An Analysis and Valuation of

Heidelberg Cement Bangladesh Ltd.

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An analysis and valuation of Heidelberg Cement
Bangladesh Ltd.

Prepared for
Khairul Alam Siddique
Lecturer, Department of Finance
University of Dhaka

Prepared by
Md. Mozammel Haque Riyad
ID:23-065
Section-A
23RD Batch, Department of Finance
University of Dhaka

12 February 2020

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 Letter of Transmittal

12 February 2020
Khairul Alam Siddique
Lecturer, Department of Finance
University of Dhaka
Subject: Submission of a report on the “An analysis and valuation of HeidelbergCement
Bangladesh Ltd.”

Honorable Sir,
It is a great pleasure for us to submit the report “An analysis and valuation of
HeidelbergCement Bangladesh Ltd.” as per our requirement for course F-307, Analysis of
Financial Investment.
Writing this report has been a challenging yet interesting experience for me. It enabled me to
grasp a thorough knowledge on the subject matter and I am confident that this knowledge will
prove to be of utmost valuable and important in future.
I have undertaken my sincerest effort for successful completion of this report. I hope that any
unintentional error, omission or mistake committed by me while preparing this report will be
considered with sympathy.
Sincerely yours,

Md. Mozammel Haque Riyad

ID No. 23-065
23rd Batch, Department of Finance
University of Dhaka

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Table of Contents
Chapter: 01.......................................................................................................................................0
Introduction......................................................................................................................................0
1.1 Origin of the report:...............................................................................................................1
1.2 Methodology:........................................................................................................................1
1.3 Objective of the study:..........................................................................................................1
1.4 Limitations:............................................................................................................................1
Chapter:02........................................................................................................................................2
Global Economy..............................................................................................................................2
2.1Global Economy Analysis:.......................................................................................................3
2.2Recent Developments and Implications for the Forecast:.....................................................3
2.3Global Growth Outlook by Division:.......................................................................................3
2.4Risks to the Outlook:..............................................................................................................4
Chapter:03........................................................................................................................................5
Macro Economy...............................................................................................................................5
3.1Macro Economy Analysis:.......................................................................................................6
3.2Bangladesh Economic Growth:...............................................................................................6
Chapter: 04.......................................................................................................................................7
Industry Analysis.............................................................................................................................7
4.1Cement Industry of Bangladesh:............................................................................................8
4.2Demand Drivers for Cement in Bangladesh:..........................................................................8
4.3Government as a Driver in the Industry:................................................................................9
4.4Production Capacity & Capacity Utilization:.........................................................................10
4.5Seasonality in Cement Market:............................................................................................10
4.6Competition of the Cement Mongers:.................................................................................10
4.7Industry Concerns:................................................................................................................11
4.8Outlook of the Industry:.......................................................................................................11
4.9Industry Life Cycle Theory:...................................................................................................12
4.10Competitive Positioning: Porter’s Five Forces Analysis:.....................................................12
Chapter: 05.....................................................................................................................................14
5.1Company Analysis:................................................................................................................15

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 5.2Company Fundamentals:......................................................................................................15
5.3Board Members:...................................................................................................................16
5.4Revenue Drivers:...................................................................................................................16
5.4.1Urbanization:.................................................................................................................16
5.4.2Real Estate Growth:.......................................................................................................16
5.4.3GDP Growth:.................................................................................................................16
5.4.4Remittance Growth:.......................................................................................................16
5.5Cost Driver:...........................................................................................................................17
5.5.1Raw Materials – The Main Driver:................................................................................17
5.5.2Energy is Power:............................................................................................................18
5.6Board Composition:..............................................................................................................18
5.6.1Roles & Responsibility:.................................................................................................18
5.6.2Transparency:................................................................................................................18
5.6.3Organizational structure & rights:.................................................................................18
5.6.4Corporate Citizenship:...................................................................................................18
Chapter 06......................................................................................................................................19
Relevant Theories..........................................................................................................................19
6.1SWOT Analysis:.....................................................................................................................20
6.2BCG Matrix of HeidelbergCement:.......................................................................................21
6.3PESTEL Analysis of HeidelbergCement:................................................................................22
6.4Value Chain Analysis of HeidelbergCement:........................................................................22
6.5Ansoff Matrix of HeidelbergCement:...................................................................................23
6.6Marketing Mix of HeidelbergCement:..................................................................................23
6.7Competitive Advantage:.......................................................................................................24
Chapter 07......................................................................................................................................25
Valuations......................................................................................................................................25
7.1Discounted Cash Flow Valuation:.........................................................................................26
7.2Relative Valuation:................................................................................................................26
7.3Duration of Growth:.............................................................................................................28
7.4Economic Value Added:........................................................................................................28
7.5Buy or Offloading stock from portfolio?...............................................................................28

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Chapter: 08.....................................................................................................................................29
Conclusion.....................................................................................................................................29
Chapter: 09.....................................................................................................................................29
References......................................................................................................................................29
Chapter: 10.....................................................................................................................................30
Appendix........................................................................................................................................30
1Calulations:..............................................................................................................................30
2Beta:.........................................................................................................................................31
3DCF:..........................................................................................................................................31
4Proforma Income Statement:..................................................................................................32
5Proforma Balance Sheet:.........................................................................................................33
6WACC:......................................................................................................................................34
7Relative valuation:...................................................................................................................34
8Target price:.............................................................................................................................35

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 Executive summary:
This report is based on analysis and valuation of a cement company and some industry analysis. I
have selected a listed company for the analysis and valuation namely Heidelberg cement
company Bangladesh Ltd.
In the very first section of this report there is a brief and concrete analysis of global economy
with a futuristic look. In the second section the macro economy scenario of Bangladesh has been
given.
After the macro analysis, I tried to show the actual cement industry scenario of Bangladesh. In
this section I have shown industry life cycle theory and porters five forces model.
In the later part of this report contains a detailed analysis of company (background, demand
drivers, supply drivers etc.). Moreover, there are some relevant analysis over the company.
I have showed the valuation of Heidelberg. I have also analyzed how Heidelberg will perform in
future. This report also contains the brief decision for Investors. In this report I have perform
some necessary relative valuation model which we have learned from the class.
Found out the intrinsic value, share price, a top down analysis, BCG matrix, Ansoff matrix,
PESTEL analysis, porter’s five forces model, VRIN model, valuation, relative valuation,
dividend discount model, economic value added, growth duration etc.

Finally, justified why acquiring the Heidelberg cement company was a right choice based on
some performance and solvency ratios. There is two parts in our ratio analysis. One is solely
based on cash flow generated from operations and the other is based on financial statements.

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 Chapter: 01
Introduction

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1.1 Origin of the report:
This report is a requisite of course “F-307: Analysis of Financial Investment”. My distinguished
course instructor Lecturer Khairul Alam Siddique assigned me to prepare the report. This report
is the outcome of the fact.

1.2 Methodology:
All the information in this report surrounds the topic. We have collected the required information
from the annual reports of Heidelberg Cement Bangladesh Ltd.

1.3 Objective of the study:

The prime objective of the report is to provide theoretical and practical knowledge on valuation,
and investment decision.

1.4 Limitations:
I have faced some limitation or problem in the meantime of making the report.
 Lack of proper knowledge.
 Lack of time.

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 Chapter:02
Global Economy

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2.1Global Economy Analysis:
Global growth is projected to rise from an estimated 2.9 percent in 2019 to 3.3 percent in 2020
and 3.4 percent for 2021—a downward revision of 0.1 percentage point for 2019 and 2020 and
0.2 for 2021 compared to those in the October World Economic Outlook. The downward
revision primarily reflects negative surprises to economic activity in a few emerging market
economies, notably India, which led to a reassessment of growth prospects over the next two
years. In a few cases, this reassessment also reflects the impact of increased social unrest.

2.2Recent Developments and Implications for the Forecast:

Trade policy uncertainty, geopolitical tensions, and idiosyncratic stress in key emerging market
economies continued to weigh on global economic activity—especially manufacturing and trade
—in the second half of 2019. Intensifying social unrest in several countries posed new
challenges, as did weather-related disasters—from hurricanes in the Caribbean, to drought and
bushfires in Australia, floods in eastern Africa, and drought in southern Africa.

Despite these headwinds, some indications emerged toward year-end that global growth may be
bottoming out. Moreover, monetary policy easing continued into the second half of 2019 in
several economies. Adding to the substantial support the easing provided earlier in 2019, its
lagged effects should help global activity recover in early 2020. As discussed below, the 2019
global growth estimate and 2020 projection would have been 0.5 percentage point lower in each
year without monetary stimulus.

2.3Global Growth Outlook by Division:

In the United States, growth is expected to moderate from 2.3 percent in 2019 to 2 percent in
2020 and decline further to 1.7 percent in 2021 (0.1 percentage point lower for 2020 compared to
the October WEO). 

Growth in the euro area is projected to pick up from 1.2 percent in 2019 to 1.3 percent in 2020 (a
downward revision of 0.1 percentage point) and 1.4 percent in 2021. 

In the United Kingdom, growth is expected to stabilize at 1.4 percent in 2020 and firm up to 1.5
percent in 2021—unchanged from the October WEO. 

Japan’s growth rate is projected to moderate from an estimated 1 percent in 2019 to 0.7 percent

in 2020 (0.1 and 0.2 percentage point higher than in the October WEO).

For the emerging market and developing economy group, growth is expected to increase to
4.4 percent in 2020 and 4.6 percent in 2021 (0.2 percentage point lower for both years than in the
October WEO) from an estimated 3.7 percent in 2019. 

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Growth in emerging and developing Asia is forecast to inch up slightly from 5.6 percent in 2019
to 5.8 percent in 2020 and 5.9 percent in 2021 (0.2 and 0.3 percentage point lower for 2019 and
2020 compared to the October WEO). 

2.4Risks to the Outlook:

Corona Virous could play a significant rule in the global economy downfall.

Rising geopolitical tensions, notably between the United States and Iran, could disrupt global oil
supply, hurt sentiment, and weaken already tentative business investment.

Higher tariff barriers between the United States and its trading partners, notably China, have
hurt business sentiment and compounded cyclical and structural slowdowns underway in many
economies over the past year

A materialization of any of these risks could trigger rapid shifts in financial sentiment, portfolio
reallocations toward safe assets, and rising rollover risks for vulnerable corporate and sovereign
borrowers.

A materialization of any of these risks could trigger rapid shifts in financial sentiment, portfolio
reallocations toward safe assets, and rising rollover risks for vulnerable corporate and sovereign
borrowers.

Weather-related disasters such as tropical storms, floods, heatwaves, droughts, and wildfires
have imposed severe humanitarian costs and livelihood loss across multiple regions in recent
years.

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 Chapter:03
Macro Economy

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3.1Macro Economy Analysis:
The economy likely grew at a strong pace in the first half of fiscal year 2020, which started in
July. USD-denominated remittances increased year-on-year by approximately one-quarter in H1
FY 2020, which should have buttressed private consumption. In addition, wages of low-skilled
workers, as measured by the Central Bank, increased at a healthy pace in the same period, while
bank lending increased by just over 10% in July–November. All in all, domestic demand looks
firm in H1 2020, despite the introduction of a new VAT regime, which reduced exceptions for
many essential consumer goods, and a one-third increase in natural gas prices on 1 July. Less
positively, however, exports of goods decreased by nearly 6% year-on-year in the first half of the
fiscal year, largely due to a drop in ready-made garment exports.

3.2Bangladesh Economic Growth:

Economic growth is likely to slow going forward, partly due to flagging global trade. In addition,
downside risks include threats from a banking system under strain from non-performing loans
and vulnerability to natural disasters such as flooding and cyclones. Our panelists project GDP to
expand 7.6% in FY 2020, which is unchanged from last month’s forecast, and 7.3% in FY 2021. 

Particulars 2014 2015 2016 2017 2018 2019 2020(E)

Population (million) 157 158 160 162 163 165.6 166.66

GDP per capita (USD) 956 1,093 1,220 1641 1,788 1906 1502

GDP (USD billion) 172.9 195 221.4 249 274 315 365

Economic Growth (GDP, 6.1 6.6 7.1 7.3 7.9 8.2 7.20
annual variation in %)

Industrial Production 8.7 11.8 13.1 14.6 14.3 14.5 14.6

(annual variation in %)

Fiscal Balance (% of -3.1 -4.0 -3.4 -3.3 -4.8 -4.50 -4.80

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GDP)

Public Debt (% of GDP) 35.25 33.68 33.33 32.62 33.99 27.90 25.90

Inflation Rate (CPI, 7.1 6.16 5.68 5.61 5.61 5.46 5.5
annual variation in %)

Trade Balance (USD -10.7 -9.67 -9,94 -16.9 -24.7 -12.4 -12.95
billion)

Chapter: 04
Industry Analysis

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4.1Cement Industry of Bangladesh:
The advancement of concrete industry in Bangladesh goes back to the mid-fifties. Till 1990
around 95% of the nation's interest for cement had been met through import. Some eager
entrepreneurs wandered into setting up cement plants amid 1997 to 2000 which opened a new
era in this sector.

Cement is a major ingredient for the construction industry. The process of producing cement is
highly energy intensive. The process requires procuring limestone, shell, and clay. Afterwards,
the raw materials are crushed and heated at a temperature more than 1,000 degree Celsius to
produce clinker. For producing final grade of cement, clinker is mixed with gypsum and
grounded to fine powder. The cost of the whole process amounts to 29% energy, 27% raw
materials, 32% labor, and 12% depreciation.
Due to the development, improved living standard and increasing purchasing power, the
construction sector of Bangladesh is passing a growth phase. Construction and real estate
activities are the two major drivers of cement consumption. Although the growth in the demand
of cement has been increasing in Bangladesh, it is far below than that of many developing
countries. So, there is a broader scope of growth for cement sector of Bangladesh. Average per
capita cement consumption in the world is 500 kg while that of Bangladesh is only 137 kg1.
However, per capita cement consumption in Bangladesh witnessed lucrative growth over the last
few years.

Country Amount
Bangladesh 137
India 230
Malaysia 700
Pakistan 129
Indonesia 202
Sri Lanka 310
China 1580
Per Capita Cement Consumption (in KG)

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4.2Demand Drivers for Cement in Bangladesh:
The country’s increasing urbanization has stimulated the growth for building materials and has
generated considerable needs for cement. Urban population has grown at a great speed over the
years. By the end of year 2016, the urban population stands at 35.0% of total population and the
number will get bigger in the upcoming years as expected growth for 2020 is at 38.2%, 2025 is at
42.0% and 2030 is at 45.6%.
With the growth in urbanization, more and more people will move into urban areas and hence,
the demand for construction materials from real estate and individual homebuilders will increase.

URBAN POPULATION (% OF TOTAL)

6%45.
5%30.

2%31.

0%32.

8%32.

5%33.

3%34.

0%35.

2%38.

0%42.
2010
2011

2012

2013

2014

2015

2016

2020

2025

2030

The demand for cement is closely linked with the growth of construction sector as when the
construction sector found strong, then demand of cement increased. Construction and real estate
activities are the two major drivers of cement consumption.

4.3Government as a Driver in the Industry:

Current and upcoming government development projects is contributing towards the highest
demand for cement in Bangladesh market.
For the time being demand for cement will be mainly fueled by the Government projects which
is taking a big shape. The ongoing Government projects that hasn’t been completed yet and
upcoming Government infrastructural projects will drive the growth for cement consumption.
Use of Cement is an indicator of the rate of development pace of a country. The countries that
are concentrating on development projects are on high end of cement uses.
Mega projects contribute heavily towards the increasing demand for cement and there are some
big projects that are ongoing and expected to initiate soon. In the recent budget (2017-18)
Government has allocated BDT 306 billion which is one-fifth of total ADP for six mega projects.

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Mega Projects which are/will be contributing towards increasing cement demand:
Project Completion Date(Year) Cost(USD)
Padma Bridge 2018 3.7 Billion
Rooppur Nuclear Power Plant 2020 12.7 Billion
Rampal Power Project 2018 1.5 Billion
Matarbari Coal project 2022 4.6 Billion
Metro Rail 2019 2.7 Billion
Deep Sea Port 2023 15 Billion

4.4Production Capacity & Capacity Utilization:

Currently the industry is experiencing overcapacity of cement production. It has been found that
there is production capacity of 40 million tons, whereas actual production is hovering around 32
million tons.2 The machineries and equipment and manufacturing sites are not being utilized
fully by the cement manufacturing companies. On an average the utilization rate of cement
manufacturing companies is currently around 75 - 80%. There are currently 34 companies who
are operating as cement producer.
Though there is over-capacity in the sector, the market demand is almost equal to the effective
capacity during peak season. Present installed capacity of the industry is 40 million MT.
However, due to interruption in power supply and other constraints, effective capacity is much
lower. The hidden capacity is there but it’s not actually hidden as there are around 12% wastage.
Cement manufactures calls it waste because of production error.

4.5Seasonality in Cement Market:

Cement sector in Bangladesh experiences high seasonality. Peak season is considered during the
winter season (November to April) while demand for cement goes slow during the monsoon
(June to October) period. The demand for cement sharply declines during the monsoons due to
slowdown in construction activities. According to the industry personnel, 60% of the total yearly
sales are generated in the first half of the year and rest 40% sales are generated in the second half
of the year due to seasonality.

Seasonal Segmentation
Peak Season November to April
Off Season June to October

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Though the yearly capacity of cement sector was saturated with overcapacity, market demand
gets matched or cross the effective capacity during the peak season. Furthermore, the cement
industry, like most other capital-intensive industries, is cyclical in nature with respect to supply.

4.6Competition of the Cement Mongers:

Only 32 factories are in operation in Bangladesh. Top 10 manufactures occupy a massive chunk
of 81% of Market Share. Among the top 10 cement market players in Bangladesh, 8 are local
and 2 are multinational. There is only one integrated cement plant (Lafarge-Holcim Bangladesh
Limited) and rest of all are Grinding Projects. Multinational cement companies are facing
intensive competition with local companies which are grabbing the top slot of the industry by
operating in economies of scale and with deft marketing strategy. MNCs now hold only around
15% of the total market share.
Company Market Share (%)
SHAH CEMENT 14
BASHUNDHARA 10
LAFARGE HOLCIM 9.78
SEVEN CIRCLE 11
FRESH CEMENT 4.86
PREMIER CEMENT 6.03
HEIDELBERG CEMENT 6.55
CROWN CEMENT 9.64
AKIJ CEMENT 4.23

4.7Industry Concerns:
Although a booming sector with great potentiality, cement industry has also some risk factors.
Firstly, it is threatened by over supply resulting from huge capacity expansion by almost all
leading industry players. Roughly, 40% capacity is likely to be added to currently capacity by the
end of the next year. However, since it takes 2-2.5 years to build a cement plant, it is likely that
before completion, demand could decrease or stagnate, or the capacity additions could exceed
demand. Secondly, almost all raw materials of cement are imported, if the supplies of the same
are cut-off due to adverse political cause or other disturbance, the industry may face serious
challenges, even the risk of hut down. Besides, following the high contribution of raw materials
in the cost structure, any movement in the price of clinker and other raw materials will
eventually affect the profitability and performance of the cement manufacturer.

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4.8Outlook of the Industry:

The future potential of the country’s cement industry is strong. According to the industry
specialists, the outlook for cement in 2017-2021 remains promising with an expected CAGR of
15% mainly driven by the residential sector. The trend of demand for cement is expected to
continue till FY 2035.

4.9Industry Life Cycle Theory:

In Bangladesh, the cement industry is in the growth stage currently. This phase of the industry
has been illustrated in the graph below.

The product life cycle model can help to analyze the different maturity stages of a product or an
industry. In the diagram above, it can be seen that the cement industry of Bangladesh is currently
in the Growth stage of the product life cycle. According to this diagram, the facts related to the
cement industry of Bangladesh can be related. At present, the sales of cement are increasing due
to an enormous demand for cement in both the local and foreign markets. Moreover, the
competitors in this industry are also increasing day by day although some smaller companies are
shutting down, but the bigger companies are getting more bigger and competing with the existing
players in the market. There is also a huge prospect for more growth of these companies and the
industry itself in the near future. 

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4.10Competitive Positioning: Porter’s Five Forces Analysis:

Threat of New entrants: Low

The cement industry is highly energy intensive company. It requires huge capital expenditure to
set up a cement manufacturing company. Furthermore, the cement industry of Bangladesh is at a
state of overcapacity which makes it much harder for a new company to venture into the cement
manufacturing business.

Bargaining Power of Customers: Very High

Since overcapacity exists in the industry, customers have varied choices. The bargaining power
of customers in the industry is high which reflects in the declining cement price in the country.

Threat of Substitutes: Very Low

The threat of substitutes is very low as there is almost no alternative for cement in construction
activities; especially for a country like Bangladesh where high-rise building is mushrooming, and
construction activities are speeding up.

Bargaining Power of Suppliers: Moderate

Bargaining power of suppliers is moderate as cement grinding units can avail clinker through
import and companies like LHBL can procure limestone from its own quarry.

Rivalry among Existing Competitors: Very High

Cement industry of Bangladesh is going through massive competition as most of the local
cement manufacturing companies have gone for expansion leaving the industry in an
overcapacity state. The cement manufacturing companies are pushing the product prices down to
capture greater market share creating intensive competition in the industry.

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 Chapter: 05
Company Analysis

5.1Company Analysis:
Heidelberg Cement Bangladesh Limited is one of the largest producers of quality cement in
Bangladesh. Heidelberg Cement Bangladesh Ltd. is a member of Heidelberg Cement Group,
Germany. The group has 136 years of experience in producing cement and is operating in more

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than 40 countries. It has around 53,000 employees and an annual turnover of Euro 11.1 billion.
In Bangladesh it represents two reputed brands “Ruby Cement” and “Scan Cement”. In 1998
Heidelberg Cement Group established its presence in Bangladesh by setting up a floating
terminal with on board packing facilities in the port of Chittagong and by distributing the cement
to the key markets of Dhaka and Chittagong. In 1999 the Group further strengthened its position
in Bangladesh and built a Greenfield manufacturing plant near Dhaka namely “Scan Cement
International Limited” with an installed capacity of 0.750 million tons per year. In 2000
Heidelberg Cement Group bought a minority position at Chittagong based company namely
“Chittagong Cement Clinker Grinding Co. Limited (CCCGCL)” quickly followed by the
acquisition of a controlling stake. The plant in Chittagong has an installed capacity of 0.7 million
tons per year. In 2003, the two companies were amalgamated, and the company’s name was
changed to Heidelberg Cement Bangladesh Limited. Since 2004, the Company has diversified its
product range by introducing Portland Composite Cement (PCC) into the market. The Company
also produces other types of cement namely Ordinary Portland Cement (OPC). The Company
further increased the capacity of its Kanchpur plant by setting up another grinding unit of 0.45
million tons per year that was commissioned in 2008. The company has also increased the
capacity of its Chittagong plant by installing another grinding unit of 0.750 million tons per year
which is on operation from the end of 2011 and the Company inaugurated the cement mill in
2012. Both the plants are certified according to the globally applicable environmental
management system Standards-14001. In 2013, the Company installed another Cement SILO
with a capacity of 8000MT in its Kanchpur plant as a part of its SILO project which will help to
increase the productivity of the Company. Sale of Portland Composite Cement (PCC) through
two brands namely Scan Cement and Ruby Cement is the key revenue driver of this a total
installed capacity of 2.1 million MT. company. Its manufacturing units are situated in
Chittagong and Kanchpur having Recently, additional capacity of grinding unit of 750,000
MT/year in Chittagong had started its commercial operation since January 12, 2012.

5.2Company Fundamentals:
Sector Cement
Market Cap (BDT mn) 20,273.5
Shareholders’ Equity (BDT mn) 4699.7
Paid-up Capital (BDT mn) 565.04
No. of Share Outstanding 56,503,590
Type of Instrument Equity
Book value per share (BDT) 83.17
Forward P/E 18.46
EPS (BDT) 14.21
Market Category A
AGM date June7, 2019

5.3Board Members:

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 Chairman Kevin Gerard Gluskie
Managing Director Jose Marcelino Ugarte
Director Sim Soek Peng
Director Fong Wei Kurk
Director Juan-Fransisco Defalque
Independent Director Golam Farook
Independent Director Abdul Awal Mintoo
Director & CFO Jashim Uddin Chowdhury, FCA

5.4Revenue Drivers:

5.4.1Urbanization:
By 2020, the urban population in Bangladesh would be 38.2% and it will be around 45.6% by
2030. This increasing trend of urban population will drive the demand for increase in demand of
cement thus driving the revenue. Per capita cement consumption which is currently 137kg is
likely to increase as it is far below global average of 500kg.
5.4.2Real Estate Growth:
Real estate sector of Bangladesh has experienced a growth of 4.2% in last year. With the
expectation of increase in urban population, real estate growth is likely to continue. This will
lead to a growth more real estate to be built which ultimate means a higher demand for cement.
5.4.3GDP Growth:
The GDP of Bangladesh has been growing at around 7%. According to the World Bank and
Bangladesh Bank estimates, the growth will be around 6.8% to 7% till 2020. The per capita GDP
will also rise which will increase the demand of Cement as people will be more likely initiate
construction activity.

5.4.4Remittance Growth:
Remittance is one of major sources inflow for Bangladesh and it has been increasing lately.
Monthly remittance inflow is likely to increase to 1600USD million in 2020 from 1482USD
million right now. The major use of the remitted money is to build houses which will drive the
demand for the cement.

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 Revenue Growth

5.5Cost Driver:
The cost structure of Heidelberg Cement is mainly divided into 4 parts;
Costs Percentage of COGS
Raw Materials 83.4%
Energy 8.28%
Depreciation Expense 2.91%
Labor 0.88%
Other Costs 4.53%

5.5.1Raw Materials – The Main Driver:

The major cost driver for Heidelberg Cement is its Raw Materials consumption at 83.4% of
COGS, which can be further decomposed into;

Raw Materials Items Percentage of RM

Clinker 65.7%
Iron Slag 11.5%
Packing Materials 7.9%
Fly Ash 7.7%
Limestone & Others 3.9%
Gypsum 3.2%

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From this, we can assume that the international Clinker Market is a huge driver for the cost of
Heidelberg Cement, as they import all the required Raw Materials (Clinker, Iron Slag,
Limestone, etc.) from other countries.
5.5.2Energy is Power:
The fuel and power cost come in second in our cost driver analysis. The world oil market is a
significant player in this sector and electricity being a major contributor as well. We can also see
in the industry that, due to power constraints the total capacity cannot be fully utilized. The
Electricity and Power board will be a very important cost driver for Heidelberg.

5.6Board Composition:
The board is composed of 8 members that works within the framework of the Memorandum &
Articles of Association of the Company, as approved by the shareholders.
5.6.1Roles & Responsibility:
Heidelberg Cement’s Corporate Governance Framework is developed based on the following
statutory requirements, best practices and guidelines –
1.Companies Act 1994 (CA 1994)
2.Stock Exchanges Listing Requirements
3.Bangladesh Securities and Exchange Commission (BSEC) Corporate Governance Guidelines
of 2012, & Other applicable rules, laws and regulations.
5.6.2Transparency:
Heidelberg, ensures transparency via publishing regular annual reports. The Board is committed
to ensuring that a clear, balanced and meaningful assessment of the Company’s financial
performance and prospects through the audited financial statements and quarterly announcement
of results are provided to shareholders and regulatory bodies.
5.6.3Organizational structure & rights:
The organizational structure is strictly maintained, and the bodies are given proper authority and
autonomy. However, corporate governance guideline and the company rules and regulations
ensures the organizational structure is strictly followed.
5.6.4Corporate Citizenship:
The Company’s focus on sustainable development, its customer centric approach in creating
value for the customers by ensuring product quality and innovative service offerings coupled
with its outreach to the communities it impacts through CSR activities and programs has enabled
your Company to earn the trust and goodwill of its investors.

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 Chapter 06
Relevant Theories

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6.1SWOT Analysis:
STRENGTH:
Strategic location of factory in Dhaka and Chittagong.
Port facility of Chittagong
Strong brand equity of Scan and Ruby with Premium Price
Strong sales force and dealer network
Strong relationship with corporate customer and large end user.
Consistent quality
Organizational positioning as “Quality Leader”
Operations in more than 40 countries
More than 100 years of existence
Weakness
Intense competition from the local companies
Price is high than consumer’s perceived value.
No conveyor belt: Expensive coaster delivery
One product line
High production cost
Selective distribution
Opportunities
Growth of cement market in Bangladesh due to development work.
Demand for quality cement
Affiliations with regular customers through seminars and during AGM
Scan/Ruby Cement has its unique quality product and brand image, which is quite
important to establish new clients both in Government and Private sector.
Recent trend in falling clinker price.
Opportunities

Growth of cement market in Bangladesh due to development work.

Demand for quality cement
Affiliations with regular customers through seminars and during AGM
Scan/Ruby Cement has its unique quality product and brand image, which is quite
important to establish new clients both in Government and Private sector.
Recent trend in falling clinker price.
Threats
Strong competition from local brands is a threat to Heidelberg Cement
Other popular brands offer lower price
Sudden change in price for raw materials as all Raw Materials are imported.
Falling revenue in 2017.
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 Cyclicality of the business.

6.2BCG Matrix of HeidelbergCement:

The BCG Matrix is an important tool in deciding whether an organization should invest or divest
in its strategic business units. The matrix involves placing the strategic business units of a
business in one of four categories; question marks, stars, dogs and cash cows. The placement in
these categories depends on the relative market share of the organization and the market growth
of these strategic business units. The steps to be followed in this analysis is as follows:
Identify the relative market share of each strategic business unit.
Identify the market growth of each strategic business unit.
Place these strategic business units in one of four categories. Question Marks are those
strategic business units with high market share and low market growth rate. Stars are
those strategic business units with high market share and high market growth rate. Cash
Cows are those strategic business units with high market share and low market growth
rate. Dogs are those strategic business units with low market share and low growth rate.
Relevant strategies should be implemented for each strategic business unit depending on
its position in the matrix.

Stars:
The financial services strategic business unit is a star in the BCG matrix of HeidelbergCement. It
operates in a market that shows potential in the future. HeidelbergCement earns a significant
amount of its income from this SBU. HeidelbergCement should vertically integrate by acquiring
other firms in the supply chain. This will help it in earning more profits as this Strategic business
unit has potential.
Cash Cows:
The supplier management service strategic business unit is a cash cow in the BCG matrix of
HeidelbergCement. This has been in operation for over decades and has earned
HeidelbergCement a significant amount in revenue. The market share for HeidelbergCement is
high, but the overall market is declining as companies manage their supplier themselves rather
than outsourcing it. The recommended strategy for HeidelbergCement is to stop further
investment in this business and keep operating this strategic business unit as long as its
profitable.
Question Marks:

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The local foods strategic business unit is a question mark in the BCG matrix for
HeidelbergCement. The recent trends within the market show that consumers are focusing more
towards local foods. Therefore, this market is showing a high market growth rate. However,
HeidelbergCement has a low market share in this segment. The recommended strategy for
HeidelbergCement is to invest in research and development to come up with innovative features.
This product development strategy will ensure that this strategic business unit turns into a cash
cow and brings profits for the company in the future.

Dogs:
The plastic bags strategic business unit is a dog in the BCG matrix of HeidelbergCement. This
strategic business unit has been in the loss for the last 5 years. It also operates in a market that is
declining due to greater environmental concerns. The recommended strategy for
HeidelbergCement is to divest this strategic business unit and minimize its losses.

6.3PESTEL Analysis of HeidelbergCement:

Another helpful tool that should be used in finding the case study solutions is the PESTEL
analysis. This also looks at the external business environment of the organization helps in finding
case study Analysis to real-life business issues as in HBR cases.
The PESTEL analysis particularly looks at the macro environmental factors that affect
the industry. These are the political, environmental, social, technological, environmental
and legal (regulatory) factors affecting the industry.
Factors within each of these 6 should be listed down, and analysis should be made as to
how these affect the organization under question.
These factors are also responsible for the future growth and challenges within the
industry. Hence, they should be taken into consideration when coming up with the
HeidelbergCement.

6.4Value Chain Analysis of HeidelbergCement:

The Value chain analysis of HeidelbergCement helps in identifying the activities of an
organization, and how these add value in terms of cost reduction and differentiation. This tool is
used in the case study analysis as follows:

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 The firm’s primary and support activities are listed down.
Identifying the importance of these activities in the cost of the product and the
differentiation they produce.
Lastly, differentiation or cost reduction strategies are to be used for each of these
activities to increase the overall value provided by these activities.
Recognizing value creating activities and enhancing the value that they create allow
HeidelbergCement to increase its competitive advantage..

6.5Ansoff Matrix of HeidelbergCement:

Ansoff Matrix is an important strategic tool to come up with future strategies for
HeidelbergCement. It helps decide whether an organization should pursue future expansion in
new markets and products or should it focus on existing markets and products.

The organization can penetrate existing markets with its existing products. This is known
as market penetration strategy.

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 The organization can develop new products for the existing market. This is known as
product development strategy.
The organization can enter new markets with its existing products. This is known as
market development strategy.
The organization can enter into new markets with new products. This is known as a
diversification strategy.
The choice of strategy depends on the analysis of the previous tools used and the level of risk the
organization is willing to take.

6.6Marketing Mix of HeidelbergCement:

HeidelbergCement needs to bring out certain responses from the market that it targets. To do so,
it will need to use the marketing mix, which serves as a tool in helping bring out responses from
the market. The 4 elements of the marketing mix are Product, Price, Place and Promotions. The
following steps are required to carry out a marketing mix analysis and include this in the case
study analysis.
Analyze the company’s products and devise strategies to improve the product offering of
the company.
Analyze the company’s price points and devise strategies that could be based on
competition, value or cost.
Analyze the company’s promotion mix. This includes the advertisement, public relations,
personal selling, sales promotion, and direct marketing. Strategies will be devised which
makes use of a few or these elements.
Analyze the company’s distribution and reach. Strategies can be devised to improve the
availability of the company’s products.

6.7Competitive Advantage:
HeidelbergCement has a factory in Chittagong, which can supply all the export requirements at
cheaper transportation cost as they can use the port facility of Chittagong.

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Heidelberg achieves competitive advantage through product differentiation and easy access to
raw materials.

Chapter 07
Valuations

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7.1Discounted Cash Flow Valuation:
Our DCF analysis with a discount rate of 12.5& terminal growth rate of 3 gives us Net Present
Value (PV) of Free Cash Flow to Firm (FCFF) of BDT 5539 billion as of December 2018 on a
consolidated basis. The fair value using DCF method stands at BDT 129 per share for the
company.

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Particulars 2019E 202E 2021E 2022E 2023E
EBIT 1,166.09 1,333.17 1,721.38 1,825.40 2,062.12
EBIT (1-tax rate) 816.26 933.22 1,204.97 1,277.78 1,443.49
Depreciation 126.00 134.00 145.00 172.00 187.00
Capital expenditure 639.64 489.41 550.96 620.25 698.25
Change in NWC 1,212.75 1,187.65 1,394.52 1,574.00 1,296.00
Free cashflow 369.15 368.98 506.41 496.03 1,032.74

Present value discount factor 0.86 0.74 0.64 0.55 0.47

Present value of free cashflow 317.47 274.15 324.43 273.81 485.39
Terminal value 3,864.08

Enterprise value 5,539.32

Cash 1,751.00
Interest-bearing debt -
Equity value 7,290.32
No. of Share 56.50
Value per share 129.03

7.2Relative Valuation:
Valuation is derived based on relative valuation methodologies calculated over projected 2018
EPS estimates and industry multiples. For multiples, average historical P/E multiple, P/NAVPS,
and Peer Companies’ (CONFIDCEM, HEIDELBCEM, MICEMENT, PREMIERCEM) average
P/E (based on TTM EPS) has been considered.
Relative Valuation Methods
Multiple Expected EPS Valuations Note 1: P/E Ratio
P/E (Note 1) 24.91 17.65 439.750 Sector 31.7
Shah 18.11
Multiple Expected EBITDA Enterprise Value Average 24.91
EV/EBITDA 14.00 1,588 22,239
Total Debt -
Cash & Cash Equiv. 1,823
Equity Value 24,062
Non-Controlling interest -
Equity Value to Shareholders 24,062
Number of Shares 57
Value Per Share 422

As part of relative valuation, EV/EBITDA multiple has been calculated. The EV/EBITDA
multiple has been derived by peer companies’ EV/EBITDA calculated on recent year-
end financial statements. For this relative valuation, SHAH has been selected for their proximity to the
EV/EBITDA.

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Last 5years’ average EV/EBITDA Multiple of Heidelberg has been also included.
Correspondingly, fair value has been derived using EV/EBITDA multiple.
Target Price:
I recommend a weight of 90% on value that we derived from DCF valuation and lower
weight of 5% on relative price-earnings based valuation, 5% on price to net asset value
based valuation, 5% on EV/EBITDA based valuation. Based on the weighted average of
the DCF and relative valuation we get a target price (1 Year) of BDT 278 for the
company. I therefore reiterate a ‘Market Weight’ rating on the Heidelberg’s stock at its
prevailing price level.

7.3Duration of Growth:

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The purpose of the growth duration model is to help evaluate the high P/E ratio for the stock of a
growth company by relating its P/E ratio to the firm’s growth rate and duration of growths.
DSEX Heidelberg
P/E Ratio 21 24.91
Expected Growth Rate 0.05 0.0341
Dividend Yield 0.06 0.0453

7.4Economic Value Added:

Economic value added (EVA) is a measure of a company’s financial performance based on the
residual wealth calculated by deducting its cost of capital from its operating profit, adjusted for
taxes on a cash basis. EVA can also be referred to as economic profit, as it attempts to capture
the true economic profit of a company. This measure was devised by management consulting
firm Stern Value Management, originally incorporated as Stern Stewart & Co.

EVA is the incremental difference in the rate of return over a company's cost of capital.
Essentially, it is used to measure the value a company generates from funds invested into it. If a
company's EVA is negative, it means the company is not generating value from the funds
invested into the business. Conversely, a positive EVA shows a company is producing value
from the funds invested in it.

The formula for calculating EVA is: Net Operating Profit After Taxes (NOPAT) - Invested
Capital * Weighted Average Cost of Capital (WACC)

Here EVA is:

= 80976000000 - (4670000000*0.1618)

= 53394000

7.5Buy or Offloading stock from portfolio?

Since the firm’s P/E ratio are quite moderately high earning greater than market rates, it has a
high potential for growth. Also, its cash flows are positive and there is no sign of loss. Plus,
Management is well furnished. EPS are great too. To infer, I would rather buy share of this
company.

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 Chapter: 08
Conclusion
Based on the above presented valuation procedures and ratio analysis, it is safe to say it is the
right choice to acquire or buy shares of the Heidelberg cement Bangladesh ltd. company.
Heidelberg company has overall better cash flow performance and cash flow coverage ratios.
Also, future EPS are not so bleak, it has an Earnings per equity of around 5 for unforeseen
period. It also enjoys the benefit of synergy from acquisition which is reflected as goodwill in
financial statement.

Chapter: 09
References
1. frank keith, R., 2018. analysis of investment management of portfolio. 10th ed. asia: south
western chengage learning
2. dhaka stock exchange. 2020. index. [ONLINE] Available at: http://www.dsebd.org/. [Accessed
10 February 2020].
3. investing.com. 2020. historical data. [ONLINE] Available at: https://www.investing.com/.
[Accessed 10 February 2020].

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 Chapter: 10
Appendix
1Calulations:
Particulars 2016 2017 2018 2019 2020 2021 2022
Sales growth rate -0.07537736 0.1377696
Average sales growth rate 0.0311961 0.03119613 0.0311961 0.03119613 0.03119613

COGS in proportion to sales 0.8003265 0.8267212

Average proportion 0.8135239 0.81352387 0.8135239 0.81352387 0.81352387

Operating expense in proportion to sales 0.095 0.0799334

Average proportion 0.0874667 0.08746671 0.0874667 0.08746671 0.08746671

Growth rate of net finance income 0.01962759 0.0171415

Average proportion 0.0183846 0.01838456 0.0183846 0.01838456 0.01838456

17 18 2019 2020 2021 2022 2023

Property, Plant and Equipment % OF SALES 33.30% 29.16% 31.00% 31.00% 31.00% 31.00% 31.00%
Investment GROWTH 7% 7% 7% 7%
Inventory % of COGS 15% 20% 17% 17% 17% 17% 17%
Account Receivables % of sales 12% 7% 9% 9% 9% 9% 9%
Advances, Deposits % of sales 2% 2% 2% 2% 2% 2% 2%
Short Term Loan (Current asset) % increase 3% 3% 3% 3%
Cash & Cash Equivalents % of sales 28% 16% 22% 22% 22% 22% 22%

Retained Earnings % of sales 36% 31% 33% 33% 33% 33% 33%

Gain on Marketable Securities % of Investment in Marketable Secuirities 31% 7% 7% 7% 7% 7% 7%

Long term loan 0% 0% 0% 0%
Deferred Tax Liability % increase 7% 9% 10% 10% 10% 10% 10%
Accounts payable % of COGS 39% 32% 35% 35% 35% 35% 35%

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2Beta:
Heidelberg Cement BD DSEX Index

Date Price Open High Low Vol. Change % Date Price Open High Low Vol. Change %
20-Feb 152.8 150.6 156.5 150 - 1.46% 20-Feb 4,471.51 4,469.65 4,526.95 4,374.67 - 0.04%
20-Jan 150.6 164.1 167.6 122.2 367.67K -8.62% 20-Jan 4,469.65 4,452.93 4,549.79 4,009.70 - 0.38%
19-Dec 164.8 167.2 175 157.2 91.77K -1.44% 19-Dec 4,452.93 4,452.93 4,452.93 4,452.93 - -5.89%
19-Nov 167.2 165.5 184.9 161.1 150.81K 2.08% 19-Nov 4,731.43 4,731.43 4,731.43 4,731.43 - 1.04%
19-Oct 163.8 197.9 210 158.5 166.63K -17.23% 19-Oct 4,682.90 4,682.90 4,682.90 4,682.90 - -5.35%
19-Sep 197.9 208.5 212 193.6 148.26K -5.08% 19-Sep 4,947.63 4,947.63 4,947.63 4,947.63 - -2.91%
19-Aug 208.5 193 242 193 353.84K 7.59% 19-Aug 5,095.77 5,095.77 5,095.77 5,095.77 - -0.84%
19-Jul 193.8 241.3 243.8 192.1 267.82K -19.98% 19-Jul 5,138.79 5,138.79 5,138.79 5,138.79 - -5.22%
19-Jun 242.2 240 256.9 237 249.29K 1.13% 19-Jun 5,421.62 5,421.62 5,421.62 5,421.62 - 0.82%
19-May 239.5 254.9 254.9 234 505.56K -3.04% 19-May 5,377.74 5,377.74 5,377.74 5,377.74 - 3.36%
19-Apr 247 342.5 385 245.1 758.42K -28.20% 19-Apr 5,202.85 5,202.85 5,202.85 5,202.85 - -5.26%
19-Mar 344 354 360 340 144.53K -2.41% 19-Mar 5,491.90 5,491.90 5,491.90 5,491.90 - -3.85%
19-Feb 352.5 353 380.4 344 337.52K 0.74% 19-Feb 5,711.82 5,711.82 5,711.82 5,711.82 - -1.88%
19-Jan 349.9 336.7 370 333.3 283.00K 4.54% 19-Jan 5,821.01 5,821.01 5,821.01 5,821.01 - 8.08%

Covariance 0.002388065
Variance 0.010463694
Beta 0.228223862

3DCF:
Particulars 2019E 202E 2021E 2022E 2023E
EBIT 1,166.09 1,333.17 1,721.38 1,825.40 2,062.12
EBIT (1-tax rate) 816.26 933.22 1,204.97 1,277.78 1,443.49
Depreciation 126.00 134.00 145.00 172.00 187.00
Capital expenditure 639.64 489.41 550.96 620.25 698.25
Change in NWC 1,212.75 1,187.65 1,394.52 1,574.00 1,296.00
Free cashflow 369.15 368.98 506.41 496.03 1,032.74

Present value discount factor 0.86 0.74 0.64 0.55 0.47

Present value of free cashflow 317.47 274.15 324.43 273.81 485.39
Terminal value 3,864.08

Enterprise value 5,539.32

Cash 1,751.00
Interest-bearing debt -
Equity value 7,290.32
No. of Share 56.50
Value per share 129.03

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4Proforma Income Statement:
Particulars 2018 2019E 2020E 2021E 2022E 2023E
Sales 11,151 11499.2 11857.9 12227.8 12609.3 13002.6
Less: COGS 9,219 9354.8 9646.7 9947.6 10257.9 10577.9
Gross profit 1,932.28 2,144.32 2,211.21 2,280.19 2,351.33 2,424.68
Plus: Other income 18.16 20 21.84 23.68 25.52 27.36
Warehouse distribution & Selling Exp 412 436.968 379.137 427.810 441.156 454.919
Admin. Exp. 497 655.452 568.705 641.716 661.735 682.378
Operating profit 1,040.92 1,071.90 1,285.21 1,234.35 1,273.96 1,314.74
Non-operating Exp. 12 12 12 12 12 12
Net Finance Income 191 211.41 218.00 224.80 231.82 239.05

Less: Contribution to WPPF 54 54 54 54 54 54

EBT 1,166.09 1,217.33 1,437.23 1,393.17 1,439.79 1,487.81
Less: Tax 30% 368 365.20 431.17 417.95 431.94 446.34
Net income 798.51 852.13 1,006.06 975.22 1,007.85 1,041.47

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5Proforma Balance Sheet:
Particular 2,018 2019E 202E 2021E 2022E 2023E
PPE 3,252 3,565 3,676 3,791 3,909 4,031
Capital Work in Progress 460 394.00 503.00 902.00 1,547 1,700
Intangible 1.70 1.70 1.70 1.70 1.70 1.70
Goodwill 273 273 273 273 273 273
Total fixed asset 3,987 4,233 4,453 4,967 5,730 6,005

Inventory 1,834 1,629 1,680 1,732 1,786 1,842

Trade & other Rec 814 1,089 1,123 1,159 1,195 1,232
Advance and prepayment 213 218 225 232 239 246
Current Tax 37 37 37 37 37 37
Cash & Cash Equivalent 1,751 2,540 2,619 2,700 2,785 2,872

Total curent asset 4,649 5,513 5,683 5,860 6,041 6,228

Total asset 8,636 9,746 10,137 10,827 11,772 12,234

Share capital 565 565 565 565 565 565

Reserve & Surplus 605 605 605 605 605 605
Gen Reserve 15 15 15 15 15 15
Dividend equalization fund 8 8 8 8 8 8
Retained Earnings 3,477 3,849 3,969 4,093 4,220 4,352
Total equity 4,670 5,042 5,162 5,286 5,413 5,545

Suppliers Credit blocked 3 3 3 3 3 3

Quasi Equity Loan 122 122 122 415 124 415
ADP Loan 12 12 12 12 12 12
Deferred Tax Liability 581 750 919 1,088 1,257 1,218
Total long-term liability 718 887 1,056 1,518 1,396 1,648
Accounts payable 2,912 3,282 3,385 3,490 3,599 3,712
Provision for WPPF 53 53 53 53 53 53
Unclaimed Dividend 251 450 450 450 1,279 1,245
Current Tax Liabilities 32 32 32 32 32 32
Total current liability 3,248 3,817 3,920 4,025 4,963 5,042
Total liabilities 3,966 4,704 4,975 5,543 6,359 6,689
Total equity & liabilities 8,636 9,746 10,137 10,829 11,772 12,234

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6WACC:
Risk-free rate (10 Yr T-Bond) 0.08
Market return 0.13
Beta 0.228223862
Cost of equity 0.09
Cost of debt (Bank Loan Rate) 0.15
After tax cost of debt 0.1125

Total market value of equity (Mn) 8,641,419.00

Book value of debt 0
Weight of equity 0.54
Weight of debt 0.46

WACC 0.161856

7Relative valuation:
Relative Valuation Methods
Multiple Expected EPS Valuations Note 1: P/E Ratio
P/E (Note 1) 24.91 17.65 439.750 Sector 31.7
Shah 18.11
Multiple Expected EBITDA Enterprise Value Average 24.91
EV/EBITDA 14.00 1,588 22,239
Total Debt -
Cash & Cash Equiv. 1,823
Equity Value 24,062
Non-Controlling interest -
Equity Value to Shareholders 24,062
Number of Shares 57
Value Per Share 422

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8Target price:
Target Price
Valuation Methods Valuation Weights
P/E 439.75 5%
Peer EV/EBITDA 422.14 5%
DCF £261.12 90%
Average Value Per share 278.10

Target Price 278.10

Current Price (Aug 23, 2019) 222.80

Expected Capital Gain 24.82%

Expected Dividend Yield

Total Return 24.82%

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