FINANCIAL ANALYSIS:

Submitted To:
Dr. Masud Rahman

Submitted By:
Nogmaye Habiba ID # 073293060
Mehrin Afroze Chowdhury ID # 072 475 060
M. Rubbyat Akram ID # 063085060

Submission Date:
12th April, 2009
April 12, 2009

To,
Dr. Masud Rahman
Professor, MBA Program
North South University

Dear Sir,

We are pleased to work on our group term paper: “Predicting Stock Price: Square
Pharmaceuticals Ltd”. This stimulating work has helped us to better understand the
different variables affecting the stock price of a firm. This in-depth financial analysis will
truly be useful for each of us in our own field of work.

We will thus greatly value the opportunity you gave us in this course. In case of any
questions regarding our findings please do contact any of the group members & we will
remain obliged to clarify wherever necessary.

Thanking You,

______________________ ________________________
Mehrin Afroze Cowdhury Nogmaye Habiba
ID# 072-475-060 ID# 073293060

______________________
M. Rubbyat Akram
ID# 063085060
EXECUTIVE SUMMARY
The objective of this report is to project the Stock Price of a specific company, as in this
case Square Pharmaceuticals Limited through different financial analysis, which
started off with identifying variables affecting the stock price and then through Stock
Valuation.

This analysis is done mainly based on the information collected from the annual report
issued by Square Pharmaceuticals Limited in the fiscal years 2006-2007 & 2007-2008.
Daily Market Index and Stock price was collected from DSE.

The different growth rate analysis for the company’s sales & profitability led to choose
an optimum growth rate, which in this case is the “Sustainable Growth Rate” or “SGR”.
Using this justified growth rate, pro forma statements (Balance Sheet & Income
Statement) were prepared along with different scenario analysis. The analysis suggested
that SPL maintains a sustainable growth without requiring any external financing
excepting for the case of a highly optimistic scenario.

It has been observed empirically that a good number of variables affect the variations of
Stock Price & the proceedings have been discussed in the report. This research also
revealed that apart from quantitative variables, some company specific and market
specific information including dividend declaration, Ex-date, etc. also affect the stock
price valuation.

In conclusion it can be stated that as a Blue Chip share SPL shows a sustainable constant
growth potential and it reflects a high confidence level from the investors.
TABLE OF CONTENTS
1.0 Company Overview..................................................................................................5
2.0 Problem Statement...................................................................................................5
3.0 Objective of the Study..............................................................................................6
4.0 Methodology..............................................................................................................6
5.0 Limitation of Study..................................................................................................7
6.0 Financial Analysis.....................................................................................................8
Balance Sheet Analysis...................................................................................................8
Pro Forma Statements.................................................................................................13
Plug Variables...............................................................................................................15
Scenario Analysis..........................................................................................................15
7.Beta.............................................................................................................................17
8.Expected Return of SPL using CAPM....................................................................18
9.Dividend Declaration, Firm Specific News and Market News..............................19
10. STOCK Valuation..................................................................................................22
11. Conclusion...............................................................................................................23
1.0 Company Overview
Square Pharmaceuticals is a renowned Pharmaceutical Company of our country. It is
currently the leading corporation in its field of expertise. Square Pharmaceuticals began
its operations in the year 1958 as a Partnership Firm. It converted into a Private Limited
Company in 1964.

The company became Public & became listed in the DSE in the year 1991, since then
there was no looking back. The supremacy of Square is such that the closest competitor
Beximco Pharmaceuticals is not even close in comparison to the market share; the latter
has only about half the market share.

Square Pharmaceuticals Limited has extended its range of services towards the highway
of global market. The company pioneered exports of medicines from Bangladesh in the
year 1987 and has been exporting antibiotics and other pharmaceutical products since
then. This extension in business and services has increased the credibility of Square
Pharmaceuticals Limited ten folds.

2.0 Problem Statement

Prospective investors are always very interested to know how a company is going to
perform financially in order to benefit their investment decisions.

There are many variables which can affect the actual financial position and the stock
value of a particular company. Most of these variables are not controllable or predictable.
It is not very easy to figure out how these variables affect the company value and the
stock price.

This case study was undertaken in order to identify some of these variables and see how
they affect the company’s market value and its stock price. Also to try to project the
future stock price depending on these variables. Different financial analysis and
techniques have been employed to justify the prediction about the stock price
3.0 Objective of the Study
The specific objectives aimed for this report are:
 To focus on some crucial information by analysis and interpretation of SPL such
ratio analysis, pro forma statement analysis etc.
 To identify the variables that can affect the stock price of SPL.
 To find out the recent financial situation or trend of SPL.
 To project the future financial state of the company.
 To predict the future stock price of SPL share based on these projected financial
performance data

4.0 Methodology
In this case study various methods and techniques have been used to help reach and
solidify the findings. This section outlines reasoning for choosing and using these
methods

4.1 Statistical Analysis Technique

This case used some important concepts of corporate finance such as ratio analysis, pro
forma statement, growth rate analysis, scenario analysis, etc. to clarify how each variable
affects the stock price of SPL. Accounting theories and practices were also closely
applied. It is also worthy to mention that many tables and graphs were used to give visual
aid for quick understanding of the scenarios. These tables and graphs help the reader to
quickly identify justification behind our conclusion about various scenarios.

4.2 Data Type

Primary Data: All SPL annual reports, the primary data were used in most parts in the
order to calculate important factors. The daily share price for both GlaxoSmith and DSE
Index were also collected from the Dhaka Stock Exchange in order to help with the
analysis.
Secondary Data: Information was also collected from the Internet and the different daily
newspapers. Examples of such data are SPL history and other basic company
information, medicine companies that are enlisted in share market etc. Also, any firm
specific or market specific news which can affect the share price of SPL.

4.3 Data Source

Few different data sources were used to collect the necessary data, like (a) Annual
Reports 2006 – 2008 (b) the Internet and (c) Newspapers. The major source was Dhaka
Stock Exchange from where the annual 2006- 2008 reports, daily stock price for SPL
and DSE Index were collected. The Internet and newspapers were also helpful to collect
information about the recent incidents.

4.4 Time Period taken under Consideration

For this case study, a time period of 4 years 2006-2008 was taken under consideration. In
most cases, these 4 years data were used as the basis for growth projection. Though it is
not a lot, it is good enough to identify some trends in data to make some realistic
predictions about the future of SPL.

5.0 Limitation of Study

The following limitations can be found in this case study:
 As it is an academic research restricted to a period of only 3 months not all the
possible variables were considered in deducing the financial position of SPL.

 SPL Corporate Office said that they cooperate and share information only
with the share holders and other stakeholders; and thus, they have limitations
to distribute information to general public (who are not in the category of
stakeholders).
6.0 Financial Analysis
There are many financial analysis techniques which can measure the financial position of
a company. In this section few of these techniques are discussed in an attempt to outline
the financial health of Square Pharmaceuticals Ltd.

4.1 Balance Sheet Analysis

Table: Balance Sheet analysis based on Book Value and Market Value

Book Value - 2007

Asset Amount Liabilities Amount
Current Asset 4,411,836,436 Current Liabilities 3,500,845,103
Non current Asset   Non-Current liabilities 785,241,612

Share holder's equity

Tangible asset 8,291,290,984 (8942400 shares) 8,417,040,705
Intangible asset  
   
Total Asset 12,703,127,420 Total Liabilities 12,703,127,420

Market value - 2007

Asset Amount Liabilities Amount
Current Asset 4,411,836,436 Current Liabilities 3,500,845,103
Non current Asset   Non-Current liabilities 785,241,612

Share holder's equity

Tangible asset 15,291,290,984 (8942400 shares) 36,753,264,000
Intangible asset 21,336,223,295    
       
Total Asset 41,039,350,715 Total Liabilities 41,039,350,715

The above table shows the balance sheet as it was presented in the annual report 2007 of
Square Pharmaceuticals Ltd. According to this balance sheet the book value of SPL
shares for the day December 31, 2007 should be Tk.941.25. But in reality the actual
market price on that day was much higher than that, Tk. 4110. It is good news for a
company because the market value is much higher than the book value. That good news
also gives a sign that the company has goodwill in the market which can be considered as
intangible asset of the company.
Figure 1: Comparison between Book Value and Market Value of SPL stock

Assumptions of balance sheet based on Market Value:

1. The company has other subsidiaries and uses same fixed assets such as furniture
and fixture, motor vehicles etc in both companies. But two companies follows two
different depreciation method which makes the value of those assets lower than
actual market value.

2. The balance sheet does not incorporate any intangible assets, like goodwill.
Square Pharmaceuticals Ltd is a renowned and well established company and
expanded its business in international market. It has gained much reputation in
both the market.

3. As shareholders of SPL are highly satisfied about their performance and there is
significant differences between book value and market value of share. So there is
strong confidence in shareholders mind about the efficient performance of SPL
make high intangible asset.
 4. The equity of the company has been severely understated. The company
calculates its equity from 1991 when SPL was first listed with the Dhaka Stock
Exchange. But according to the time value of money theory the value of money
has increased a lot over these years.

5. Table 1: Ratio analysis of SPL

Short-term Solvency
Ratio 2008-2007   2007-2006   2006-2005   2005-2004   2004-2003
Current ratio 1.26   1.44   1.78   1.66   1.61

Quick ratio 0.68   0.84   1.19   1.08   0.98

Cash ratio 0.059   0.055   0.140   0.196   0.042

  Long-term Solvency
Total Debt 33.74%   30.07%   31.15%   29.58%   21.90%

Times interest
earned (TIE)
6.58   8.64   12.51   15.92   12.13

Cash Coverage 6.6   8.6   12.5   15.9   12.1

  Asset Management
Inventory
Turnover
2.40   2.76   2.63   2.76   3.54

DSO (Days Sales

outstanding) 13.75   13.53   14.87   15.75   14.99

Total Asset
turnover
0.75   0.83   0.76   0.78   0.93
  Profitability Performance
Profit Margin 14.45%   14.96%   16.45%   20.26%   17.69%

Return on Asset 10.88%   12.43%   12.54%   15.88%   16.50%

Return on Equity 16.42%   17.77%   18.21%   22.55%   21.13%

  Market-value Measures
EPS 154.53   218.61   234.67   290.71   269.46

PE ratio (Price
Earning)
26.60   11.19   9.70   12.96   8.43

Book Value per

share
941.25   1230.08   1288.65   1289.07   1275.04
       
Market Book Ratio 4.37 1.99 1.77 2.92 1.78
       

Interpretation of Ratio:
From the trend it can be concluded that Square’s current assets are increasing and current
liabilities are decreasing. So, its liquidity position is relatively stronger compare to others.
It has got an inconsistent quick ratio which means that difference between assets and
inventories and also liabilities frequently fluctuates. SPL’s inventory turnover ratio is also
inconsistent. So it means that company management is not able to manage its inventory
efficiently all the time. Its receivable turnover ratio is increasing. It means that
company’s management has dealt proficiency with its collection policies. The fixed asset
turnover ratio is decreasing. It means that company does not use its fixed assets
efficiently and intensively. The total asset turnover ratio of SPL is stable. It means that
company is generating sufficient volume of business given its total investment. Its total
interest turn ratio is increasing. It means that company is not able to meet its annual
interest cost. The profit margin on sales is increasing. It means that company has low cost
of debt and also operating expenses are going down signifying the company’s
efficiency.ROA is increasing. It means that company’s high BEP plus low interest cost
resulting from its low use of debt. Its ROE has increased more than ROA. It means that
company’s greater use of equity.

Financial strength and weaknesses of SPL:

In this section the strengths and weaknesses for the companies have been summarized.
Square Pharmaceuticals Ltd.
Strengths:
 Liquidity position is relatively stronger compare to others.
 Company management has proven efficiency in managing its inventory.
 Company’s management has dealt proficiency with its collection policies
 Company is generating sufficient volume of business given its total investment
 Operating expenses are going down signifying the company’s efficiency.

Weaknesses:
 Company does not use its fixed assets efficiently and intensively.
 Company is not able to meet its annual interest cost.
7. Financial Planning and Growth
Financial planning formulates the method by which financial goals of a company are to
be achieved which has two dimensions: a time frame and a level of aggregation. To
identify which factors positively contribute to the growth of the stock price of Square
Pharmaceuticals Ltd. (SPL), we have analyzed the trend of different variables from the
five year financial statement and detected the growth or reduction of every item. After
that we have selected few components which show a growing trend and positively
contribute to the growth of SPL.

Growth Rate
To predict the performance of any firm in the future, it is very important to understand
the growth of that company. The following table shows the company’s, growth over the
last seven year (2004 - 2008).

Table 2: Growth rates and their geometric mean

Growth Rates (%) 2008-2007 2007-2006 2006-2005 2005-2004 GEOMEAN

Sales 10.10% 23% 14.21% 13% 0.1439

Fixed Asset 21.85% 29.18 13% 20.82% 0.6445
Operating Cost 20.30% 42.98% 17.89% 23.24% 0.2454
Current Asset 20% -9% 24% 61% 0.3521 
Retained Earning 22.48% 24.06% 35.66% 68.07% 0.2265
Non-current Liability 32.30% -5.98% 63.47% 965% 0.5864
Current Liability 36.98% 13.04% 15.93% 55.91% 0.2560
Dividend -20% 12.01% 32% 20% 0.1918
EPS 9 -89 -18 28 0.2520

The growth rates that have been shown in the chart, we can find that geometric mean of
sales growth is 14.39 %. As the world economy is experiencing the recession and the
impact of recession is also started affecting our economy, so it will be a highly optimistic
choice if we expect that the company will grow at the rate of 14%. On the other hand, the
other growth rates that have been calculated also give us the indication that we can not
consider them as company growth rate given GDP growth of Bangladesh is 5.45% and
world economy is in recession. Let’s see what the other variables that we can consider as
growth rate for the company.
 Variables GDP Sustainable growth Rate Br
Growth 5.45% 9% 7%

If the Square pharmaceuticals Ltd. maintains constant retention ratio and the return is also
expected to be constant in future then the company can expect to grow at 7% growth rate.
Though the rate is higher than GDP growth but considering the future opportunity to have
higher return and the sustainable growth rate we are taking the growth rate in between
these two. At the same time, keeping a constant retention ratio will give an indication to
the share holders that the company does not have any liquidity problem and company is
efficient enough in investment decision. Because at the present situation of world
economy and our economy, while new investment is risky SPL is not retaining profit
unnecessarily rather distributing to shareholders. It will increase shareholders confidence
regarding the company and thus will increase the share price.

Pro Forma Statements

According to the Growth Rate section of this case, a single growth rate (7%) has been
selected at the overall growth rate for SPL. Assuming a constant growth rate, the table
below shows the pro forma income statement for coming 5 years.

Table : Pro Forma income statement for the next 5 years

  2012 2011 2010 2009 2008 2007

  (Growth Rate = 7%)

Sales 11,582,053,028 10,824,348,624 10,116,213,668 9,454,405,297 8,835,892,801 8,257,843,739

COGS 6,810,878,069 6,365,306,606 5,948,884,679 5,559,705,307 5,195,986,268 4,856,061,933
Gross Profit 4,771,174,959 4,459,042,018 4,167,328,989 3,894,699,990 3,639,906,532 3,401,781,806

Operating Expenses 2,373,785,126 2,218,490,772 2,073,355,862 1,937,715,759 1,810,949,307 1,692,475,988

Operations
Profit/(Loss) 2,397,389,833 2,240,551,246 2,093,973,127 1,956,984,231 1,828,957,225 1,709,305,818
Other Income 848,022,755 792,544,631 740,695,916 692,239,174 646,952,499 604,628,504
Other Cost 624,556,471 583,697,636 545,511,810 509,824,121 476,471,141 445,300,132
353,100,35
Depreciation 495,241,508 462,842,531 432,563,113 404,264,592 377,817,375 1
EBIT 2,125,614,609 1,986,555,709 1,856,594,121 1,735,134,692 1,621,621,208 1,515,533,839
144,254,63
Tax 202,324,592 189,088,404 176,718,134 165,157,135 154,352,463 8
 Net Income 1,923,290,017 1,797,467,305 1,679,875,986 1,569,977,557 1,467,268,745 1,371,279,201
Dividend 673,151,506 629,113,557 587,956,595 549,492,145 513,544,061 479,947,720
Addition to Retained
Earnings 1,250,138,511 1,168,353,749 1,091,919,391 1,020,485,412 953,724,684 891,331,481

Table : Pro Forma balance sheet for the next 5 years

  2012 2011 2010 2009 2008 2007

  (Growth Rate = 7%)
Current Assets 5,519,485,955 5,358,724,228 5,202,644,882 5,051,111,536 4,720,664,987 4,411,836,436
Fixed Assets 10,372,928,552 10,070,804,420 9,777,480,019 9,492,699,048 8,871,681,353 8,291,290,984
Total Assets 15,892,414,507 15,429,528,648 14,980,124,901 14,543,810,583 13,592,346,339 12,703,127,420
Current Liabilities 4,379,778,275 4,252,211,918 4,128,361,085 4,008,117,558 3,745,904,260 3,500,845,103
Non-current
Liabilities 785,241,612 785,241,612 785,241,612 785,241,612 785,241,612 785,241,612
Total Liabilities 5,165,019,887 5,037,453,530 4,913,602,697 4,793,359,170 4,531,145,872 4,286,086,715
Common Stock 2,929,705,000 2,929,705,000 2,929,705,000 2,929,705,000 2,929,705,000 2,929,705,000
Reserves 1,207,813,437 1,207,813,437 1,207,813,437 1,207,813,437 1,207,813,437 1,207,813,437
Retained Earnings
brought forward 8,236,983,236 7,145,063,845 6,124,578,433 5,170,853,749 4,279,522,268 3,043,819,175
Retained Earnings 1,168,353,749 1,091,919,391 1,020,485,412 953,724,684 891,331,481 1,235,703,093
Total Equity 13,542,855,422 12,374,501,673 11,282,582,282 10,262,096,870 9,308,372,186 8,417,040,705
Total Liabilities
and Equity 18,707,875,309 17,411,955,203 16,196,184,979 15,055,456,040 13,839,518,058 12,703,127,420
Excess Fund 2,815,460,802 1,982,426,555 1,216,060,078 511,645,457 247,171,719 0

The above table shows the pro forma balance sheets for the coming 5 years. There are
some assumptions are made in preparing the pro forma income statement and balance
sheet.
 Initially all assets, including fixed assets, accounts payable vary directly with
sales.
 Long term debt and common stock won’t vary with sales as management decision
is to keep a constant long term debt and common stock.
 As the company decided to maintain a constant retention rate, the company will
pay dividend every year at the same rate.
 The balance sheets indicate the company has excess fund, which can be financed
distributed to payoff long term debt and reduce the obligations of interest
expenses.
Plug Variables
The pro forma statements from the above section indicate the firm will have excess fund
if it will grow at 7% rate. The company can decrease its long term debts by the extra
fund, thus will decrease the debt equity ratio. As the company decided to maintain a
constant retention rate, it ends up with extra fund at the end of the year. In the current
recession of economy, it will be risky to do any new investment. So, the company can
payoff its debt which will give an encouraging signal to the shareholders. The table
below lists the change is capital structure of the company.

Table : Expected change in capital structure of Square Pharmaceuticals Ltd.

  2012 2011 2010 2009 2008 2007

Initial Debt/Equity
Ratio 33.53% 32.56% 31.61% 30.69% 28.68% 26.80%

Revised Debt/Equity
Ratio 19% 20% 21% 22% 24% 26.80%

The above table shows that the debt/equity ratio of the company’s capital structure will
go down from the current 26.80% to 19%.

Scenario Analysis
In this case study, the growth rate of 7% has been selected as the constant growth rate
and the pro forma statement has been generated based on this growth rate. For scenario
analysis, both optimistic and pessimistic scenarios are being considered.

Table : Scenario analysis for both optimistic and pessimistic situations

  Optimistic Normal Pessimistic

Growth Rate 12.00% 10.00% 7.00% 5.00% 3.00%
Income Statement        

Sales 9,248,784,988 9,083,628,113 8,835,892,801 8,670,735,926 8,505,579,051

COGS 5,438,789,365 5,341,668,126 5,195,986,268 5,098,865,030 5,001,743,791
Gross Profit 3,809,995,623 3,741,959,987 3,639,906,532 3,571,870,896 3,503,835,260
Operating Expenses 1,895,573,107 1,861,723,587 1,810,949,307 1,777,099,787 1,743,250,268

Operations Profit/(Loss) 1,914,422,516 1,880,236,400 1,828,957,225 1,794,771,109 1,760,584,993

Other Income 677,183,924 665,091,354 646,952,499 634,859,929 622,767,359
Other Cost 498,736,148 489,830,145 476,471,141 467,565,139 458,659,136
Depreciation 395,472,393 388,410,386 377,817,375 370,755,369 363,693,362
EBIT 1,697,397,900 1,667,087,223 1,621,621,208 1,591,310,531 1,560,999,854
Tax 161,565,195 158,680,102 154,352,463 151,467,370 148,582,277
Net Income 1,535,832,705 1,508,407,121 1,467,268,745 1,439,843,161 1,412,417,577
Dividend 537,541,447 527,942,492 513,544,061 503,945,106 494,346,152
Retained Earnings 998,291,258 980,464,629 953,724,684 935,898,055 918,071,425

Balance Sheet          
Current Assets 4,941,256,808 4,853,020,080 4,720,664,987 4,632,428,258 4,544,191,529
Fixed Assets 9,286,245,902 9,120,420,082 8,871,681,353 8,705,855,533 8,540,029,714
Total Assets 14,227,502,710 13,973,440,162 13,592,346,339 13,338,283,791 13,084,221,243
Current Liabilities 3,920,946,515 3,850,929,613 3,745,904,260 3,675,887,358 3,605,870,456

Non-current Liabilities 879,470,605 863,765,773 840,208,525 824,503,693 808,798,860

Total Liabilities 4,800,417,121 4,714,695,387 4,586,112,785 4,500,391,051 4,414,669,316
Common Stock 2,929,705,000 2,929,705,000 2,929,705,000 2,929,705,000 2,929,705,000
Reserves 1,207,813,437 1,207,813,437 1,207,813,437 1,207,813,437 1,207,813,437
Retained Earnings 998,291,259 980,464,629 953,724,685 935,898,055 918,071,425
Total Equity 5,135,809,696 5,117,983,066 5,091,243,122 5,073,416,492 5,055,589,862
Total Liabilities and
Equity 9,936,226,817 9,832,678,453 9,677,355,907 9,573,807,543 9,470,259,179
External Fund Needed 4,291,275,894 4,140,761,709 3,914,990,433 3,764,476,248 3,613,962,064

New Debt/Equity Ratio 30% 29.48% 28.68% 28.14% 27.61%

In the above scenario analysis, we have taken the 7% growth rate in normal situation. If
we want to be optimistic enough to predict that the economy will have a high growth and
the company will also able to grow at 10% to 12%. On the other hand, the situation can
also be worse enough to have a growth lower than the normal and the company may face
a growth of 5% or even 3%. In that case the good news for the company is that if the
company will have to grow at 5% then company doesn’t have to face any loss as the rate
is much closer to GDP growth rate. After analyzing the scenario of different situation we
can say that the projected growth rate is appropriate for the company which will help the
company to operate in the market even if the situation is worse. It gives a positive
indication towards the company and increases the shareholders confidence to invest in the
company’s share.

7.Beta

Beta measures the responsiveness of a security to movements in the market portfolio (i.e.,
systematic risk).
Cov ( Ri , RM )
i 
 2 ( RM )

To better understand the relationship with the market index and the stock price volatility,
Beta calculation is commonly used by the financial analysts. Beta can be thought of as
the tendency of a security's returns to respond to swings in the market. A beta of 1
indicates that the security's price will move with the market. A beta of less than 1 means
that the security will be less volatile than the market. A beta of greater than 1 indicates
that the security's price will be more volatile than the market.

Our calculation was done using daily stock price and index price for 2007-2008. The beta
value of Square Pharmaceuticals Ltd. was determined to be 0.78245 for 2007-2008.
Considering 2008 the beta was 0.7088. It has indicated a strong relation between stock
return and the market return. The beta value is determined through calculating the
covariance and variance of the both the index price and stock price growth rate.

2007-2008 2008
Covariance 0.00013 .000122
Variance 0.000165 .000173
Beta 0.782447 .70883

Below graph for daily change in SPL stock price & DSE Index reveals the strong
relationship.
 Daily Change In SPL Price & DSE Index
15
10
5
0
-5
-10
-15
-20
-25
-30

2008-November-20
2007-November-14
2007-November-29

2008-November-05
2007-June-12
2007-June-27
2007-July-15
2007-July-30

2008-January-24

2008-June-04
2008-June-22
2008-July-08
2008-July-23

2009-January-21
2007-January-14
2007-January-29

2008-January-08

2009-January-05
2007-February-15

2007-May-13

2007-December-17

2008-February-10

2008-May-04

2008-December-14
2007-March-05
2007-March-21
2007-April-09
2007-April-24

2007-May-28

2007-September-19

2007-October-29

2008-February-26
2008-March-12
2008-March-31
2008-April-16

2008-May-20

2008-August-07

2008-September-11

2008-October-21
2007-August-14
2007-September-03

2007-October-04

2008-August-27

2008-October-05
SPL change% DSE change%

Figure 2: Daily Change in SPL Price & DSE Index (07-08)

8.Expected Return of SPL using CAPM

The general idea behind CAPM is that investors need to be compensated in two ways:
time value of money and risk. The time value of money is represented by the risk-free
(Rf) rate in the formula and compensates the investors for placing money in any
investment over a period of time. The other half of the formula represents risk and
calculates the amount of compensation the investor needs for taking on additional risk or
risk premium. This is calculated by taking a risk measure (beta) that compares the returns
of the asset to the market over a period of time and to the market premium (Rm-Rf).

R i  RF  β i  ( R M  RF )

We have determined market return Rm for year 2008 taking the Quarterly change in DSE
Index. The average market return in 2008 has been found to be 1.76%. If we post all the
values in the above equation (considering Rf=7.5) we get the expected return R i to be
3.435%. This is lower than the risk free rate. This is the outcome of low market return.
As such the expected return derived from CAPM can not be used for stock valuation.
9.Dividend Declaration, Firm Specific News and Market News
It has been empirically observed that, movement of Share Price of a specific company is
significantly influenced by the “Announcement of Dividend Declaration”, “Firm
Specific News” and “Market News”. In case of dividend declaration, one important issue
is “Ex-Dividend Date” affecting share price.
An attempt was made to find whether share price of SPL behaved in accordance with the
influence of these variables.

Analysis of Stock Price Fluctuation during the year 2007:

The last quarter of the year 2006 was more or less stable which was reflected in the
following year until 19/05/07 when a Firm Specific News came that Square
Pharmaceuticals Ltd. has obtained "Certificate of CMP compliance of a Manufacturer"
from the Medicines and Healthcare products Regulatory Agency (MHRA) of London on
19.05.07. This approval will help to start exporting its Finished Pharmaceutical Products
to the United Kingdom as well as to enter into the Pharmaceutical markets in other
European countries, in Australia, in South Africa and the GCC countries in near future.
Due to this news share price gradually increased by 33.73% in 10 days. This shows that
Market is not efficient enough.

Daily SPL Close Price (2007-08)

6000

5000

4000

3000

2000

1000

0
2007-November-05

2007-November-22

2008-November-10

2008-November-26

2008-December-23
2007-December-10
2007-June-07

2007-June-25

2007-September-06

2008-February-07

2008-June-12

2008-July-02

2008-September-11
2007-January-14

2007-January-30

2007-February-19
2007-March-08

2007-March-28

2007-May-06

2007-May-22

2007-July-12

2007-July-30

2007-September-24

2007-October-17

2008-January-03
2008-January-22

2008-February-26

2008-March-13

2008-May-08

2008-May-27

2008-July-20

2008-October-06

2008-October-23

2009-January-14
2007-April-16

2007-August-16

2008-April-02

2008-April-21

2008-August-26
2008-August-05

SPL Close

Figure 3: Analysis of stock price fluctuation during the year 2007-08

Then the price remained stable until 16th July’07. On 16th July’ 07 the Board of Directors
has recommended cash dividend @ 50% and stock dividend @ 50% for the year ended
March 31, 2007. As a result share price increased by 45% in 9 days. This is also a
delayed response. Also this was a overreaction to good news followed by a reversion of
10.83% decrement of share price for 13 days.

Then share price again faced a decrement of 24.65% in 3 days following the Ex dividend
date of 15/08/07.

Analysis of Stock Price Fluctuation during the year 2008:

Starting of 2008 was a continuation of the trend of last year. Then it showed a unusual
hike of 37.8% starting from 25/03/08 to 20/5/08 (35 days). In response to a DSE query,
the company has informed that there is no undisclosed price sensitive information of the
company for recent unusual price hike. This may due to rumor effect as there was no
other “good news”. Another explanation may be that Investors expected a high dividend
declaration from SPL like 2007. According to Weak Form Market Efficiency security
prices reflect all information found in past prices and volume. So, this phenomena
describes Weak Form Market Efficiency.

On 21/07/08, The Board of Directors has recommended cash dividend @ 40% and stock
dividend @ 35% for the year ended March 31, 2008. This was not impressive as 2007. As
a result, share price decreased by 17.94% in only one day. This shows a rather efficient
form.

Then again a decrement was found due to the “Ex-Dividend Date” phenomenon , as the
Shareholders were willing to dispose their shares after getting the dividend. The record
date was 14/08/08. As a result share price decreased by around 28% from 13/08/08 to
18/08/08 (1 day). This also shows a rather efficient form.
As a whole, it can be observed that, the stock price of a specific company is significantly
influenced by the Ex dividend Date phenomenon on dividend declaration, Firm specific
news and Market news. It can be predicted that Ex Date phenomenon will occur in
somewhere around in the 2nd week of August for Square Pharmaceuticals Ltd..
10. STOCK VALUATION

In this section we shall make a projection of market stock price of Square

Pharmaceuticals Ltd.. It has a security specific beta risk of 0.70883 and the expected
return for the company is 3.435%. But the expected return 3.435% is based on market
return 1.76%. This phenomenon may be due to the fact that in 2008 due to the political
situation & anti corruption activity of the government, a lot of money has been invested
in DSE. As a result the price of stocks fell.It is vivid from the below graph.

DSE Index in 2008

3300
3200
3100
3000
2900
2800
2700
2600
2500
2400

2008-November-02
2008-November-12

2008-November-24
2008-December-04
2008-December-28
2008-January-13

2008-February-05
2008-February-17

2008-June-17
2008-June-29

2008-July-22

2008-October-08
2008-January-01

2008-January-24

2008-February-28
2008-March-11

2008-March-23

2008-May-25

2008-June-04

2008-July-10

2008-September-09
2008-September-21

2008-October-21
2008-May-12
2008-April-17

2008-August-03

2008-August-28
2008-April-06

2008-April-29

2008-August-13

dse close

Figure : Trend of DSE Index in 2008

As the Expected Return derived from CAPM is too low (3.435%), we shall use another
formula for expected rate of return.

ks=(D1/P0)+g
For growth rate, we took the g=RR*ROE as 7%. Using this growth rate, from this
formula we get the Expected Return 9.23%.
Using the above information we can forecast expected stock value for SPL using the
Gordon Model (Dividend Valuation Model). We assume that dividends will grow at a
constant rate, g, forever. Since future cash flows grow at a constant rate forever, the value
of a constant growth stock is the present value of a growing perpetuity:

Where,

P0 
Div 1 Div1  Div0 (1  g )
ks  g

We assume g=7% & k=9.23%. From all the above information we can forecast the future
stock price for 2009. So the stock price for 1st January, 2009) would be BDT 3845.

But the real average stock price for first three months in 2009 was BDT 2959.41. The
average stock price is 23% lower than our forecasted price. This indicates the price of
SPL share is undervalued in the market. The explanation for lower market price may be
due to decreasing trend in the General Index.

11. Conclusion

After analyzing all the ratios, we have found out the following information about Square
Pharmaceuticals Ltd:

In the liquidity ratios we can see that both current ratio and quick ratio are below the
benchmark and for the last five years the both the ratios have been deteriorated. This
reveals that the company is not holding the short-term solvency. Huge inventories have
been piled up in last year that consumed cash. Most alarming is cash ratio which has
drastically gone down since 2004 but slightly improved in 2007. The firm should be
concerned to promote cash sales, may be, by means of cash discount.

In asset management ratios we can see inventory turnover ratio, DSO and total asset
turnover slightly deteriorated in 2007. However the all the ratios are better than Beximco
Pharmaceuticals Ltd. Also the DSO of Square pharmaceuticals indicates that it collects
the sales faster than Beximco Pharmaceuticals Ltd.

Debt management ratios give a clear idea about long term solvency of Square
Pharmaceuticals Ltd. The debt ratio increased slightly in 2007. TIE and Cash coverage
ratio are better than Beximco Pharmaceuticals Ltd.

Profit margin Ratio, ROA and ROE of Square pharmaceuticals Ltd has deteriorated
compared to the previous years. Although the decrease rate is not so high still it is a
problem for Square and they need to try to improve these ratios.

Both P/E and M/B ratios have improved to demonstrate that investors have more trust in
the firm. There must be some good news not reflected in the accounting ratios. For
example, in an inflationary economy inventories being piled up might indicate profit
potentials of the next year as the cost of production of the next year would go down
compared to industry due to cost savings in inventories.

From the total analysis, we can summarize that for the last year 2007, even though
Square Pharmaceuticals Ltd. deteriorated in all the ratios, but still holding the better
position compared to Beximco Pharmaceuticals Ltd (the best alternative forgone) and
this has been reflected through the increment in share price and in P/E and M/B ratios.
The firm gained the trust of the investors. Square Pharmaceuticals Ltd might have a good
news that is not reflected in other ratios but investors know.
Therefore we can come to the conclusion that Square Pharmaceutical Ltd is a better
company to invest on.