Valuation of IFAD Autos Limited

Course code: F-307

Course Title: Analysis of Financial Investment

Submitted to
Khairul Alam Siddique
Lecturer
Department of Finance
Faculty of Business Studies
University of Dhaka

Submitted by
Syeda Nabiha Ferdous
ID: 23-018
Section- A
BBA 23rd Batch
Department of Finance
University of Dhaka

Date of Submission: February 12, 2020

 Letter of Transmittal

September 30,2019

Khairul Alam Siddique

Lecturer
Department of Finance
Faculty of Business Studies
University of Dhaka
Subject: Submission of the report on Valuation of IFAD Autos Limited
Dear Sir,

You assigned us a report regarding the valuation of companies. Here we have attached the report.

I have selected IFAD Autos Limited which is a listed company and analyzed the company’s
management, their capital structure, future earnings prospects and the market value. I also tried to
determine the economic value of the whole business of the company.

Hope you like my effort. I look forward to doing such challenging tasks in future also.

Sincerely yours

……………………..
Syeda Nabiha Ferdous
ID No.: 23-018
Section: - A, 23rd Batch
Department of Finance
Faculty of Business Studies
University of Dhaka

2
 Table of Contents
Executive Summary ........................................................................................................................ 1
Chapter 1: Introduction ................................................................................................................... 1
Chapter 2: Analysis on Global Economy........................................................................................ 2
Chapter 03: Analysis on Macro Economy ...................................................................................... 4
Chapter 04: Analysis on Automobile Industry ............................................................................... 7
Chapter 5: Company Overview .................................................................................................... 11
Chapter 6: Valuation of Share....................................................................................................... 16
6.1 Free Cash Flow Model ........................................................................................................ 16
6.2 DDM Method ...................................................................................................................... 19
6.3 Relative Valuation .............................................................................................................. 20
Chapter 7: Conclusion................................................................................................................... 22
Chapter 8: References ................................................................................................................... 23
Chapter 9: Appendix ..................................................................................................................... 24
Appendix 1 ................................................................................................................................ 24
 Executive Summary
IFAD autos limited is one of the leading automobile manufacturers and assemblers of Bangladesh.
The automobile industry of Bangladesh is consolidated whereas IAL captures a big portion of
shares in different segments of the industry. IAL is engaged in importing, marketing, assembling,
and body building of different models of Ashok Leyland’s vehicles in Bangladesh.
The objective of our report is to determine the intrinsic value of IFAD Auto Limited’s share using
different valuation techniques. We will also perform a top down analysis which includes the
analysis of global economy, macro economy, industry and company.
The global economy is in a slow down pace for the last couple of years. The reasons are Prolonged
trade tensions exacerbating the cyclical slowdown in global economy, Global automobile
production contracts amid higher tariffs and policy uncertainty, further easing of macroeconomic
policies as external headwinds to growth rise. But the economists expect the growth of global
economy to improve form the next year.
The economy of Bangladesh is one of the fastest growing economy in the world. In the first quarter
of 2019, Bangladesh was the seventh fastest growing economy in the world by reporting a GDP
of 7.8%. But recently the export sector of the economy is suffering due to the global slowdown of
economy.
In the next chapter we analyzed the industry IFAD Autos Limited belongs to, the Automobile
industry of Bangladesh. The automobile industry in Bangladesh, as a whole, is growing. We have
an estimated annual demand of 30,000 units for the passenger vehicles among which brand new
vehicles are contributing 5,000 units. The demand for brand new cars is increasing as
manufacturers are now offering new generation, highly efficient mobility solutions across different
customer segments.
The next chapter contains the overview of IFAD Autos limited as a company. The company is in
a growth stage now. It is pursuing new and unique strategies and expanding its business with a
view to acquiring a large market share.
In the fifth chapter we have calculated the intrinsic value of the share of IFAD Autos limited using
different valuation techniques. We have used the free cash flow to firm approach to calculate the
per share value. For that purpose, we have also prepared a proforma income statement and balance
sheet. Then we used the dividend discount model and calculated the value under different
assumptions and lastly, we used relative valuation techniques. And we have provided an insight
for the investors whether they would buy or sell the share of IFAD Autos Limited
 Chapter 1: Introduction
A business valuation is a general process of determining the economic value of a whole business
or company unit. Business valuation can be used to determine the fair value of a business for a
variety of reasons, including sale value, establishing partner ownership, taxation, and even divorce
proceedings. Owners will often turn to professional business evaluators for an objective estimate
of the value of the business.
Valuations can and should be used as a powerful driver of how you manage your business. The
purpose of a valuation is to track the effectiveness of your strategic decision-making process and
provide the ability to track performance in terms of estimated change in value, not just in revenue.
The scope of this report is to perform the equity valuation of IFAD Autos limited using different
valuation techniques such as DCF model, DDM model etc. and by doing this valuation we are
providing insight for investors wheter the shares of this company is undervalued or overvalued
and therefore, helping the investors in picking the right shares to make an optimum portfolio.
 Chapter 2: Analysis on Global Economy
“We are now in a significantly weakened global expansion”, said IMF chief economist Gita
Gopinath. The global economy for the past few years have been slowing down. It has slowed to
its lowest pace in three years. The weakness in growth is mostly driven by:
• Prolonged trade tensions exacerbating the cyclical slowdown in global economy
• Global automobile production contracts amid higher tariffs and policy uncertainty
• Further easing of macroeconomic policies as external headwinds to growth rise.
There are also several other factors acting as a driver for growth slowdown. It is now on track to
stabilize. According to IMF chief, Global growth is expected to stabilize at around 3.5% boosted
mainly by growth in China and India and their increasing growth in world income.
The following table shows the global economic growth for the past few years along with the
expected growth rates for the upcoming years:
Table 1: Global Economic Growth
Region Economic Growth
Forecasted
2015 2016 2017 2018 2019 2020 2021 2022 2023
World 3.5 3.4 3.8 3.6 3 3.4 3.6 3.6 3.6
Advanced economies 2.3 1.7 2.5 2.3 1.7 1.7 1.6 1.6 1.5
Emerging and Developing 6.8 6.7 6.6 6.4 5.9 6 6.2 6.1 6
Asia
Emerging and Developing 0.8 1.8 3.9 3.1 1.8 2.5 2.5 2.5 2.6
Europe
Emerging market and 4.3 4.6 4.8 4.5 3.9 4.6 4.8 4.8 4.8
developing economies
European Union 2.5 2.1 2.8 2.2 1.5 1.6 1.7 1.6 1.6
Latin America and the 0.3 -0.6 1.2 1 0.2 1.8 2.4 2.6 2.8
Caribbean
Middle East and Central 2.6 5 2.3 1.9 0.9 2.9 3.2 3.2 3.3
Asia
South Asia 7.4 7.6 6.9 6.7 5.9 6.6 7 7.1 7.2
Other advanced economies 2.3 2.4 2.9 2.6 1.6 2 2.3 2.4 2.4
Sub-Saharan Africa 3.1 1.4 3 3.2 3.2 3.6 3.7 3.9 4.1
Source: IMF
So, we can see that, since 2019 in almost all regions the economic growth was slowly declining
due to the reasons explained above. The world economic development growth was 3% in 2019
which was 0.06% lower than 2018. But according to the projections of the economists the growth
rate is starting to stabilize and it will be growing at a slow pace for the next few years.
The world economic growth is expected to be 3.4% in 2020, 0.04% higher than the last year and
it is expected to be at a stable rate of 3.6% for the next 3 years, 2021 to 2023. The emerging market
and developing economies are expected to grow at 4.6 % in 2020, 0.07% higher that 2019 and
other advanced economies are also expected to grow at 2% in 2020 higher than 2019 and to slowly
grow in the next years.
As Bangladesh belongs to the South Asia region, we are concerned with this area. And from the
table we see that the growth rate of south Asia was slowing down and it fell to 5.9% in 2019 from
7.45 in 2015. But from the year 2020, the economists expect the growth rate to be 6.6%, 0.06%
higher than 2019. And also, in the later years the growth rate is expected to increase slowly.
The uptick in global growth for 2020 is driven by emerging market and developing economies that
are projected to experience a growth around 4.6%. About half of this rebound is driven by
recoveries or shallower recessions in stressed emerging markets and the rest by recoveries in
countries where growth slowed in 2019 relative to 2018. So, the investors should grab the
opportunity of investing in the emerging industries and benefit thereby.
To rejuvenate growth policymakers must undo the trade barriers put in place with durable
agreements, rein in geopolitical tensions and reduce domestic policy uncertainly and also
undertake structural reforms to boost productivity, improve resilience and lower inequality.
 Chapter 03: Analysis on Macro Economy
Bangladesh is one of the world’s fastest growing economy. The economy of Bangladesh is a
developing market economy. In a decade since 2014, Bangladesh averaged a GDP growth of 6.5%
that has been largely driven by its export of RMF, remittances and the domestic agricultural sector.
The country has pursued export-oriented industrialization, with its key export sectors
include textiles, shipbuilding, fish and seafood, jute and leather goods. It has also developed self-
sufficient industries in pharmaceuticals, steel and food processing and telecommunication sector.
In the first quarter of 2019. Bangladesh was the world’s seventh fastest growing economy with a
rate of 7.3% real GDP annual growth. One of the most densely populated economies in the world,
Bangladesh has continued making impressive strides in achieving social development goals for its
167 million citizens.
The key macroeconomic variables GDP growth rate, per capita income, unemployment rate,
inflation rate, per capita GDP are presented in the following table:
Growth in GDP
Bangladesh’s GDP is experiencing rocketing growth in last few years and it is expected to continue
in next few years also. This Growth rate survived even during the global recession of 2007-08.
The country is expected to outperform other countries of south Asia. Aggregate economy has a
positive relationship with gross domestic production.

Chart 1: Real GDP Growth Rate %

8.2
8.0
7.8
7.6
7.4
7.2
7.0
6.8
6.6
2016 2017 2018 2019e 2020f 2021f 2022f

Data Source: World Bank

Forecasted GDP growth rate indicates that Bangladesh will be able to survive its above average
growth in next few years when it is expected to grow at a rate of above 7%. At the same time, it
will outperform the growth of India and Pakistan. This positive growth will affect the stock market
positively.
Inflation
Inflation is another important variable of macro economy. Too much control over inflation reduces
inflation to a lower level which may prevents the growth of economy. On the other hand, too high
inflation leads to chaos in the economy by increasing the nominal interest rate, reducing the
demand for fund. Also, people will save less and it will result in fall in the investment. Hence, to
survive expected growth, Bangladesh Bank used to keep inflation within target.
Table 3: Inflation Rate
Year 2015 2016 2017 2018 2019 2020 (E)
Inflation % 6.4 5.5 5.9 5.8 5.5 5.5
Data Source: Bangladesh Bank Quarterly July-Sept’ 2019
Government expects the actual inflation rate to be within 5.5% in 2020. Due to previous success
in controlling inflation, this target is credible. Also, according to Statista, Inflation in Bangladesh
is expected to be within 5.5-5.6% in the period of 2024.
Money Supply
Money supply is another important variable that predict future business picture. Decline in rate of
growth of money have preceded while increases in the growth rate of money supply have
consistently preceded business expansion (Friedman & Schwartz, 1963). Also, study conducted
by Sprinkel (1971), Keran (1971) indicated strong leading relationship between changes in money
supply and stock return. Hence understanding money supply trend is also important for getting
insights of macro-economy. Historical trend in money supply shows fluctuations in money growth
rate of the country.
Table 4: Money Growth Rate
Year 2014 2015 2016 2017 2018 2019
M1 Growth % 14.6 13.53 32.1 13.02 25.3 7.2
M2 Growth % 16.08 12.42 16.35 10.88 2.5 9.9
Data Source: Bangladesh Bank Quarterly October-December 2019, 2017, 2015
To achieve high GDP growth target in upcoming future, both government and Bangladesh bank
have to take expansionary policy that will tie inflation within the target of 5.5% and also facilitate
the expected growth of above 7%. Considering the prior outcome policy taken, Bangladesh bank
has stated that its monetary policy will be “cautiously accommodative” so that it can achieve its
targeted GDP growth and inflation. Hence investors can expect that money supply will be
consistent with economy and there will be no surprising impact on stock market due to money
growth.
Interest Rate
“Single-Digit Interest Rates” policy of government will affect the economy through investment,
industrialization and job creation. Recently lending rate and deposits rate have been determined as
maximum 9% and 6% respectively. Although it will have a positive impact on economy, stock
price of banks falls immediately. Also, government’s officials expect acceleration of
industrialization.

Bangladesh has seen export led growth in recent years driven by the private sector and so the
continued rise of GDP. But only in 2019, the export earnings fell drastically. Globally no major
setback was suffered by Bangladesh economy during 2019, on a sustained basis but Bangladesh
experienced some slow-down in export and import growth due to shrinking global economic
growth. President trump’s unilateral Trade policy affected Bangladesh exports to some extent such
as Loss of market to competitors with greater competitive advantage, particularly in garment
manufacturing. according to Bangladesh Bureau of Statistics, exports from Bangladesh declined
by 7.6 percent in the first five months of the current fiscal year while imports dropped by 3.20
percent during the same period.
 Chapter 04: Analysis on Automobile Industry
Ifad Autos Limited belongs to the Automobile industry of Bangladesh. The Automobile industry
of Bangladesh is the third largest in South Asia. And it has been one of the fastest growing sectors
of Bangladesh. However, the last 2 years the sector is experiencing sluggish demand. 2018-19 was
a year of strong headwinds for the entire commercial vehicle industry of Bangladesh. During 2017
to 2019, the medium and heavy truck segment of the industry registered 44% decline. The reason
of this decline includes the discussion about Election year, delaying in mega infrastructure
projects, unfavorable exchange rate, bank liquidity crunch and the global trade dispute.
To get better knowledge about the industry we have analyzed the effect of business cycle, along
with inflation, interest rate, consumer sentiments on this industry. We have also analyzed the
industry life cycle and the market competitiveness in this chapter.
Effect of business Cycle on Automobile Industry
The automobile industry is a highly cyclical one, i.e. an economic boom is generally accompanied
by high sales in the automobile industry, while sales usually suffer during economic downturns
(let alone recessions). The correlation between sales of the industry and GDP is extremely high.
The strength of the economy is, by far, the major determinant of auto company sales and profits.
Sales are similarly tied to the level of consumer confidence and to people’s spending power. This
is due to the usually high investment involved with the purchase of a new vehicle. During a
prosperous time with high incomes, many families and individuals have the means to buy a car,
whereas they try to save their money when times are not so rosy and avoid such a large expense.
As the world economy was in a slow pace for the past few years, the automobile industry of the
country was also facing downturns.

Effect of Interest on Automobile Industry

Interest rate changes affect the automobile industry through 2 channels.
The first one is the household expenditure channel. Higher interest rates raise the cost of borrowing
for households leading to a decline in demand for automobiles. Hence, sales and real prices fall.
Automakers will react to the decline in demand by curtailing production.
The second channel is the firm inventory channel. Higher interest rates raise the cost of holding
inventories of automakers leading to a fall in production and lowering of sales price to increase
sales.

Effect of Inflation on Automobile Industry

Inflation has always had a severely detrimental effect on the car industry. The market as a whole
can stall badly and every sector linked to vehicle production and manufacturing is affected.
Inflation raises the cost of manufacturing. Rising costs for manufacturers invariably means that
these costs have to be covered and it is usually the consumer who’s paying for it through increased
prices. As a result, the cost of car finance also goes up.
Effect of Unemployment on Automobile Industry
Unemployment is a major factor in this environment. People do not feel optimistic about their
prospects when they are unemployed. Additionally, people without jobs are less likely to have the
means to afford a car. Someone with a job is not likely to make a major purchase if he is worried
about losing his job.
In 2009, the unemployment rate was between 8% and 10%, and auto sales were 9 million on an
annualized basis. In March 2015, the unemployment rate was 5.5% and auto sales were 16 million.
Effect of Consumer Confidence on Automobile Industry
Consumer Confidence shows how optimistic people are feeling about the economy. There are three
components to consumer confidence surveys: consumer sentiment (how people personally feel at
the moment), current economic conditions (how they feel the economy is doing currently) and
consumer expectations (how they think it will be in six months).
Auto sales are dependent on all three of these conditions. Unemployment and consumer confidence
are assessments of the economic environment.
Effect of Technology on Automobile Industry
Automobile manufacturing is much easier today as car makers use the robots in the manufacturing
of vehicles. This has helped to cut down the cost of production for automobiles while at the same
time helping to increase production volume. Therefore, automakers are able to meet demand and
at the same time satisfy the customer expectations.
Also, technology helps to improve customer service.

Competitiveness Analysis
Competitor analysis in marketing and strategic management is an assessment of the strengths and
weaknesses of current and potential competitors. This analysis provides both an offensive and
defensive strategic context to identify opportunities and threats. To asses the competitiveness of
this industry we will be doing the Porter’s Five Forces Analysis. The five forces identified by
Porter are divided into 5 components:
a) Threat of New Entrants
b) Bargaining Power of Suppliers
c) Bargaining Power of Buyers
d) Threat of Substitutes Products
e) Rivalry Amo ng Existing Players

Threat of New Entrants

Automobile industry requires high initial investment. In addition to that, a large amount of credit
sale is also a major barrier for new entrants. It is also very time consuming to build strong
distribution channel across the country. These barriers reduce the threat of new entrants for the
existing companies.
Bargaining Power of Suppliers

Commercial automotive industry of Bangladesh is dominated by e few numbers of companies.

Sales volume of the companies are also very high for single customers to force the company to
compromise its profitability.

Bargaining Power of Buyers

Industry players sell commercial vehicles that are quite identical products. Since commercial
vehicles are considered industrial products, industry players have to ensure the supply according
to the industry demand. Customers have few scopes to choose from. Hence, bargaining power of
buyers is low.

Threat of Substitutes

In Bangladesh 70% of the cargos and passengers are transported by road vehicles. Though other
modes are available they are not popular due to cost and inconvenience. Threat of substitutes is
low considering there are very few alternatives for transportation on road.

Rivalry Amo ng Existing Players

The automobile industry is consolidated in Bangladesh. Few major players dominate the market.
So, the competition among the players is moderate and price competition is quite low.

Major Growth Drivers

1. Expansion of some major industries: Automobile industry faces significant growth
riding on improved connectivity and rapid expansion of some major industries that require
transport facilities for procuring raw materials and distributing their products. Such as,
cement and textiles industry.

2. Implementation of Axle Load Policy: The axle load policy was introduced in December
2017 to restrict the plying of overloaded trucks to keep roads intact from early damage and
save maintenance cost which has been piling up due to lack of control on the traffics. The
axle load policy is active several roads and highways. Prior to the enactment of axle load
policy pre purchase were observed which gave a push to the sale of trucks.

3. Increased Mobility of people and Trade activities: Growing population of Bangladesh

has triggered the use of vehicles at a greater pace creating demand for transportation.
Furthermore, mobility of the population is growing rapidly as more and more activities are
channeling at different regions and internal migration is going through a fast-paced
 movement increasing the share of urban population. Hence, demand for different types of
vehicles is increasing at a great speed.

4. Flexible Credit Purchase: Most of the vendors of motor vehicles provide credit purchase
facilities to its customers. The customers usually require to pay 20-30% of total price as
down payment. Due to the ease in vehicle purchase, purchase trend has shown robust
growth.

To conclude, the local demand of this industry is $2.5Bn and there is future investment possibility
of around $2.5 to 3 Bn with an employment opportunity of 1.5mn. And The growth of automobile
industry is linked to the country’s industrial activities and the overall GDP. Thus, realizing its
necessity and potentiality, government of Bangladesh has added automobile industry as one of the
thrust sectors of Bangladesh. So, investors should invest in this sector of Bangladesh.
 Chapter 5: Company Overview
IFAD Autos Limited is one of the leading automobile distributors in Bangladesh with strong
growth in commercial vehicle market. The automobile industry of Bangladesh is consolidated
where IFAD Autos captures market share of around 35.2% in the truck segment, 29.7% in the bus
segment and 6.36% in the mid-sized carrier segment and 8.5% in the tractor segment. IAL is
engaged in importing, marketing, assembling and body building of different models of Ashok
Leyland’s Vehicle’s in Bangladesh. IAL has changed its business model from completely build up
(CBU) to both completely build up and completely knocked down (CKD) by commencing
production of assembly unit.
IAL started its journey back in 1985 and was incorporated as a public limited company on February
17, 1988. The company was converted into public limited company in 2011 and underwent an IPO
in late 2014. IAL has expanded gradually promising to deliver a robust growth in its topline over
the years. The sales growth of IAL over the years have shown accelerated growth and expansion
plan has been undertaken to cater to the growing demand in the industry.
Ownership Structure
the total paid up capital of IFAD Autos Limited is. The ownership structure of the company is as
follows:
Owner’s Directors and General Public Institutions Foreign
Category Sponsors Investors
Holding % 62.77% 12.47% 20.34% 4.42%
Directors and Sponsors hold the highest amount of ownership of the company.

Business Model
IFAD Autos sells vehicles through the medium-term credit facilities to the client. The company
borrows the fund from Financial institutions to meet its import payments and also provides credit
facilities to the clients.
Joint Venture
IFAD Autos intends to diversify its business by signing a joint venture with Gulf oil Bangladesh
Limited, a subsidiary company of Gulf Oil International Ltd with a view to subscribe 49% of its
equity shares.
Products
IFAD Autos product line is composed of the following products:

No. Products Models

01 Heavy and Medium Vehicles-Truck 7
02 Special Application Vehicle 11
03 Bus 6
04 Light Commercial Vehicles 5
 05 Tractors 6

New Strengths of the Company

1. Truck Assembly Plant: From February 2017, the company started operation of its local
assembly plant for heavy duty trucks. The assembly plant capacity is 10000 vehicles per
year in 3 shifts. The company transforming its business unit from CBU to semi knock down
model.

2. Truck Body Building Plant: this is the new addition in the company. The body building
unit commenced its operation from 2017. It will provide one stop solution for our
customers. Approximately 36000 units can be building every year.

3. Cabin Manufacturing Plant: It commenced its operation in FY 2018-19. The total

capacity of the plant will be 4500 units. It will add up additional gross profit margin. And
increase the bottom line.

4. JV with Gulf oil International Ltd.: the company signed a joint venture with Gulf Oil
International Limited to subscribe 49% of its equity shares.

5. Automation and Digitalization: in these challenging years the company has heavily
invested in automation and its infrastructure. The company implemented the SAP for
flawless supply chain management in the assembling plant.

Touchpoints
To gain dominant portion of market share through excellent customer service, IFAD established a
strong distribution channel all over Bangladesh. IFAD used both direct and indirect distribution
channels to sell its vehicles. In the direct distribution channel, the company uses its own sales force
to reach the target customers and sell vehicles. Its direct distribution channel comprises of 21
selling points, 9 mega service centers, 30 service points and 11 offices in different districts of the
country. Its indirect channel; consists of 120 dealers in different corners of Bangladesh.

Generic Business Strategies

Porter’s generic business strategies describe how a company pursues competitive advantage across
its chosen market scope. There are four generic strategies, Cost leadership, cost focus,
differentiation, differentiation focus.
Market: IFAD Autos Limited established its business all over Bangladesh, not focusing on any
particular areas. IFAD uses both direct and indirect distribution channel to reach to its customers
and sell vehicles. So, the market they are operating in is Broad.
Source of Competitiveness: IFAD autos Ltd targets a broad market and their strategy is to
differentiate their product from competitors by improved performance and service excellence. The
company wants to be customer centric to make the company more attractive to its customers. They
truly understand their customer needs, desires and challenges and they focus on transport solutions
that make customer’s successful and create value for the society.
The strategies adopted by the firm to gain competitive advantages are:
a. Sharpen Positioning of Brands: Optimum coverage of markets, customer segments and
customer budgets are the focus in the first company initiative. The goal will be achieved
by setting up needs based, automobile specific customer segments.

b. More Focus on LCVs: the future growth will depend on LCVs. By 2020, the portfolio in
the growing LVC segment will initially be expanded by adding more than 8 models, with
simultaneous development as per customers need and also develop and offer economy
products that are in conformity with market requirements.

c. Develop one stop solution: IFAD Autos commenced its operation in Truck body building
unit. It will provide one stop solution for their customers.

d. Listen, Learn & Approach: Adopting this strategy will help the company’s service
excellence and customer interactions to gain market share.

VRIN Model
Barney’s VRIN model is a tool for assessing whether a resource is a source of sustainable
competitive advantage. To serve as a basis for sustainable competitiveness advantage, resources
must be-
i. Valuable: It involves value creating strategies which can help one outperform its
competitors or reduce its weakness by improving its effectiveness and increase in
efficiencies.
ii. Rare: It includes all resources which are rare and not be available to the competitor.
iii. Imperfectly Imitable: It means that value of that particular resource would be governed
by only one firm and others can’t duplicate the resource for its use.
iv. Non-substitutable: It means that the resources can’t be substituted by any other available
resources.
We can classify the assets that IFAD Autos has into 5 categories. Financial Assets, Organizational
Resources, Human Resources, Tangible Assets, Intangible Assets. Financial assets include shares,
security deposits, money etc. Organizational resources include Efficiency of manufacturing
process, production capacity etc. Human resources include the key management personnel
Tangible Assets include PPE and other assets and intangible assets include patent, licenses etc.
Yes-score=5: while possess the characteristics entirely
No-Score=0: while don’t possess the characteristics entirely
Moderate= 2.5: Possess the characteristics for a certain time period or within certain limit
 Table: VRIN Matrix
Resources V R I N Score Explanation
Financial Yes No No No 5
Organizational Yes Moderate Yes Yes 17.5
Human Yes Moderate Moderate Yes 15
Tangible Yes Moderate Moderate No 10
Intangible Yes Yes Yes Moderate 17.5
The score stands at 55 out of 80. So, we can conclude that the competitive advantage is moderately
strong.

Ansoff Matrix
Ansoff matrix is a strategic planning tool used by firms to analyze and plan their strategies for
growth. The matrix shows four strategies that can be used to help a firm grow and also analyzes
the risk associated with each strategy. The four strategy of the Ansoff Matrix are:
a. Market penetration: It focuses on increasing sales of existing products to an existing
market.
b. Product Development: it focuses on introducing new products to an existing market.
c. Market Development: Its strategy focuses on entering a new market using existing
products.
d. Diversification: It focuses on emerging a new market with the introduction of new
products.

Existing Products New products

Existing Market

Market Product IFAD

Penetration Development Autos
Limited
New Market

Market
Development Diversification

To have a better growth in future, the management of IFAD Autos has acquired product
development strategy by introducing new models of vehicles and focusing more on customer needs
of the existing market.
In the product development strategy, a firm develops a new product to cater to the existing market.
The product development strategy is employed when firms have a string understanding of their
current market and are able to provide innovative solutions to meet the needs of the existing
market. The move of IFAD Autos Limited involves extensive research and development and
expansion of product range according to customer needs.
 Chapter 6: Valuation of Share

6.1 Free Cash Flow Model

Free cash flow (FCF) measures a company’s financial performance. It shows the cash that a
company can produce after deducting the purchase of assets such as property, equipment,
and other major investments from its operating cash flow. In other words, FCF measures a
company’s ability to produce what investors care most about: cash that’s available to be distributed
in a discretionary way.
Here we are using the Free Cash Flow to the Firm technique to get the intrinsic value of the share
of IFAD Autos limited. This method determines the cash flow available to all funding providers
in a business: debt holders, preferred stockholders and common stock holders.
Forecasting Data
For determining the value of share using the FCFF method, we need to project the balance sheet
and income statement of upcoming 5 years. We projected the financial statements from FY 2019-
20 to FY 2023-24. Major components to determine Free Cash Flow to Firm are Sales revenue,
Cost of Goods sold, Gross Profit, Operating Expense, Operating Income, Financing expense, Other
Income, Contribution to Workers’ Profit Participation Fund (WPPF), Tax, Net Profit after Tax,
Capex, Incremental Working Capital. Here, we have forecasted these data by using historical
trends and laws of Bangladesh.
The following table consists the major assumptions we have made for projecting the income
statement and balance sheet:

Table: Assumptions Table

Components Average Value

Sales Growth 26%

Cost of Goods Sold 82% of sales

General & Admin Expense 3% of sales

Selling Expense 2% of sales

Growth of operating Income 25%

Financial Expense 3.1%

WPPF 1% of Sales

Tax Rate 27%

 Depreciation 10%

Inventory 16% for sales

Advances & prepayments 14% of Sales

Accounts Payable 4% of sales

Accounts Receivable Growth rate 19%

Advance Against Sales 0.5% of Sales

Accrued Expense 1% of Sales

Provision for Expense 1%

Provision for current Tax 7%

Terminal growth rate is assumed to be 3%

Existing long term will be repaid by 5 equal yearly installments

Risk free rate is 9.2%

Revaluation surplus is assumed to be indifferent for the next 5 years

Cash dividend is 10% and it is assumed to grow 10% every year

So, the above table summarizes our key assumptions made for the valuation of share using the free
cash flow to firm model.
Cost of Capital Calculation
Cost of capital refers to the opportunity cost of making a specific investment. It is the rate of return
that could have been earned by putting the same money into a different investment with equal risk.
Thus, the cost of capital is the rate of return required to persuade the investor to make a given
investment
IFAD Autos Limited has two components of capital- 1. Equity 2. Debt. As the company is listed,
we can calculate cost of equity capital by using CAPM. To calculate Cost of equity (Key), we need
to find out Risk Free rate, Market return of DSE and Beta.
Risk Free rate: The risk-free rate of return is the theoretical rate of return of an investment with
zero risk. The risk-free rate represents the interest an investor would expect from an absolutely
risk-free investment over a specified period of time. We have considered Yield of 10 years
government bond as risk free rate (Rf)., the rate is 9.2%
Market Return: Average annual return of Dhaka Stock Exchange has been taken as market return.
Considering last 60 months return of DseX, average annual return was 15.718%.
Beta: A beta coefficient is a measure of the volatility, or systematic risk, of an individual stock in
comparison to the unsystematic risk of the entire market. To calculate beta, we have divided
covariance of market return and return of by variance of return of IFAD Autos limited.
Beta of IFAD Autos limited
Covariance with market return 0.001928381
variance 0.001450968
Beta
1.329030573

Cost of Equity: Risk Free Rate + (Risk Premium * Beta)

= 9.2%+ (12.71% - 9.2%) * 1.33
= 17.86%
Cost of Debt: IFAD Autos Limited’s cost of debt has been calculated by dividing financing costs
by total loan. We have found that cost of debt before tax is 3.11%.
WACC: Weight of Equity is, We = 0.633 and weight of debt, Wb =
Title Cost Weight WACC
Cost of Debt (after Tax) 2% 0.367 12%
Cost of Equity 17.86% 0.633
Appendix 1 includes all data regarding cost calculation *
0.367.

Valuation
We have prepared the proforma Income Statement and the Proforma Balance Sheet using the
assumptions stated above. The statements are attached in the appendix. The net income that we
have projected for the next 5 years, based on the historical data is stated in the following table:

Particulars 2018-19 2019-20 2020-21 2021-22 2022-23 2023-24

Net Income
After tax 1,381,066, 1,242,231, 1,578,826, 1,981,548, 2,489,117, 3,128,986,
816 343 763 844 142 479

Using this net income after tax we have calculated the value of the share of IFAD Autos Limited
in the following table:
 2019-20 2020-21 2021-22 2022-23 2023-24
EBIT
EBIT (1-tax rate) 1,381,066,816 1,242,231,343 1,578,826,763 1,981,548,844 2,489,117,142
Capital expenditure 120,232,434 124,271,709 128,446,687 132,761,925 137,222,135
Change in NWC -17597701538 -3940234479 -1344280223 -990369915.2 -1112354540
Free cashflow 19,099,000,788 5,306,737,532 3,051,553,673 3,104,680,684 3,738,693,818
Terminal value 42,136,863,757.52
Total Cash Flow 19,099,000,788 5,306,737,532 3,051,553,673 3,104,680,684 45,875,557,575
Discount Factor 0.89 0.80 0.71 0.63 0.56
Present value of free cashflow 17,031,553,934 4,220,023,440 2,163,973,288 1,963,321,623 25,870,182,558

Enterprise value 51,249,054,844

Cash 2237511698
Interest-bearing debt 6574566648
Equity value 46,911,999,894
Value per share (BDT) 189.17

Here, to calculate the free cash flow available to the firm we have deducted incremental working
capital and added the net capital expenditure with projected the net income after tax of the
company. Then we have calculated the terminal value using the FCFF of the last year 2013-24 and
a perpetual growth rate of 3%. Then the total cash flows of the 5 year has been discounted to the
present year and we are calling it the enterprise value. Then by adding cash with the enterprise
value and deducting total book value of debt we get the total equity value. And as we divide the
total equity value by the total number of outstanding shares, we get the intrinsic value per share of
BDT 189.7.

6.2 DDM Method

The dividend discount model is a method of valuing a company's stock price based on the theory
that its stock is worth the sum of all of its future dividend payments, discounted back to their
present value. In other words, it is used to value stocks based on the net present value of the future
dividends.
For performing the valuation of IFAD Auto’s share using the Dividend Discount Model (DDM),
we have made 2 assumptions.
The first assumption is the company’s dividend is same for all year, meaning there is no growth
of dividend and the second assumption is that the company’s dividend grows each year at a
constant rate.
We also assumed; the company pays a 10% cash dividend on its share. The par value of the
company’s share is BDT 10 and Total outstanding share is 247,990,600.
Zero Growth Model
We have assumed that the company’s dividend growth rate is 0%. And the discount rate (WACC)
is 12%.
The following table contains the valuation of the share:
Zero Growth Model
Dividend growth rate 0%
 k 12%
Value per share 8.238
Total Outstanding Share 247,990,600
Total Value to the Shareholders 2,042,937,777

We have calculated the value per share by dividing the cash dividend paid at the current year with
the discount rate. The and value per share is BDT 8.238 under zero growth model.
Constant Growth Model
Under this model, we have calculated the growth rate of dividend to be increasing each year at 1a
1% rate. The following table contains the valuation details.
Constant Growth model
Dividend growth rate 10%
k 12%
Value per share 40.98
Total Outstanding Share 247,990,600
Total Value to the Shareholders 10,161,692,106
Here, the value per share is calculated by the formula, cash dividend of the current year divided
by the difference between the growth rate and the discount rate. And we see, the value per share
came out to be BDT 40.98.
6.3 Relative Valuation

Here valuation is derived based on relative valuation methodologies, calculated over projected
2019-20 EPS estimates and industry multiples. For multiple, we have considered the average
historical P/E multiple and the peer companies average P/E.
The average historical P/E multiple and the peer companies’ average P/E is stated in the following
table:

Year Historical P/E Peer firms of IAL P/E

2015 25.07 IFAD Autos 18.6
2016 31.86 AFTABAUTO 13
2017 29.02 TATA Motors 13.1
2018 17.11 Ashok Leyland 25.1
Average 25.765 Average 17.06666667
Average 36.515 Average 17.06666667

Now we multiply the average P/E s with the projected EPS of the year 2019-20. The following
table contains the valuation detail:
 Particulars Multiple 2019-20 estimates Valuation
Historical P/E 25.765 5.01 129.08265
Peer firms of 17.067 5.01 85.504
IAL

Determination of Target price

Now, we determine the target price of the share of IFAD Autos limited based on the intrinsic value
of the share we calculated using different valuation techniques. The following table contains the
valuation details:
Model Assigned Value per share Weighted Adjusted
Weight Value
FCFF 60% 189.17 113.50
Relative Valuation 20% 107.29 21.46
DDM 20% 40.98 8.20
100% Target Price= 143.15

We recommend a higher weight on value that we derived from DCF calculation and lower weight
of 20 on relative valuation techniques and 20% on value derived from DDM. Based on the
weighted average of the value derived from 3 valuation techniques we get a target share price of
BDT 143.15 for the company.
 Chapter 7: Conclusion
Based on the intrinsic values per share determined by various valuation techniques we set the target
price of IFAD Autos Limited to be 143.15 within a 1-year target period. With our recommended
target price, the stock represents a 200% capital appreciation on price which is far higher than our
required rate of return. We therefore reiterate an over weight rating on the IFAD Autos stock at its
prevailing price level.
The overweight of stock indicates that the stock is expected to outperform the broader market
averages. It usually derives the rating from comparing the expected return from the stock in a
specific time period with the weighted average cost of capital. The overweighed stock of IFAD
Autos Limited concludes that expected return from the stock is greater than the average cost of
capital. And it is therefore, good for the investors to invest in the stock of IAL.
 Chapter 8: References
1. http://www.boomingbangladesh.com/automobile/
2. https://www.thedailystar.net/shift/automobile-industry-in-bangladesh-the-future-of-it-
1805257
3. https://www.ifadautos.com/
4. https://economictimes.indiatimes.com/industry/auto/auto-news/slowdown-in-auto-sector-
sector/articleshow/72128758.cms?from=mdr
5. http://www.theindependentbd.com/post/191585
6. https://www.investopedia.com/ask/answers/040715/what-economic-indicators-are-
important-investing-automotive-sector.asp
7. https://www.imf.org/en/Data
8. https://databank.worldbank.org/home.aspx
9. https://data.adb.org/dataset/trade-conflict-impact
10. https://www.reportlinker.com/d0123486337/Automotive-Industry-in-
Bangladesh.html?pos=1
11. https://en.wikipedia.org/wiki/Automotive_industry_in_Bangladesh
12. https://www.marketresearch.com/seek/Automotive-Bangladesh/242/1213/1.html
 14.

Chapter 9: Appendix

Appendix 1: IS & BS of IFAD Autos Limited (Historical Data)

Income Statement
2014-15 2015-16 2016-17 2017-18 2018-19
Sales
5,057,046, 6,932,578, 10,239,393 15,004,63 11,017,36
311 110 ,588 4,671 9,561
Cost of Goods Sold
4,213,242, 5,707,340, 8,399,327, 12,137,89 8,753,053,
610 829 650 5,792 427
Gross Profit
843,803,70 1,225,237, 1,840,065, 2,866,738, 2,264,316,
1 281 938 879 134
Less: Operating Expenses
General & Admin
Expenses 189,151,57 277,933,94 234,930,89 314,806,2 319,749,6
7 2 0 02 93
Selling & Distribution
Expenses 114,908,62 108,008,26 147,216,22 232,897,6 229,530,3
0 6 3 39 96
Operating Profit
539,743,50 839,295,07 1,457,918, 2,319,035, 1,715,036,
4 3 825 038 045
Add: Other Non operating
Income 109,381,65 163,792,34 116,459,69 147,278,4 70,889,24
0 7 8 64 8
Less: Financial Expenses
88,507,633 96,133,289 88,271,391 296,922,5 27,083,01
50 5
Add:Share of Net Profit of
Joint Ventures 50,470,47
6
Less: Contribution to
WPPF 26,696,072 43,188,292 70,767,006 103,304,3 74,550,33
31 2
 EBT
533,921,44 863,765,83 1,415,340, 2,066,086, 1,734,762,
9 9 126 621 422
Less: Provision for Income
Tax 166,641,54 268,629,00 367,527,51 512,174,8 353,695,6
5 4 5 90 06
Net Income
367,279,90 595,136,83 1,047,812, 1,553,911, 1,381,066,
4 5 611 731 816

Balance Sheet
Particulars 2014-15 2015-16 2016-17 2017-18 2018-19
Non-Current Assets
Property,Plant & Equipment
2,412,285 2,461,762, 2,654,552, 2,596,253 2,745,589,
,156 232 103 ,798 377
Capital WIP
46,980,78 30,137,061 39,009,836 266,111,5 650,023,7
5.00 64 23
Investment in Joint Venture
169,540,4
76
Investment in Shares
56,000,000 56,000,000 56,000,00 56,000,00
0 0
Total
2,459,265 2,547,899, 2,749,561, 2,918,365 3,621,153,
,941 293 939 ,362 576
Current Assets
Inventories
835,414,6 954,286,52 1,128,210, 1,447,449 3,025,696,
19 9 719 ,917 216
Accounts & Other
Receivable 10,718,84 12,913,400 15,303,181 19,735,51 21,688,11
2,427 ,516 ,783 6,498 2,173
Investment in Shares
249,370,4 366,560,95 350,024,07 103,693,3 84,337,42
75 8 0 04 9
Advances, Deposits and
Prepayments 835,992,5 816,670,62 1,048,123, 1,954,030 1,997,611,
02 6 172 ,552 108
Cash & Cash Equivalents
1,527,551 1,571,322, 1,542,725, 2,821,547 2,237,511,
,344 128 864 ,363 698
Non-Current Assets Held
For Sale 53,223,916 53,223,916
Total
14,167,17 16,622,240 19,372,265 26,062,23 29,033,26
1,367 ,757 ,608 7,634 8,624
Total Assets
16,626,43 19,223,363 22,175,051 28,980,60 32,654,42
7,308 ,966 ,463 2,996 2,200

Equity Attributable to
Shareholders
Ordinary Share Capital
1,150,000 1,495,000, 1,554,800, 2,254,460 2,479,906,
,000 000 000 ,000 000
Share Premium
388,330,5 388,330,50 388,330,50 990,799,6 990,799,6
08 8 8 20 20
Revaluation Surplus
1,551,640 1,004,201, 1,002,368, 928,700,5 1,043,419,
,198 992 697 87 214
Retained Earnings
1,970,941 2,125,033, 3,043,137, 4,472,004 5,201,431,
,688 443 321 ,876 229
Unrealized Gain/Loss
6,164,422 13,834,212 (21,724,2
36)
Total
5,060,912 5,018,730, 6,002,470, 8,624,240 9,715,556,
,394 365 738 ,847 063
Non-current Liabilities
Defferred Tax Liability
196,917,63 221,015,91 221,923,3 115,774,3
0 4 62 19
Security Deposits
15,085,00 14,925,000 14,895,000 13,250,00 12,510,00
0 0 0
Long Term Loans
94,348,78 303,908,35 745,114,37 588,033,9 684,815,1
3 1 9 56 52
Leased Obligation
5,899,266 5,738,331, 5,794,735, 7,375,241 8,693,960,
,611 458 303 ,258 878
Total
6,008,700 6,254,082, 6,775,760, 8,198,448 9,507,060,
,394 439 596 ,576 349
Current Liability
Current Portion of Long term
Loans 150,698,8 183,865,40 216,860,14 118,675,1 203,178,4
34 3 7 77 02
Current Portion of Leased
Obligations 3,246,641 3,582,767, 5,150,024, 5,107,415 5,279,722,
,596 780 823 ,791 025
Accounts & Others Payable
37,240,43 22,118,437 117,046,46 1,267,264 1,260,512,
3 3 ,883 623
Dividend Payable
345,871 1,057,338 772,916 2,782,945
Unallocated IPO and Rights
Share Subscription 4,779,100 2,453,400 2,370,000 2,632,976 2,274,096
Advance Against Sales
19,030,00 70,720,655 69,287,515 17,682,82 12,585,31
0 0 2
Short Term Bank Loans &
Credits 1,585,997 3,612,926, 2,977,244, 4,418,010 5,686,573,
,680 099 598 ,519 094
Provision for Income Tax
434,129,7 422,109,35 767,484,07 1,079,640 860,094,5
71 1 9 ,866 33
Provision for Expenses
- - - 145,817,7 124,082,7
25 38
Inter Company Current
Account 30,000,00 - - - -
0
Accrued Expense
48,307,10 53,244,165 95,445,166
6
Total
5,556,824 7,950,551, 9,396,820, 12,157,91 13,431,80
,520 161 129 3,673 5,768
Total Liability
11,565,52 14,204,633 16,172,580 20,356,36 22,938,86
4,914 ,600 ,725 2,249 6,117

Shareholder's Equity &

Liability 16,626,43 19,223,363 22,175,051 28,980,60 32,654,42
7,308 ,965 ,463 3,096 2,180
Appendix 2: Projected IS & BS of IAL

Income Statement
Forecasted Period
2018-19 2019-20 2020-21 2021-22 2022-23 2013-24
Sales
11,017,3 13,902,59 17,543,40 22,137,6 27,935,0 35,250,70
69,561 5,588 3,896 66,188 72,757 2,730
Cost of Goods Sold
8,753,05 11,344,85 14,315,84 18,064,8 22,795,7 28,765,44
3,427 9,846 8,949 79,945 06,256 0,196
Gross Profit
2,264,31 2,557,735 3,227,554 4,072,78 5,139,36 6,485,262,
6,134 ,742 ,948 6,243 6,501 534
Less: Operating
Expenses
General & Admin
Expenses 319,749, 418,304,9 527,850,5 666,083, 840,517, 1,060,632,
693 49 46 917 809 406
Selling &
Distribution 229,530, 247,563,3 312,395,1 394,205, 497,439, 627,708,8
Expenses 396 56 87 162 512 49
Operating Profit
1,715,03 1,891,867 2,387,309 3,012,49 3,801,40 4,796,921,
6,045 ,437 ,215 7,164 9,180 279
Add: Other Non
operating Income 70,889,2 88,611,56 87,601,78 86,603,5 85,616,6 84,640,95
48 0 0 07 10 9
Less: Financial
Expenses 27,083,0 196,783,2 208,714,2 254,084, 312,452, 387,222,0
15 86 61 196 153 50
Add:Share of Net
Profit of Joint 50,470,4
Ventures 76
Less: Contribution to
WPPF 74,550,3 89,175,25 112,528,4 141,997, 179,183, 226,108,1
32 3 46 367 603 61
EBT
1,734,76 1,694,520 2,153,668 2,703,01 3,395,39 4,268,232,
2,422 ,458 ,288 9,107 0,033 027
Less: Income Tax
Expenses 353,695, 452,289,1 574,841,5 721,470, 906,272, 1,139,245,
606 15 25 263 891 548
Net Income
1,381,06 1,242,231 1,578,826 1,981,54 2,489,11 3,128,986,
6,816 ,343 ,763 8,844 7,142 479

Number of Shares
247,990, 247,990,6 247,990,6 247,990, 247,990, 247,990,6
600 00 00 600 600 00
EPS
6 5 6 8 10 13