% 16%
Growth rate 7% 4% 4%
Avg. growth 5%

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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.

Free Cash flow to Equity (FCFE)

The valuation of stock can be done through FCFE like DDM. This can be done by discounting
the free cash flow. For discounting we have used required rate return found from CAPM which
is 5.13%.

Year 2015 2016 2017 2018

Current assets 6,187,424,000 6,656,843,000 5,287,096,000 4,000,021,000
Current liability 3,155,378,000 3,946,551,000 3,324,759,000 3,205,401,000
Working capital 3,032,046,000 2,710,292,000 1,962,337,000 794,620,000
Changes in working capital (321,754,000) (747,955,000) (1,167,717,000)

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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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