Financial Statement Analysis and Valuation of Berger Paints Bangladesh Limited

A Report
On
“Financial Statement Analysis and Security Valuation”
SUBMITTED TO:
Taher Jamil
Assistant Professor,
Department of Finance,
University of Dhaka.
Course Name: Financial Statement Analysis and Valuation
Course Title: F-401
Submitted by: Group no:
Sl. No. Name ID No:
1. Pantho Sarker 20-033
2. Md. Gulam Kibria 20-075
3. Md. Touhidul Islam 20-077
4. Khaleda Yeasmin 20-087
5. Sheikh Sajid Hasan 20-181
Department of Finance
BBA 20thBatch; Section: A
University of Dhaka
DATE OF SUBMISSION: 22 July 2017

Letter of Transmittal
December 22, 2017
Taher Jamil
Assistant Professor,
Department of Finance,
University of Dhaka.
Subject: Submission of the term paper on “Financial Statement Analysis and Security Valuation”.
Dear Sir, “Financial Statement Analysis and Security Valuation ”, a Study on United State
aspect, successfully as a partial requirement of the course. We enjoyed preparing this report
and it helped us to gain knowledge about the feasibility study of “Financial Statement
Analysis and Security Valuation We are also very grateful for your kind help and advice in
completing the study. Moreover, in spite of some challenges, we have finished this task in a
friendly environment and the entire team worked very hard while preparing this report.
We aspire that this study will fulfil your suggestions and expectation. If you need any further
assistance to interpret this study, please inform us. It will be our pleasure to clarify your
questions.
Sincerely,
Group no:
Sl. Name ID No: Assigned Company Signatures:
No.
1. Pantho Sarker 20-033 Berger Paint Bangladesh
Limited
2. Md. Gulam Kibria 20-075 GQ Ball Pen Industries Limited
3. Md. Touhidul Islam 20-077 Heidelberg Cement Bangladesh
Limited
4. Khaleda Yeasmin 20-087 Keya Cosmetic Limited
5. Sheikh Sajid Hasan 20-181 Meghna Cement Mills Limited
3rdyear 2nd Semester (20thbatch), Section: A
Department of Finance
University of Dhaka

Acknowledgement
At first we would like to thank the mightiest and our parents. Without their blessing, we could
not be successful in completing the study. We would like to thank our honourable course
teacher ofDepartment of Finance, Taher Jamil for providing us such an opportunity to prepare
the Report on “Financial Statement Analysis and Security Valuation”. Without his helpful
guidance, the completion of this report was unthinkable. During our preparation of the report
work, we have come to very supportive touch of different individuals & friends and
professionals who lent their ideas, time & caring guidance to amplify the report’s contents. We
want to convey our heartiest gratitude to them for their valuable responses.

Executive Summary
Financial statement analysis and security valuation is key concept to investors and equity
analysts. Investors of all type need to keep some knowledge on the security valuation and
statement analysis. This report shows the valuation of the stock of Berger Paints Bangladesh
Limited, the leading paint company ofBangladesh with tremendous growth. The intrinsic value
of the stock of Berger is calculated based on four basic model of valuation. With cost of equity
and WACC of 5.153% and terminal growth rate of 1.8% gives us following intrinsic value
of the stock of Berger Paints Bangladesh Limited.
Valuation Model Intrinsic Value
(BDT)
FCF ( using parsimonious Approach) 3,563.42
Residual Earning Valuation Model ( using parsimonious Approach) 3,449.23
Residual Operating Income Valuation model ( using parsimonious
Approach)
3,390.38
DDM (using parsimonious Approach) 1,816.55
FCF ( using pro-forma financial statements ) 3,320.02
Now the market price of the stock ofBerger Paints Bangladesh Limited at DSE is BDT 2,128.9.
So, the stock is undervalued in DSE. Only DDM model suggest it as overvalued. But, most of
the model suggest it as undervalued. Our target price is BDT 3,107.05 which is the average
of all these methods. So, our recommendation is to BUY this stock.
Moreover, the financial statement analysis of Berger Paints and other four assigned companies
are done to demonstrate and analyse the current position of the companies. The ratio analysis,
reformulated financial statements, ROE decomposition ( 2 factors, 3 factors, and 5 factors),
ROE sensitivity analysis are done in each chapters.

Table of Contents
Chapter- One: Introduction.............................................................................................................4
1.1 O rigin of the R e p o rt.............................................................................................................4
1.2 O bjective of the R ep o rt...................................................................................................... 5
1.3 Scope of the R ep o rt..............................................................................................................6
1.4 Limitations of the Report......................................................................................................... 7
1.5 Sources and Methodology.........................................................................................................8
Chapter - Two: Valuation Report of Berger Paints Bangladesh Limited.......................... 9
2.1 Company profile........................................................................................................................9
2.2 Business description:................................................................................................................9
2.3 Strategy of the Berger Limited:.............................................................................................10
2.4 Vision of the Berger:............................................................................................................... 10
2.5 Mission of the Berger:............................................................................................................10
2.6 Objective of Berger:................................................................................................................ 10
2.7 Economic condition and growth prospects:.........................................................................10
2.8 Industry overview:...................................................................................................................12
2.9 Competitive positioning:.........................................................................................................12
2.10 SWOT analysis of Berger paints Bangladesh ltd.:...........................................................13
2.11 Porter’s five forces analysis:...............................................................................................13
2.12 Distribution network of Berger:...........................................................................................15
2.13 Capacity and Production:..................................................................................................... 15
2.14 Growth and margin of Berger Paints Bangladesh Limited:........................................... 16
2.15 Valuation -Snapshot and Recommendation......................................................................18
2.16 Valuation - in D etails...........................................................................................................18
2.17 Basic Challenge of Valuation- cost of equity and WACC : .......................................... 19
2.18 Valuation - following parsimony:......................................................................................22
Chapter Three: Financial Statement Analysis of Berger Paints Bangladesh Limited ....35
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3.1 Ratio Analysis of Berger Paints Bangladesh Limited...................................................... 35
3.2 Reformulation of Financial Statements............................................................................... 57
Chapter Four: Financial Statement Analysis of GQ Ball Pen Industries Limited..........60
4.1 Company Overview:...............................................................................................................60
4.2 Corporate history of the GQ Ball Pen Industries Limited:...............................................60
4.3 Ratio analysis of the GQ ball pen industries limited:........................................................61
4.3.1 Activity Ratios:................................................................................................................62
4.3.2 Liquidity Ratios:..............................................................................................................63
4.3.3 Solvency Ratios:..............................................................................................................65
4.3.4 Profitability Ratios:......................................................................................................... 66
4.4 Reformulated Financial Statements of GQ Ball Pen Industries Limited:.......................68
4.4.1 Reformulated Income Statement:................................................................................. 68
4.4.2 Reformulated Balance Sheet:......................................................................................... 69
4.4.3 Reformulated Cash flow Statement:.............................................................................70
4.5 DuPont analysis of the GQ Ball Pen Industries Limited..................................................71
Chapter-Five: Financial Statement Analysis of Heidelberg Cement Ltd.......................... 72
5.1 Overview of HeidelbergCement Ltd.....................................................................................72
5.2 Overview of HeidelbergCement Bangladesh Ltd................................................................73
5.3 Corporate Mission................................................................................................................... 73
5.4 Ratio Analysis..........................................................................................................................75
5.5 Reformulation of Financial Statements............................................................................... 86
Chapter-Six: Financial Statement Analysis of Keya Cosmetics Limited.......................... 91
6.1 About Keya Cosmetics Ltd:...................................................................................................91
6.2 Five years Financial Data of Keya cosmetics ltd:..............................................................92
Chapter-Seven: Financial Statement Analysis of Meghna cement Limited....................105
7.1 Reformulated statements of Meghna cement mills ltd .................................................... 105
7.2 Ratio analysis of Meghna cement mills ltd:.......................................................................109
Page 2 of 128

7.2.1 Activity ratios:............................................................................................................... 109
7.2.2 Liquidity ratios:.............................................................................................................. 113
7.2.3 Solvency ratios:.............................................................................................................. 114
7.2.4 Profitability ratios:.........................................................................................................116
Appendix..........................................................................................................................................120
Page 3 of 128

Chapter- One: Introduction
1.1 Origin of the Report
To have an overview of the Financial Statement Analysis and Valuation in practical life we’ve
a study on “Financial Statement Analysis and Security Valuation: A study on Berger Paint
Bangladesh Limited”, a paint, and home decorate services company and one of the largest
companies in the world. Now a day’s education is not just limited to books and classrooms. In
today’s world, education is the tool to understand the real world and apply knowledge for the
betterment of the society as well as business. From education the theoretical knowledge is
obtained from courses of study, which is only the half way of the subject matter. Practical
knowledge has no alternative. The perfect coordination between theory and practice is of
paramount importance in the context of the modern business world in order to resolve the
dichotomy between these two areas. Therefore, for the B.B.A. program we are assigned to
prepare a report on “FinancialStatementAnalysis andSecurity Valuation: A study on Berger
Paint Bangladesh Limited” for Financial Statement Analysis and Valuation Course (F-401)
course by our honorable course teacher Taher Jamil.
Page 4 of 128

Our objectives are...
> To increase our experience in data collection & analysis.
> To know about the actual picture of Berger Paints Bangladesh Limited.
> To have practical knowledge of Financial Statement Analysis and Valuation.
> To know the implications of Financial Statement Analysis and Valuation.
> To have better analytical abilities regarding Financial Statement Analysis and
Valuation in real world.
> To know Berger Paints Bangladesh limited from a closer view.
1.2 Objective of the Report
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1.3 Scope of the Report
While completing the report we’ve had a lot of scopes of gathering knowledge of real
business world and the wide horizon of business, although the report is only concerned
about the Berger Paints Bangladesh Limited. We have collected their information from the
internet as it a multinational company and its head office is outside of Bangladesh. We got
almost all the information we needed because the website of the company is very much
updated and resourceful. We knew about their mission, vision, products, area of operation,
accounting system, managerial and organizational structure etc. We are really grateful to
our course teachers for assigning us such an interesting and knowledgeable topic.
Page 6 of 128

1.4 Limitations of the Report
While preparing this report, we have faced some problems. The main problem was to co
ordination all the group members. Moreover, during data collection we faced several
problems.
• Due to limited access of the data, this study may not be perfect to the scent percent.
• Lack of enough experience in analyzing of data.
Due to inadequate information, in-depth analysis could not be done in the report
Page 7 of 128

1.5 Sources and Methodology
This report’s research is based on application of Financial Statement Analysis and Valuation
in Berger Paints limited. The data types are secondary that were collected from the internet.
The company’s updated information is given on its website and we mainly collected
information from there.
Page 8 of 128

Chapter - Two: Valuation Report of Berger Paints
Bangladesh Limited
2.1 Company profile
Berger paints Bangladesh ltd. is a renowned and reliable name in the paint industry of
Bangladesh. A manufacturer of home decoration paints along with specialized industrial grade
paints and powder coatings it focuses mainly in proving quality products, maintaining superior
customer relationship and innovation. Berger has been outperforming its peers in a regular
basis and holds a dominant position in the painting industry with holding more than 56%
market share and expanding it through enhancing its distribution network and R&D investment.
Berger paints Bangladesh ltd. previously known as “Jensen & Nicholson” was listed in the
Dhaka and Chittagong stock exchange in December 2005 and issued only 5% of shares to the
public.
2.2 Business description:
The Business model for Berger paints Bangladesh ltd. is manufacturing and marketing of
paints, varnishes and coatings. In 1970 Berger paints limited established its paint factory in
Chittagong. The company also established powder coating and emulsion plants in its Dhaka
factory which it refers to as “the state of the art factory”.
Berger paints has a wide array of products mainly categorized into three classes-
1. Home decor paints.
2. Industrial paints and
3. Marine paints.
The products include all types of Decorative Paints, specialized outdoor paints to protect
against adverse weather conditions, Color Bank, Superior Marine Paints, Textured Coatings,
Heat Resistant Paints, Roofing Compounds, Epoxies and Powder Coatings. Among these
home-decorating paints has consistently been the major revenue driver of the company
The major differentiation strategy that puts Berger ahead of its competitors is vast before and
after sales customer support. It has specialized online home decor service, free technical advice
on surface preparation, color consultancy, special color schemes etc.
Page 9 of 128

Berger has also launched a new product class named “Breath easy” to meet the global trend of
going green. It is an odorless paint with no toxic fumes which is environment friendly and adds
more value to its product line and customer satisfaction.
Berger has the largest and most strategically aligned distribution network in the country which
captures a huge market share all over the country. The channel is disbursed through Dhaka,
Chittagong, Rajshahi, Khulna, Bogra, Sylhet, Comilla, Mymensingh, Barisal, Rangpur, Feni
and Brahman Baria proving an all-out coverage in the country.
2.3 Strategy of the Berger Limited:
“Our strategy is to build long-term partnerships with the customers/consumers. With their
support, we aim to maximize the potential of our business- through a combination of enhanced
quality of product, service, creative marketing, competitive pricing and cost efficiency.”
2.4 Vision of the Berger:
“To be the most preferred brand in the industry ensuring consumer delight.”
2.5 Mission of the Berger:
We shall increase our turnover by 100 percent in every five years. We shall remain socially
committed ethical company.
2.6 Objective of Berger:
Our aim is to add value to life, to outperform the peers in terms of longevity, customer service,
revenue growth, earnings and cash generation. We will be the employer of choice for all
existing and future employees.
2.7 Economic condition and growth prospects:
Bangladesh is a frontier market economy with lower income status which it intends to improve
by 2021 and is considered one of the fastest growing and prospective economies all over the
world.
Page 10 of 128

Figure 1: GDPgrowth ofBangladesh
One of the key growth drivers of the country is human resource. The demographics of
Bangladesh is best suited for a robust and sustainable economic growth for coming years with
majority of the population around 20-30 years of age.
The target GDP growth has been stated as 7.4% in the recent national budget with a target
inflation of 5.5%. To meet the growth expectations and support the economic growth,
Bangladesh has issued the biggest budget in its history amounting 4002.66 billion taka with
highest allocation to education, public administration and transportation. It is 18% of the GDP
and has been a 26.2% growth from the previous budget although it is highly anticipated that
the budget will be revised downwards as Bangladesh still lacks the effective implementation
infrastructure.
Figure 2: Budget size andgrowth
Page 11 of 128

The interest rate are supposed to fall gradually and the nominal exchange rate is supposed to
fall as a currency devaluation is perceived by the market as most of the competitor countries
have already gone under devaluation. Still interest rates and inflation are supposed to stay
within reasonable bracket.
The political cycle is clearly evident in the economy of Bangladesh indicating a mild slowdown
in the beginning of 2019 due to national elections given the history of extreme political unrest
and turmoil.
Considering all the factors Bangladesh is supposed to grow at 7.2% approximately in the next
2 years without any extraordinary circumstances.
2.8 Industry overview:
Paints industry experienced moderate growth in 2017. Typically the July-September period is
historically the “off season” for the industry because of weather conditions. Incidentally, that
is the third quarter for Berger in their accounting period. The growth slowed down in the first
quarter of 2017 due to early monsoon. Despite the idle money in banking sector and lower
interest on housing finance, the real estate sector is yet to get momentum. Shortage of gas
supply in heavy industries was another predicament for industrial growth. The real estate sector
continues to struggle due to high price of real estate and restriction on domestic gas supply. On
the positive side, soft raw materials price and stable exchange rate of Bangladeshi Taka in 2016
has helped the manufacturing industry to reduce cost of goods manufactured. Like previous
year, the overall business environment in the country was good and we expect this to continue
in future years. The economy of Bangladesh is steadily growing to enter middle-income group.
Most of the indicators like inflation, export and interest rate are favorable to encourage
domestic investment. The World Bank estimates Bangladesh's economic growth at 6.80% in
the current fiscal, while government’s estimation is 7.4%. We strongly believe that Bangladesh
will be able to sustain economic growth in upcoming years as the country has demonstrated
such resilience in the past.
2.9 Competitive positioning:
Berger paints Bangladesh ltd. is the largest player in the paints industry in Bangladesh along
with other major local competitors such as Asian Paints, Roxy Paints, Pailac and Elite Paints.
The industry structure can be depicted as “Monopolistic competition”. There are almost 40
paint companies currently operating in Bangladesh but with only 2 or 3 companies dominating
the industry while Berger being in the top.
Page 12 of 128

2.10 SWOT analysis of Berger paints Bangladesh ltd.:
The above SWOT analysis is prepared to show a better picture of the company’s current
position. It seems that the strengths and opportunities of the company out weights the weakness
and threats and the puts the company in a sound position to perform better at present and in the
future.
2.11 Porter’s five forces analysis:
It is considered as the gold standard of industry analysis. The following analysis gives us a
brief review of the painting industry in Bangladesh-
Page 13 of 128
Threats
- Local competition.
- Low barriers to entry.
- Exchange rate risk.
- New low cost alternatives
Opportunities
- High economic growth
-Increasing demand for interior
decoration.
- Innovation with changing trends.
- Business and product diversification.
Weakness
- Import of raw materials
- dependence of decorative segment
where competition is intense.
- low customer turnover.
Strength
- Market leader.
- Largest distribution network.
- Brand name and international presence
- largest array of product and services.
- Eco friendly products.

Bargaining power of buyers
Moderate
Bargaining power of suppliers
High
Intensity of rival
competition
Low
Threat of new entrants
Low
Threat of substitution
Low
1. Competition among industry members: The nature of the painting industry in
Bangladesh is like “monopolistic competition”. So although there are a good number
of companies available they are comparatively very small and the industry is dominated
by a few market participants including Berger, Asian paints and Roxy paints.
2. Bargaining power of buyers: The bargaining power is buyers is moderate in a sense that
buyers can switch between brands if the price differential is huge but it is not the case
and buyers are generally biased towards a few brands which makes their bargaining
power moderate to low.
3. Bargaining power of suppliers: Bargaining power of suppliers is comparatively high as
most of the raw materials are imported and there is significant amount of risk regarding
exchange rates and global price changes.
4. Threat of new entrants: threat of new entrants is low because although the barriers to
entry is moderate there is not so much scope to capture the market as product
differentiation is very difficult and competing against the market leaders is tougher.
5. Threat of substitution: there are not so many substitutes available for paint. Wall
wrapping is although a new concept but it is highly unlikely that it will be able to take
place of paint in the near future.
Page 14 of 128

2.12 Distribution network of Berger:
With its strong distribution network, Berger has reached almost every corner of Bangladesh.
The nationwide dealer network, supported by sales depots strategically located at Dhaka,
Chittagong, Rajshahi, Khulna, Bogra, Sylhet, Comilla, Mymensingh, Barisal, Rangpur, Feni
and Brahman Baria has enabled them to strategically cater to all parts of the country.
2.13 Capacity and Production:
Berger Paints Bangladesh Limited has at present needed equipment and machinery available
to continue the operation. The company can even increase the production it wants because it
has the capacity to produce more products. The previous five years history of capacity and
production of the company is given bellow to understand the future growth prospect of the
company.
Line of
Business
2012 2013 2014 2015 2016
Liquid Non
Liquid
Liquid Non
Liquid
Liquid Non
Liquid
Liquid Non
Liquid
Liquid Non
Liquid
Installed
Capacity
41,303
(LT)
15,757
(KG)
50,287
(LT)
16,195
(KG)
62,093
(LT)
17,991
(KG)
65,099
(LT)
25,454
(KG)
99,866
(LT)
32,390
(KG)
Actual
Production
38,593
(LT)
11,442
(KG)
42,458
(LT)
13,189
(KG)
53,507
(LT)
17,170
(KG)
57,272
(LT)
20,117
(KG)
88,839
(LT)
26,887
(KG)
Page 15 of 128

BPBL is a rapidly growing company, each and every year their sales amount, the actual amount
of the net profit and net profit margin is increasing. In this portion of the analysis we will
observe the growth and margin of the company.
In the given Chart, we can
see that the amount of sales
in 2012 was 7,611,213 but in
2013 it has increased to
8,796,778 which are higher
than the previous year, this
continued to previous five
years. The increased amount
of sales indicates that the
company is successful making
demand of their products
among the customers,
competing the peers companies.
Let’s come to the net profit margin ratio, as we know net profit margin is the ratio that describes
the profitability of a company and how much of the sales the company can receive as net profit.
2.14 Growth and margin of Berger Paints Bangladesh Limited:
We see that although the sales
increase in 2012 and 2013 the
net profit margin did not
increase, rather decreased. But
from 2014 the company
started to increase the net
profit margin. In 2016 its net
profit margin was 12.51%. In
the present competitive market
condition it is quite
satisfactory.
Page 16 of 128
1
2012
1
2013
1
2014
1
2015 2016

Return on Equity is the measure of profitability of a company, which is calculated by dividing
net return by total equity. We have found the return on equity graph of Berger Paints
Bangladesh Limited to be upward sloping.
We see that in 2012
ROE was 34.92% but in
2013 it dropped to
33.82%. It’s because of
the comparative
increase in the equity
growth that that of
revenue growth. But
after that the company
recovered that situation
and the revenue growth rate oversees the equity growth rate.
Return on Equity
38.58%! 38.23% |... . ............,
O-
£
34.92%!
35.86%
33.82%]
2012 2013 2014
Year
2015 2016
Return on Asset is also a measure of profitability but it also measures the efficiency of the
company to use the asset in the most efficient ways.
2012 2013 2014 2015 2016
As we can see that the company had a good return on its asset in the previous years but in the
recent years the company is experiencing a negative turn in the return on asset. It’s because of
the larger volume of the company’s asset base. The company has now turned into a cash cow
company and thus the denominator of the ROA ratio has become so large to decrease the value
of the ratio.
Page 17 of 128

2.15 Valuation -Snapshot and Recommendation
With a discount rate of 5.153% and terminal growth rate of 1.8% gives us following intrinsic
value of the stock of Berger Paints Bangladesh Limited.
Valuation Model Intrinsic Value (BDT)
FCF ( using parsimonious Approach) 3,563.42
Residual Earning Valuation Model ( using parsimonious Approach) 3,449.23
Residual Operating Income Valuation model ( using parsimonious
Approach)
3,390.38
DDM (using parsimonious Approach) 1,816.55
FCF ( using pro-forma financial statements ) 3,320.02
Now the market price of the stock ofBerger Paints Bangladesh Limited at DSE is BDT 2,128.9.
So, the stock is undervalued in DSE. Only DDM model suggest it as overvalued. But, most of
the model suggest it as undervalued. Our target price is BDT 3,107.05 which is the average
of all these methods. So, our recommendation is to BUY this stock.
2.16 Valuation - in Details
The intrinsic value of the stock of Berger Paints Bangladesh Limited has been determined
following parsimonious approach where intrinsic value of the stock has been determined using
FCF valuation model, DDM valuation, Residual Earning Valuation Model and Residual
Operating Income Valuation model. On the other hand, intrinsic value of the stock of Berger
Paints Bangladesh Limited has also been determined using FCF and DDM based on the basis
of pro-forma financial statements (FSs).
Page 18 of 128

DDM
Figure 3: Valuation method
2.17 Basic Challenge of Valuation- cost of equity and WACC :
Determination of cost of equity and cost of capital is the most challenging tasks of any
fundamental valuation model. The determination of cost equity and cost of capital or weighted
average cost of capital for Berger Paints Bangladesh Limited is determined below:
Determination of cost of equity: In cost of equity determination, the capital asset pricing
model ( CAPM) is considered here. The formula for cost of equity according to CAPM model
is ke = Rf +P(Rm - R r ).
(a) Risk-free rate, Rf = The rate of 364 days T. Bill issued by Bangladesh is to be
considered as the risk free rate. The cut off yield of the 364 days T bill issued on
10/07/2017 was 4.47 which is considered as the risk free rate.
(b) Beta of Berger Paints Bangladesh Limited: The beta coefficient for Berger has been
determined based on historical monthly price data from 2012 to 2016. The covariance
of market return (return of DSEX) and stock return for this time frame has been
calculated and it is 0.00106902. Moreover, the variance of market return for this time
frame is calculated as 0.00304. The basic formula for beta is =
Cov(stock return, m arket return/Var(m arket return). The calculated beta for
Berger Paints Bangladesh Limited is 0.35. After Blumes adjustment the beta for Berger
Paints Bangladesh Limited is = 0.565. The detail procedure is shown in the appendix.
Page 19 of 128

(c) Determination of Market Return, Rm: To determine the market return of Berger
Paints Bangladesh Limited, we have to consider the monthly index return (DSEX) from
2012 to 2016. We have to consider the average of the monthly index return and multiply
it to 12 to find out index return or market return- yearly. The monthly average index
return is 0.47% and yearly index return or market return is 5.69%.
Therefore, the cost of equity for Berger Paints Bangladesh Limited using CAPM model is k e =
4 .4 7 % + 0 .5 6 5 (5 .6 9 % — 4 .4 7 % ) = 5.159%.
Determination of WACC:
To determine the weighted average cost of capital for Berger Paints Bangladesh Limited. The
cost of debt and proportion of debt and equity in capital structure have to be considered. Here,
we have to follow the historical approach to determine the cost of debt and we will consider
market value weight of equity and book value weight of debt as proxy of market value. The
formula for WACC calculation is as follows-
WACC = ke x w e + kd(l —tax ra te) x w d
(a) Determination of cost of equity, ke: The cost of equity for Berger Paints Bangladesh
Limited has been calculated in the previous section. The cost of equity is 5.159%
(b) Determination of cost of debt, kd:Berger is a company of no long term or short term
debt. Only the bank overdraft rate is considered here as the debt in cost of debt
calculation. The average finance cost is considered here has as cost of debt which is
only 5%.
Amount in BDT’000
Particulars 2011 2012 2013 2014 2015
Operational overdraft 317,423 33,171 67,691 102,434 1,859
Average operational overdraft 334,009 67,017 118,908 103,364
Finance cost 17772 10805 4573 7884 2979
Finance cost (%) 3% 7% 7% 3%
A v e ra g e Fin an ce cost 5%
(c) Determination of weight of equity and debt: We have considered the market price of
January 1to determine market value of equity.
Page 20 of 128

Amount in BDT’000
Market price 2317.8
Number of shares 23,188,940
Market value of equity 53,747,325,132
Book/market value of debt 103,364
Weight - equity 0.99999808
Weight -debt 0.000001923
On the other hand, the average book value of bank-overdraft is used as book value of debt. The
weight of debt is very minimal. So, we can say that the Berger Paints Bangladesh Limited is
almost no debt company.
(d) Arriving at WACC: Now all the value required to find WACC is found. So, we get
the weighted average cost of capital of 5.1593%.
Determination of Terminal Growth Rate: Though Berger Paints Bangladesh Limited is
expected to continue for foreseeable future, our forecast horizon is five years. So, we have to
determine a terminal value to capture the value beyond our forecasting horizon. To do this , we
have to consider a terminal growth rate. The current population growth rate of Bangladesh
is considered as the terminal growth rate and it is 1.8%.
Page 21 of 128

2.18 Valuation - following parsimony:
Considering the basic valuation principal of parsimony. The intrinsic value of the stock of
Berger paints has been determined using different valuation models. The determination of
intrinsic value under these model are shown in the following sections.
Free Cash Flow Valuation Model: In this model, the free cash flow to the firm will be
determined using parsimonious approach. The FCF valuation of the stock of Berger Paints
Bangladesh Limited is shown below step by step.
(a) Forecasting the revenue: The most difficult challenge of FCF valuation model is to
forecast revenue up the forecast horizon. Here, the average growth rate of revenue for
last five years is considered to as the growth rate of revenue from 2017 to 2011. And
the average revenue growth is 16.79%.
(b) Determining the operating profit or income: The operating profit margin for last 5
years is analysed from reformulated income statement of Berger Paints Bangladesh
Limited. The average of the last 5 years operating profit margin which is 10.60% is
considered as the uniform rate of operating profit margin for 2017 to 2021. Based on
this uniform margin operating profit is to be determined.
Page 22 of 128

Amount in BDT’000
Particulars 2016 A 2017 E 2018 E 2019 E 2020 E 2021 E
Revenue 16,500,892 19,272,172 22,508,882 26,289,188 30,704,387
PM - operating income 10.60% 10.60% 10.60% 10.60% 10.60%
Operting income 1,749,609 2,043,451 2,386,643 2,787,473 3,255,622
NOA 521,062 4556914.212 5322235.74 6216090.96 7260066.767 8479375.515
Change in NOA 4,035,852 765,322 893,855 1,043,976 1,219,309
FCF -2,286,244 1,278,129 1,492,788 1,743,497 2,036,313
Cost o f capital 5.16%
Year 1 2 3 4 5
PV of discount factor 0.9509 0.9043 0.8599 0.8177 0.7776
PV of FCF -2174077.35 1155792.14 1283676.19 1425710.117 1583459.566
Summation o f PV of FCF 3274560.669
Terminal growth rate 0.018
Continuing value 61709085.02
PV of terminal value 79357256.42
Enterprise value 82631817.088
Less: Interest bearing debt 0
Equity value 82,631,817
Number of shares outstanding 23,188,940
Value per share 3563.42
(c) Forecasting Change in Net Operating Assets (NOA): The basic equation for NOA
1
is NOA = Revenue x ■where, asset turnover (ATO) indicates the amount of net
ATO
operating assets required to support revenues. Now, last five years ATO has been
calculated using this same formula. The average ATO of last five years is considered
as the ATO for forecasted years. We got NOA for each forecasting year by dividing
each year’s forecasted revenue with average ATO. Finally, change in NOA will be
calculated considering the change of NOA in each year.
(d) Arriving to the free cash flow : The FCF for each year of the forecasting horizon is
to be determined by adding operating profit with change in net operating assets (NOA).
(e) Determination of cost of capital: Now a suitable discount rate have to determine the
present value of the stock of Berger Paints Bangladesh Limited. We will use the
weighted average cost of capital computed in the previous section as the cost of capital
to discount the cash flows. It is 5.159%
(f) Determination of Terminal value at the end of forecasting Horizon: The last year
of forecasting horizon is 2021. The terminal value has to be calculated at this time by
using the terminal growth rate. The formula to find out terminal value is as follows-
FCF2021(1 + g)
2021 = WACC - g
Page 23 of 128

Here, Terminal growth rate = 1.18%, WACC = 5.1593%
The calculated terminal value TV2021 = BDT. 61709,085,020.
(g) Finding the enterprise value and equity value: By discount all the cash flows and
terminal value we will get the enterprise value of Berger Paints Bangladesh Limited
and it is BDT 82,631,817,088. As Berger has no short term or long term debt.
Enterprise value is considered as the equity value of the company.
(h) Intrinsic value per share: By dividing the equity value by the total number of
outstanding share we got the intrinsic value per share of Berger Pints Bangladesh
Limited and it is BDT 3563.42.
Residual Earning (RE) Valuation Model: Residual earing valuation model determines
present value of expected residual earing which is the excess earing over the required return on
investment of equity holder. The present value of the all excess earrings or residual earrings
are added to the book value or CSE to determine the equity value of the firm. From this equity
value the value per share of a stock is determined. Using parsimonious approach without
developing pro-forma statement, the determination of per share value of the stock of Berger
paints Bangladesh Limited is shown below:
(a) Forecasting the revenue: The most difficult challenge of RE valuation model is to
(b) Forecasting net profit margin and net income: The average of the last five years net
profit margin is considered as the net profit margin for the years considered in the
forecasting horizon. The average profit margin is 10.78%. We will get the net profit or
earnings for each forecasted year by multiplying revenue with the net profit margin.
(c) Determining dividend pay-out ratio and transfer to equity: The average of the last
five years dividend pay-out ratio is considered as dividend pay-out ratio for the next
five years. Based this ratio we can easily find out the portion of earing transfers to
equity.
Page 24 of 128

Amount in BDT’00
Particulars 2 016 A 2 0 1 7 E 2 018 E 2 0 1 9 E 2 020 E 2021 E
Revenue 14,128,113 16,500,892 19,272,172 22,508,882 26,289,188 30,704,387
P M ( N et profit m argin) 10.78% 10.78% 10.78% 10.78% 10.78%
Earnings 1778735 2077469 2426375 2833878 3309820
D PR - dividend payout ratio 47.57% 47.57% 47.57% 47.57% 47.57%
Transfer to the equity 932515 1089128 1272044 1485681 1735197
CSE 5,214,834 6,147,349 7,236,477 8,508,521 9,994,201 11,729,398
Cost of equity 5.16% 5.16% 5.16% 5.16% 5.16%
Benchmark income 269,047 317,158 373,349 438,977 515,627
Residual income 1509688 1760311 2053026 2394901 2794193
Year 1 2 3 4 5
PV of residual income 1,435,621 1,591,822 1,765,436 1,958,382 2,172,795
Summation of PV of residual income 8,924,056
Terminal growth rate 1.8%
Continuing value
PV of Continuing value 65,845,028
Value per share 3,449.23
Target price, T7n77
84,676,049
4,157.39
(d) Determining ending BV of each forecasting period: By adding the previous year’s
ending book value with the transfer to equity, we will find the ending book value or
CSE of each forecasted period.
(e) Determining cost of equity and benchmark earnings: The cost of equity determined
in the previous section will be used as the cost of equity in this model. The determined
cost of equity is 5.159%. The benchmark earning or required earning of each forecasted
year has been determined by multiplying cost of equity with each year’s earnings.
(f) Determination of residual income: The residual income for each year of forecasting
horizon by subtracting benchmark income from earnings.
(g) Determination of continuing value at the end of forecasting Horizon: The last year
of forecasting horizon is 2021. The continuing value has to be calculated at this time by
using the terminal growth rate. The formula to find out continuing value is as follows-
RE2 0 2 1 C1 + d)
CV2021 = — g
Here, Terminal growth rate = 1.18%, cost of equity = 5.1593%
Page 25 of 128

The calculated terminal value CV2021 —BDT. 84,676,049,261 .
(h) Finding equity value and value per share: By discounting the residual earnings and
continuing value and summing up them with the book value or CSE at the end of 2016,
we will find the equity value of Berger Paints Bangladesh Limited. The intrinsic value
per share will be calculated by dividing equity value with number of shares outstanding.
The intrinsic value per share is BDT 3,449.23.
Residual Operating Income (ReOI) Valuation Model: Residual operating income valuation
model considers the excess or residual operating income over the benchmark operating income
in determining the enterprise value. The residual operating income valuation of the stock of
Berger Paints Bangladesh Limited is shown below:
(a) Forecasting the revenue: The most difficult challenge of ReOI valuation model is to
Amount BDT’000
Revenue 14,128,113 16,500,892 19,272,172 22,508,882 26,289,188 30,704,387
PM - operating income 10.60% 10.60% 10.60% 10.60% 10.60%
Operating income 1,749,609 2,043,451 2,386,643 2,787,473 3,255,622
ATO 3.62 3.62 3.62 3.62 3.62
NOA 3,679,583 4,556,914 5,322,236 6,216,091 7,260,067 8,479,376
Cost of operation 5.16% 5.16% 5.16% 5.16% 5.16%
Benchmark operating income 189,839 235,103 274,588 320,704 374,566
Residual operating income 1,559,769 1,808,348 2,112,055 2,466,769 2,881,056
Year 1 2 3 4 5
PV of residual operating income 1,483,245 1,635,260 1,816,196 2,017,151 2,240,341
Summation of PV of ReOI 9,192,192
Terminal growth rate 1.8%
Continuing value 87308371.27
PV of continuing value 67891950.39
Less - Book value of NFO -1,535,251
Value per share 3390.38
Page 26 of 128

(b)
(c)
(d)
(e)
(f)
Forecasting operating profit margin and operating income: The average of the last
five years operating profit margin is considered as the operating profit margin for the
years considered in the forecasting horizon. We will take operating profit margin from
reformulated income statement to find out average operating profit margin. The average
operating profit margin is 10.60%. We will get the operating income for each
forecasted year by multiplying revenue with the operating profit margin.
Determination of the operating asset turnover (ATO) and net operating assets
(NOA): The basic formula to find out ATO = Revenue / NOA. From the reformulated
balance sheet, we have NOA of Berger Paints Bangladesh Limited from 2012 to 2016.
So, we can easily find the ATO for these historical periods using the above mentioned
formula. The average of these five years ATO is considered as the ATO of the years of
our forecasting horizon. This average ATO is 3.62. Multiplying this ATO with
forecasted revenue, we will find NOA for each year of forecasting horizon.
Determining cost of operation and benchmark operating incomes: The cost of
equity is considered as the proxy of cost of operation here. The cost of equity
determined in the previous section will be used as the cost of equity in this model. The
determined cost of equity is 5.159%. The benchmark operating income of each
forecasted year has been determined by multiplying cost of equity with previous years
NOA. Because, benchmark operating income t = Cost of equity x NOAt-1.
Determination of residual operating income: The residual operating income for each
year of forecasting horizon by subtracting benchmark operating income from operating
income.
Determination of continuing value at the end of forecasting Horizon: The last year
of forecasting horizon is 2021. The continuing value has to be calculated at this time by
using the terminal growth rate. The formula to find out continuing value is as follows-
ReOl2Q21(1 + g)
CV2 0 2 1 —
ke - g
The calculated Continuing value CV2021 —BDT 87,308,371,266.
(g) Finding equity value and value per share: By discounting the residual operating
income and continuing value and summing up them with the book value or CSE at the
end of 2016 and deducing the book value of net financial obligation (NFO), we will
find the equity value of Berger Paints Bangladesh Limited. The intrinsic value per share
Page 27 of 128

will be calculated by dividing equity value with number of shares outstanding. The
intrinsic value per share is BDT 3390.38.
Dividend Discount Model of Valuation: Dividend discount model of valuation is the most
basic model of valuation. Decisions based only DDM model can leads to misleading results.
So, this model is considered with other valuation models. The valuation of stock of Berger
Paints Bangladesh Limited under DDM model is considered below.
(a) Forecasting the revenue: The most difficult challenge of DDM valuation model is to
Amount BDT’000
Particulars 2016 A 2017 E 2018 E 2 019 E 2020 E 2021 E
Dividend 846,221 988,341 1,154,330 1,348,197 1,574,623
Cost of equity 5.16% 5.16% 5.16% 5.16% 5.16%
Year 1 2 3 4 5
PVof discount factor 0.950938607 0.904284235 0.859918791 0.817729977 0.777611006
PVof dividend 804,704 893,741 992,630 1,102,461 1,224,444
Summation ofPV of dividend 5,017,981
Terminal growth rate 0.018
terminal value 47,717,847
PVof terminal value 37,105,923
Number ofshares outstanding 23,188,940
(b) Forecasting net profit margin and net income: The average of the last five years net
profit margin is considered as the net profit margin for the years considered in the
forecasting horizon. The average profit margin is 10.78%. We will get the net profit or
earnings for each forecasted year by multiplying revenue with the net profit margin.
(c) Determining dividend pay-out ratio and dividend: The average of the last five years
dividend pay-out ratio is considered as dividend pay-out ratio for the next five years.
Based this ratio we can easily find out the dividend for the next five years.
(d) Determining cost of equity : The cost of equity determined in the previous section will
be used as the cost of equity in this model. The determined cost of equity is 5.159%.
(e) Determination of Terminal value at the end of forecasting Horizon: The last year
Page 28 of 128

TV2 0 2 1 —
Dividend2021(1 + g)
ke - g
(f) The calculated terminal value TV2021 —BDT 47,717,846,945.
(g) Finding equity value and value per share: The value of equity is calculated by
discounting all the dividends and summing up them with present value of terminal
value. The intrinsic value per share is found by dividing value of equity by the number
of outstanding shares.
Valuation - Using Pro-forma Financial Statements
In this section, the pro-forma financial statements will be developed and based on these
statements intrinsic value of the stock of Berger Paints Bangladesh Limited will be determined
using FCF method of valuation.
Assumption Sheet: To develop pro-forma financial statements we have to develop some
realistic assumptions based on the present condition of the business. The assumption sheet to
develop pro-forma financial statement of Berger Paints Bangladesh Limited is shown below:
Amount in BDT’000
Particulars 2017 E 2018 E 2019 E 2020 E 2021 E
Revenue Growth rate 16.8% 17.1% 15.5% 16.1% 16.4%
Cost of sales/ Revenue 59.6% 58.2% 57.3% 56.7% 56.6%
Net operating expense /revenue 25.4% 26.7% 27.2% 27.4% 27.6%
Growth of Deposit 80.4% 87.2% 83.0% 83.5% 84.6%
Investment in Subsidiary Growth 0.0% 0.0% 0.0% 0.0% 130.0%
Profit or loss on sale of PPE / Revenue 0.022% 0.024% 0.027% 0.029% 0.039%
| WPPF/Sales 0.5% 0.4% 0.5% 0.6% 0.6%
Tax Rate 27.33% 27.53% 27.05% 27.20% 27.40%
Dividend Pay-out Ratio 48% 46% 46% 45% 44%
Inventories / Revenue 14.44% 14.20% 14.07% 13.83% 14.13%
Trade and other receivables / revenue 7.2% 7.3% 7.3% 7.2% 7.2%
Advances, deposits and prepayments
/ revenue
2.034% 2.054% 2.058% 2.070% 2.098%
Overdraft
51,288.75 55,818.19 52,849.98 40,453.98 50,102.73
Inter- Company Receivables/
Revenue
1.0% 1.0% 1.1% 1.0% 1.0%
Page 29 of 128

Deferred tax assets 0.02% 0.01% 0.01% 0.02% 0.01%
Bank overdraft
Trade and other payables / Revenue 13.1% 13.5% 14.0% 14.1% 14.1%
Provision for royalty / revenue 1.6% 1.5% 1.5% 1.6% 1.6%
Growth of Provision for tax 42.8% 32.7% 40.2% 43.8% 39.9%
Growth of Emoloyees’ retirement
gratuity
96.7% 9.4% 23.4% 34.4% 41.0%
Unclaimed dividend-local 0.072% 0.069% 0.066% 0.066% 0.066%
Liability for unclaimed IPO
application money
Growth of deferred tax liabilities 17.557% 13.163% 14.965% 13.959% 14.911%
PPE Growth 24% 23% 24% 25% 24%
Growth of Capital Work in process 41% 56% 52% 33% 45%
Growth of Intangible Assets 52% 72% 80% 55% 65%
(a) Assumption 1- Revenue growth rate: Moving average of the growth rate of the recent
five years revenue growth is used as revenue growth rate. This assumption is valid
because the company is facing moderate growth due to under performance of the real
estate sector, which is a major driving force of the product demand in paint industry.
(b) Assumption 2- cost of sales/revenue: Moving average of the cost of sale as percentage
of sales of recent five years is considered to determine the cost of sales. There is a trend
of reducing cost of sales margin. It will be correctly reflected if moving average is used.
(c) Assumption 3- Net operating expense/ revenue: Net operating expense / revenue is
determined by using moving average of recent five years net operating expense/
revenue. There is an increasing trend in operating expense and expected that it will
continue.
(d) Assumption 4: Tax rate: Moving average of the recent 5 years tax rate is considered
as the tax rate.
(e) Assumption 5- Overdraft: Moving average of last five years bank overdraft is
considered.
(f) Assumption 6- PPE , Capital work in process and intangibles: Moving average of
last five years amount is used.
(g) Assumption 7- Moving average of percentage of Revenue: Profit or loss on sale of
PPE, WPPF, inventories , trade and other receivables , inter company receivables,
payables, other income statement and balance sheet variables are determined in this
way
Page 30 of 128

Pro-forma Balance Sheet: The pro-forma balance sheet based on the assumptions is shown
below:
Amount in BDT’000
Non-Current Assets 2,888,194 3,647,023 4,677,598 6,075,661 7,782,202 10,288,300
Property, plant and equipment 2,394,698 2,980,860 3,671,385 4,537,092 5,684,221 7,055,624
Capital work in progress 328,149 461,464 718,918 1,092,830 1,454,669 2,114,863
Intangible assets 76,047 115,399 197,996 356,439 554,012 912,423
Term deposit- Long term
Investment -at cost 89,300 89,300 89,300 89,300 89,300 205,390
Current Assets 5,339,566 5,687,583 6,450,271 7,233,539 8,149,824 8,766,965
Inventories 1,992,519 2,383,271 2,744,722 3,138,920 3,583,296 4,259,841
Trade & other receivables 942,645 1,189,430 1,417,669 1,629,764 1,874,610 2,155,979
Advances, deposits and prepayments 321,538 335,599 396,859 459,166 536,274 632,576
Term deposit 1,450,000 950,750 991,257 1,022,361 1,077,527 778,419
Cash and cash equivalents 482,628 653,183 700,912 743,362 803,057 620,571
Inter- Company Receivables 150,236 172,119 196,021 237,421 271,117 315,431
Deferred tax assets 0 3,232 2,831 2,546 3,942 4,148
Total Assets 8,227,760 9,334,607 11,127,869 13,309,200 15,932,026 19,055,265
Shareholders’ Equity 5,206,827 6,140,318 7,277,961 8,627,060 10,227,611 12,116,240
Share capital 231,889 231,889 231,889 231,889 231,889 231,889
Share premium 115,068 115,068 115,068 115,068 115,068 115,068
General reserve 10,000 10,000 10,000 10,000 10,000 10,000
Retained earnings 4,849,870 5,783,361 6,921,004 8,270,103 9,870,654 11,759,283
Non Current Liabilities 184,611 217,023 245,590 282,343 321,756 369,733
Deferred tax liabilities 184,611 217,023 245,590 282,343 321,756 369,733
Current Liabilities 2,836,322 2,977,265 3,604,318 4,399,797 5,382,659 6,569,293
Bank overdraft 51,289 55,818 52,850 40,454 50,103
Trade and other payables 2,233,856 2,168,054 2,615,730 3,115,912 3,662,869 4,256,247
Provision for royalty 265,977 270,005 293,717 343,634 411,002 492,335
Provision for current tax 315,389 450,360 597,757 838,068 1,204,943 1,685,420
Em oloyees’ retirement gratuity 12,946 25,467 27,861 34,373 46,209 65,145
Unclaimed dividend-local 8,007 11,944 13,287 14,812 17,035 19,895
Liability for unclaimed IPO application
money
147 147 147 147 147 147
Total Liabilities & Shareholders Equity 8,227,760 9,334,607 11,127,869 13,309,200 15,932,026 19,055,265
Pro-forma Income Statement: : The pro-forma income statement based on the assumptions is shown
below:
Page 31 of 128

Particular 2016 A 2017 E 2018 E 2019 E 2020 E 2021 E
Revenue-net 14,128,113 16,500,892 19,322,425 22,307,876 25,905,416 30,145,581
Cost of Sales (7,231,444) (9,834,439) (11,236,491) (12,787,945) (14,684,427) (17,059,166
Gross profit 6,896,669 6,666,453 8,085,934 9,519,931 11,220,989 13,086,414
Net operating expenses (4,414,209) (4,196,692) (5,156,704) (6,074,031) (7,106,250) (8,321,667
Operating Income 2,482,460 2,469,761 2,929,229 3,445,900 4,114,739 4,764,748
Finance costs (2,979) (2,509) (2,731) (2,586) (1,979) (2,451)
Investm ent income 87,463 60,164 62,202 63,713 66,479 50,911
Net finance income 84,484 57,654 59,471 61,127 64,500 48,460
Other non-operating (loss)/ incom e 12,774 3,653 4,593 6,057 7,588 11,622
Income before W PPF and Tax 2,579,718 2,531,069 2,993,294 3,513,084 4,186,827 4,824,830
W PPF (129,698) (80,681) (86,348) (119,627) (166,703) (182,899
Income before tax (EBT) 2,450,020 2,450,388 2,906,946 3,393,457 4,020,124 4,641,930
Tax (682,605) (669,790) (800,212) (917,899) (1,093,636) (1,271,666
Net income 1,767,415 1,780,598 2,106,734 2,475,558 2,926,488 3,370,265
Dividend (626,102) (847,107) (969,091) (1,126,459) (1,325,936) (1,481,636
Transfer to the reserve 1,141,313 933,491 1,137,642 1,349,099 1,600,551 1,888,628
FCF valuation: Free cash flow valuation using pro-forma financial statements is a very
rigorous process. FCF valuation for Berger Paints Bangladesh Limited is shown below:
(a) Determination of EBIT: To determine earnings before interest and tax , we have add
back interest expense from EBT.
(b) Determination of tax rate: Here, the moving average tax rate of the recent five years
is used to determine the tax rate for each period of forecasting horizon.
(c) Determination of depreciation and amortization: Moving average rate of
depreciation and amortization of the recent five years has been used as the rate of
depreciation and amortization for each year of the forecasting horizon. The
determination of the rate is shown in the below table.
Page 32 of 128

Amount in BDT’00
2012 2013 2014 2015 2016 2017 E 2018 E 2019 E 2020 E 2021
A m ortization
11,397 12,441 12,586 6,424 23,742 50,249 76,877 116,673 206,302
347,50
D epreciation
150,986 174,253 240,274 271,039 398,326 495,448 623,745 774,129 987,210
1,200,164
Average PPE
1,150,380 1,438,951 1,711,002 2,119,019
Average
Intangible
Assets
19,935 19,913 43,660 70,146
D epreciation
rate
15% 17% 16% 19% 17% 17% 17% 17% 17%
A m ortization
rate
62% 63% 15% 34% 44% 39% 33% 37% 38%
(d) Determination of Capital Expenditure: Change in the net property plant and
equipment from previous year is considered as the capex for that period.
(e) Determination of Changes in working capital : The determination of change in
working capital is shown in the below table.
Capex 586,162 690,524 865,707 1,147,129 1,371,403
Non-Cash Current Asset 3,406,938 4,080,419 4,755,270 5,465,270 6,265,297 7,363,827
Non-debt current liabilities 2,836,322 2,925,977 3,548,499 4,346,947 5,342,205 6,519,190
Net operating working
Capital
570,616 1,154,443 1,206,771 1,118,323 923,092 844,637
Change in NWC 583,827 52,329 -88,448 -195,231 -78,455
(f) Arriving to the free cash flow : The FCF for each year of the forecasting horizon is
to be determined by adding after tax ebit, depreciation and amortization and deducting
change in working capital and capex.
(g) Determination of cost of capital: Now a suitable discount rate have to determine the
present value of the stock of Berger Paints Bangladesh Limited. We will use the
weighted average cost of capital computed in the previous section as the cost of
capital to discount the cash flows. It is 5.159%
Page 33 of 128

Amount in BDT’000
P articulars 2 0 1 6 A 2 0 1 7 E 2 0 1 8 E 2 0 1 9 E 2 0 2 0 E 2 0 2 1 E
EBIT 2,447,878 2,904,215 3,390,871 4,018,145 4,639,479
Taxrate 27.33% 27.53% 27.05% 27.20% 27.40%
EBIT (1-tc) 1,778,775 2,104,755 2,473,672 2,925,047 3,368,485
Plus:Depreciation & amrotization 545,697 700,622 890,803 1,193,512 1,547,665
Less: Capital investment 586,162 690,524 865,707 1,147,129 1,371,403
Less: Change in WC 583,827 52,329 -88,448 -195,231 -78,455
FCF 1,154,483 2,062,524 2,587,215 3,166,661 3,623,202
Cost of capital 5.16% 5.16% 5.16% 5.16% 5.16%
Year 1 2 3 4 5
PV ofFCF 1097842 1865108 2224795 2589474 2817442
Summation of PV of FCF 10,594,662
Terminal growth rate
Continuing value
1.8%
85380731.04
PV of terminal value 66,393,012
Enterprise value 76,987,674
Less: Interest bearing debt 0
(h) Determination of Terminal value at the end of forecasting Horizon: The last year
FCF2Q2i(1 + d )
2021 = WACC - g
Here, Terminal growth rate = 1.18%, WACC = 5.1593%
The calculated terminal value TV2021 = 55785380731,042.
(i) Finding the enterprise value and equity value: By discount all the cash flows and
terminal value we will get the enterprise value of Berger Paints Bangladesh Limited
and it is BDT 82,631,817,088. As Berger has no short term or long term debt.
Enterprise value is considered as the equity value of the company.
(j) Intrinsic value per share: By dividing the equity value by the total number of
outstanding share we got the intrinsic value per share of Berger Pints Bangladesh
Limited and it is BDT 3320.02.
Page 34 of 128

Chapter Three: Financial Statement Analysis of Berger
Paints Bangladesh Limited
3.1 Ratio Analysis of Berger Paints Bangladesh Limited
Activity Ratios:
Activity ratios represents how well an organisation utilises its assets or with how much
efficiency an organisation operates. Analysts can measure how efficiently an organisation its
various assets. These ratios also shows operational performance too. The following table shows
the commonly used activity ratios of Berger Paints Bangladesh Limited from 2012 to 2015.
Table 1: Activity Ratios ofBerger Paints Bangladesh Limited
Activity Ratios
Particulars 2012 2013 2014 2015 2016
Inventory Turnover 4.01 4.39 4.44 4.42 4.12
Days of Inventory on Hand 91 83 82 83 88
Receivable Turnover 15.66 15.18 14.59 13.84 15.01
Days of sales outstanding 23 24 25 26 24
Payables Turnover 5.69 5.55 5.14 4.04 3.58
Number of days of payables 64 66 71 90 102
Working Capital Turnover 7.33 6.79 6.96 7.01 6.54
Fixed Asset Turnover 7.55 7.65 7.56 7.17 6.67
Total Asset Turnover 2.18 2.24 2.26 2.10 1.94
Inventory Turnover ratio and Days Inventory on Hand: A higher inventory turnover
implies a shorter period that inventory is held. Higher inventory ratio and lower days inventory
on hand shows effective inventory management. On the other hand low turnover ratio and high
days inventory on hand shows slow-moving inventory. All of these case the comparison is
done with respect to industry. However, no other company of paint industry is listed. So, time
series analysis is considered here.
Page 35 of 128

4.50
4.40
4.30
4.20 --------------
4.10 --------4.01
2012
Inventory Turnover
2013 2014 2015
4.12
2016
Figure 4: Inventory Turnover Ratio
Days of Inventory on Hand
92
90
88
86
84
82
80
78
76
Days of Inventory on Hand
■2012 1 2013 ■ 2014 B 2015 1 2016
Figure 5: Days Inventory on Hand
In this case of Berger Paints Bangladesh Limited, above graph is showing that the inventory
turnover has dramatically increased from 2012 to 2013 and it shows and increasing trend up to
2015 and DOH (days inventory on hand) is showing decreasing trend for this same time period.
This growth in inventory turnover (decreasing trend in DOH) is the sign of efficient inventory
management or sign of inadequate inventory. The exact reason can be determined after
showing the revenue trend in these years. The following graph is showing the revenue trend
of Berger Paints form 2012 to 2016.
Page 36 of 128

Revenue Growth rate
2013 2014 2015 2016
Figure 6: Revenue Growth Rate of Berger
The inventory turnover from 2012 to 2014 is the sign that efficiency in inventory management
has increased. On the other hand, the decrease of inventory turnover both in 2015 and 2016 is
the sign of slow moving inventory which is reflected in the decreasing revenue growth rate in
these years.
Receivables turnover ratio and days sales outstanding (DSO):
A relatively high receivables turnover ratio (and commensurately low DSO) might indicate
highly efficient credit and collection. Alternatively, a high receivables turnover ratio could
indicate that the company’s credit or collection policies are too stringent, suggesting the
possibility of sales being lost to competitors offering more lenient terms. A relatively low
receivables turnover ratio would typically raise questions about the efficiency of the company’s
credit and collections procedures. The following two graphs shows the receivable turnover
ratio and DSO of Berger Paints Bangladesh Limited from 2012 to 2015.
Page 37 of 128

Receivable Turnover Ratio
16.00
15.50
15.00
14.50
14.00
13.50
13.00
12.50
■2012 ■ 2013 ■ 2014 B 2015 ■ 2016
15.66
Receivable Turnover
Figure 7: Receivables Turnover of Berger Paints Bangladesh Ltd.
27
27
26
26
25
25
24
24
23
23
22
22
Days of sales outstanding
26
25
24
23
Days of sales outstanding
24
■2012 ■ 2013 ■ 2014 B 2015 ■ 2016
Figure 8: DSO of Berger Paints Bangladesh Ltd.
From 2012 to 2015, the receivables turnover ratio of Berger Paints has showed a decreasing
trend. Each year from 2012 to 2015, DSO has increased by one additional day. This decreasing
turnover and increasing DSO could be the effect of reducing revenue growth or increasing
average accounts receivables.
Page 38 of 128

Table 2 Revenue and Receivables growth rate of Berger Paints:
Particulars 2012 2013 2014 2015 2016
Growth rate of trade and other 6% 32% 26% 12.8% 0.33%
receivables
Revenue Growth rate 20% 16% 24% 12.7% 15%
The revenue growth is higher about 4 times the receivables growth in 2012. But, in 2013, DSO
has increased by one day it is due to both increased receivables growth and reduced revenue
growth. In 2013, slightly increased DSO fails to attract new market share at rate of 2011. It is
basically due to the industry wide effect of underperforming real-estate sector. Berger has to
increased receivables significantly to keep at least 16% growth. In 2014 and 2015, they again
stringent credit policy.
So, DSO has increased due to higher growth in receivables in both 2013 and 2014. The same
reason is applicable for 2015 also. However, Berger has taken serious strategic position to
increase the credit management efficiency by reducing receivables growth at 0.33% in 2016,
which is accompanied by increased revenue growth. So, DSO has decreased by 2 days and it
is a sign of efficiency in credit collection procedures.
Table 3:Maturity-wise Presentation of Trade and other Receivables
Particulars 2012 2013 2014 2015
Maturity wise presentation of trade receivable-unsecured:
Outstanding > 360 days 0.84% 1.38% 1.82% 2.00%
Outstanding > 180 but <360 days 2.30% 2.78% 2.86% 3.00%
Outstanding below 180 days 96.86% 95.84% 95.31% 95.00
%
The outstanding book debt more than one year has increased significantly in the combination
of total book debt. It indicates that the credit management efficiency of Berger has decreased
in recent years. This indication is supported by the increased percentage of outstanding book
debt over six months.
Payable Turnover Ratio and Number of days of payables:
The number of days of payables reflects the average number of days the company takes to pay
its suppliers, and the payables turnover ratio measures how many times per year the company
theoretically pays off all its creditors. The payable turnover ratio and number of days of
payables for Berger Paints Bangladesh Limited is shown in bellow two charts.
Page 39 of 128

Payable Turnover Ratio
6.00 5.69 5.55
Payables Turnover
■2012 ■ 2013 ■ 2014 B 2015 ■ 2016
Figure 9: Payable Turnover of Berger Paints Bangladesh Ltd.
Number of days of payables
as
a
'•*-
o
0)S I
E
2012 2013 2014 2015 2016
Year
Figure 10: Number of days of Payables of Berger Paints Bangladesh Ltd.
From 2012 to 2016, payable turnover has decreased (number of days of payables has increased)
significantly. This high days payables was the result of trouble in making payment on time or
the company is taking the advantage of lenient credit terms. To ensure the core cause, an analyst
should scrutinize whether Berger paint has enough cash and current assets to pay-off on time.
The quick ratio for Berger is in the range of 0.75 to 0.5 for this time period and these liquidity
ratio is decreasing at a decreasing trend. So, it indicates that the ability of Berger to payoff
accounts payables instantly somehow decreased. Moreover, they have tried their best use of
the given credit period given by the suppliers.
Page 40 of 128

Working Capital Turnover Ratio: Working capital turnover indicates how efficiently the
company generates revenue with its working capital. A high working capital turnover ratio
indicates greater efficiency. It means that the company is generating a high level of revenues
relative to working capital. If the working capital turnover ratio is negative for any
organization, the fixed assets turnover and total assets turnover can be used to examine its
efficiency. The following chart shows the working capital turnover ratio for Berger Paints
Bangladesh Limited from 2012 to 2016.
Working Capital Turnover
2012 2013 2014 2015 2016
Year
Figure 11: Working Capital Turnover of Berger Paints Bangladesh Ltd.
From 2012 to 2013, working capital efficiency determined by working capital turnover of
Berger paints Bangladesh Limited has decreased from 7.33 to 6.79. Though revenue generation
rate against the working capital has increased slightly from 2013 to 2015. Berger Paints
achieved to generate BDT. 7.01 revenue for each BDT. 1 working capital. However, it faces a
great shock in 2016.
Fixed Asset Turnover: This ratio measures how efficiently the company generates revenues
from its investments in fixed assets. Generally, a higher fixed asset turnover ratio indicates
more efficient use of fixed assets in generating revenue. A low ratio can indicate inefficiency,
a capital-intensive business environment, or a new business not yet operating at full capacity—
in which case the analyst will not be able to link the ratio directly to efficiency. The fixed asset
turnover for Berger Paints Bangladesh Limited from 2012 to 2016 is shown in the following
graph.
Page 41 of 128

Fixed Asset Turnover
2012 2013 2014 2015 2016
Year
Figure 12: Fixed Asset Turnover of Berger Paints Bangladesh Ltd.
The fixed asset turnover for Berger Paints has increased slightly in 2013 to 7.65 times. It
indicates that Berger achieved 7.65 times revenue that of its net fixed assets. Though the
turnover decreased to 7.56 times in 2014. However, extreme fall of turnover occurred in 2015
and 2016. This decrease caused by the higher growth of fixed assets than that of revenue.
Total Assets Turnover: The total asset turnover ratio measures the company’s overall ability
to generate revenues with a given level of assets. A higher ratio indicates greater efficiency.
Because this ratio includes both fixed and current assets, inefficient working capital
management can distort overall interpretations. It is therefore helpful to analyze working
capital and fixed asset turnover ratios separately. A low asset turnover ratio can be an indicator
of inefficiency or of relative capital intensity of the business.
Total Asset Turnover
2012 2013 2014 2015 2016
Year
Figure 13: Total Asset Turnover of Berger Paints Bangladesh Limited
Page 42 of 128

The total asset turnover for Burger Paints Bangladesh Limited faced a tremendous decline
recent 2 years. It indicates the ability of the company to generate revenue against its total assets
decreased to 1.94 in 2016. The basic reason behind this decline in turnover is the declining of
revenue growth rate of Berger Paints Limited in recent years. Berger achieved only 12% and
15% revenue growth respectively in 2015 and 2016.
Liquidity ratios:
Liquidity measures how quickly assets are converted into cash. Liquidity ratios also measure
the ability to pay off short-term obligations. The liquidity ratios for Berger Paints Limited for
the recent accounting years is shown in the following table.
Table 4: Liquidity Ratios of Berger Paints Bangladesh Limited
Liquidity Ratios
Particulars 2012 2013 2014 2015 2016
Current Ratio 2.00 2.04 1.91 1.85 1.88
Quick Ratio 0.75 0.73 0.61 0.60 0.50
Cash Ratio 0.32 0.26 0.16 0.15 0.17
Cash Conversion Cycle 50 42 36 19 11
Current Ratio:
This ratio expresses current assets in relation to current liabilities. A higher ratio indicates a
higher level of liquidity (i.e., a greater ability to meet short-term obligations). A lower ratio
indicates less liquidity, implying a greater reliance on operating cash flow and outside
financing to meet short-term obligations.
Page 43 of 128

Current Ratio
2012 2013 2014 2015 2016
Figure 14: Current Ratio of Berger Paints Bangladesh Limited
The current ratio of Berger Paints Bangladesh is showing a declining trend from 2013 to 2016.
On the time series basis, Berger’s ability to short term liabilities using current assets has
decreased.
Quick Ratio: Quick ratio shows a company’s instant ability to pay off its current liabilities
using its current assets. It excludes inventory from current assets in quick ratio calculation. The
following graph is showing the quick ratio of Berger Paints Bangladesh Limited from 2012 to
2016.
Figure 15: Quick Ratio of Berger Paints Bangladesh Limited
Page 44 of 128

The quick ratio of Berger Paints Bangladesh Limited is also showing a declining trend. In 2012,
it can pay 75% of its current liabilities instantly using its current assets- cash, marketable
securities, and trade and other receivables. But, this ability has reduced to only 50% in 2016.
Cash Ratio:
The cash ratio normally represents a reliable measure of an entity’s liquidity in a crisis situation.
This ratio measures how much current liabilities of an organization can be mitigated using its
cash and highly marketable securities. The cash ratio for Berger Paints Bangladesh Limited
from 2012 to 2016 is shown in the bellow graph.
Figure 16: Cash Ratio of Berger Paints Bangladesh Limited
The cash ratio of Berger Paints Limited has decreased up to 2014. However, cash ratio is
showing a stable position from 2014 to 2016. This decline in cash ratio is not a good sign for
Berger Paints Bangladesh Limited.
Cash Conversion Cycle: This metric indicates the amount of time that elapses from the point
when a company invests in working capital until the point at which the company collects cash.
The cash conversion cycle for Berger Paints Bangladesh Limited is shown in the following
graph.
Page 45 of 128

Cash Coversion Cycle
50
40
to
30
o
20
10
0
60
50
2012 2013 2014 2015 2016
Year
Figure 17: Cash Conversion Cycle
The cash conversion cycle of this company has tremendously improved in recent years. The
main reason behind this tremendous improvement is extremely high numbers of days of
payables. If it is due to proper utilization of the credit period, it is good. Moreover, decreased
DSO in 2016 also contributed to the lower cash conversion cycle.
Solvency Ratio:
Solvency refers to a company’s ability to fulfil its long-term debt obligations. Solvency ratios
provides insight about the financial risk, capital structure and other issues that indicates an
organisation’s ability to pay long term debt obligation. The commonly used solvency ratios for
Berger Paints Bangladesh Limited from 2012 to 2016 is showed in the below graph.
Table 5: Solvency Ratios of Berger Paints Bangladesh Limited
Solvency Ratio
Particulars 2012 2013 2014 2015 2016
Debt Ratios
Debt to A sset Ratio 0.930% 1.581% 1.916% 0.029% 0.000%
Debt to Capital Ratio 1.407% 2.388% 2.963% 0.046% 0.000%
Debt to Equity Ratio 1.428% 2.446% 3.054% 0.046% 0.000%
Financial Leverage Ratio 1.622 1.542 1.573 1.581 1.576
Coverage Ratio
Interest Coverage 58.53 114.70 326.56 246.24 823.43
Page 46 of 128

Debt to Asset Ratio: This ratio measures the percentage of total assets financed with debt.
Generally, higher debt means higher financial risk and thus weaker solvency. In case of Berger
Paints Limited they have no long term or short term debt at all. Only bank overdraft is
considered here as debt. But, it is minimal not more than 1.5% of total assets in recent years.
Berger has a strong financial standing as no debt company in paint industry.
Debt to Capital Ratio: The debt-to-capital ratio measures the percentage of a company' s
capital (debt plus equity) represented by debt. . In case of Berger Paints Limited they have no
long term or short term debt at all. Only bank overdraft is considered here as debt. But, it is
minimal not more than 2.9% of total capital in recent years. Berger has a strong financial
standing as no debt company in paint industry.
Financial Leverage: This ratio (often called simply the “leverage ratio”) measures the amount
of total assets supported for each one money unit of equity. Higher financial leverage indicates
that the company is highly dependent on debt and other liabilities.
1.640
1.620
1.600
1.580
1.560
1.540
1.520
1.500
Figure 18: Leverage of Berger Paints Bangladesh Limited
Berger Paints Bangladesh Limited has faced a decreasing trend in leverage ratio from 2012 to
2013. However, the financial leverage has increased in recent years.
Page 47 of 128
Financial Leverage Ratio
1.622
2012 2013 2014 2015 2016

Interest Coverage: This ratio measures the number of times a company' s EBIT could cover
its interest payments. The interest coverage of Berger Paints Bangladesh Limited from 2012 to
2016 is shown in the below graph.
Interest Coverage
900.00 823.43
0.00
2012 2013 2014 2015 2016
Year
Figure 19: Interest Coverage of Berger Paints Bangladesh Limited
The number of times interest expense can be paid using the EBIT of Berger has increased
tremendously. It was only 58 times in 2012. But, it increased up to 346 times in 2015. But, the
extreme increase has occurred in 2016 of 823 times. The main reason behind this is lower
interest expense of that accounting year. However, the overall solvency indicated by interest
coverage ratio is very strong for Berger Paints Bangladesh Limited.
Profitability ratios:
Profitability ratios measure the return earned by the company during a period. The commonly
used profitability ratios of Berger Paints Bangladesh Limited is shown in the bellow table-
Table 6: Profitability Ratios of Berger Paints Bangladesh Limited:
Profitability Ratios
Particulars 2012 2013 2014 2015 2016
Return on Sales
Gross Profit Margin 33.17% 37.71% 39.48% 42.84% 48.82%
Operating Profit Margin 14.01% 13.72% 13.26% 16.27% 17.57%
Pretax Margin 13.43% 13.97% 13.68% 15.76% 17.34%
Net Profit Margin
Return on Investment
9.89% 9.79% 10.09% 11.62% 12.51%
Page 48 of 128

Operating Return on Asset 30.49% 30.76% 29.98% 34.17% 34.08%
Return on Asset 21.53% 21.93% 22.80% 24.40% 24.27%
Return on Total Capital 32.29% 33.17% 34.89% 38.04% 38.22%
Return on Equity 34.92% 33.82% 35.86% 38.58% 38.23%
Gross Profit Margin: Gross profit margin indicates the percentage of revenue available to
cover operating and other expenses and to generate profit. Higher gross profit margin indicates
some combination of higher product pricing and lower product costs. The gross profit margin
of Berger Paints Bangladesh Limited from 2012 to 2016 is given in the following graph.
60.00%
50.00%
40.00%
30.00%
20.00%
10.00%
0.00%
Gross Profit Margin
48.82%
Gross Profit Margin
■2012 ■ 2013 ■ 2014 B 2015 ■ 2016
Figure 20: Gross Profit Margin
The gross profit margin of Berger has showed an increasing trend in recent years. It could be
achieved by increasing the product price or reducing cost of production. Moreover, reduced
price can also boost up the market demand which can ultimately boost up the revenue amount.
Table 7: Cost of Sales / Revenue of Berger Paints Bangladesh Limited
Year 2012 2013 2014 2015 2016
Cost of Sales /revenue 67% 62% 61% 57% 51%
From the above table, it is clear that the cost of sales as a percentage of revenue has declined
sharply in recent year of 2015 and 2016. It is the basic reason behind this upward sloping gross
margin of Berger Paints Bangladesh Limited.
Page 49 of 128

Operating Profit Margin:
Operating profit is calculated as gross profit minus operating costs. So, an operating profit
margin increasing faster than the gross profit margin can indicate improvements in controlling
operating costs, such as administrative overheads. In contrast, a declining operating profit
margin could be an indicator of deteriorating control over operating costs. The following graph
shows the operating profit margin of Berger Paints Bangladesh Limited from 2012 to 2016.
From the above graph it is clear that management of operating expenses has deteriorated from
2012 to 2014. During this this operating profit margin of Berger declined. However, it showed
a fantastic turn in 2015. Both in 2015 and 2016, the efficiency in managing operating expenses
has improved for Berger Paints Bangladesh Limited.
Pre-tax margin:
The pretax margin is the ratio of pretax income to revenue. The pretax margin reflects the
effects on profitability of leverage and other (non-operating) income and expenses. The pre
tax margin of Berger Paints Bangladesh Limited from 2012 to 2016 is shown in the following
graph.
Page 50 of 128

Pretax Margin
2012 2013 2014 2015 2016
Years
Figure 22: Pre-tax Margin of Berger Paints Bangladesh Limited
Here, the pre-tax margin is showing the same trend that of operating profit margin. Only the
effect of leverage and non-operating incomes and expenses are considered.
Net Profit Margin: Net profit margin is the ultimate figure of income statement which
considers both recurring and non-recurring items of income statements to provide a better view
of profitability of an organisation. The net profit margin for Berger Paints Bangladesh Limited
from 2012 to 2016 is shown in the following graph.
Net Profit Margin
14.00%
12.00%
10.00%
8.00%
(D
6.00%
O
4.00%
2.00%
0.00%
2012 2013 2014 2015 2016
Years
Figure 23: Net Profit Margin
The net profit margin was almost stable from 2012 to 2013. However, net profit margin has
increased in 2015 and 2016. Though revenue growth was not favourable in these years. The
Page 51 of 128

favourable ultimate figure is the efficient management of operating expenses and favourable
financial incomes.
Operating ROA: Operating ROA shows how much operating profit an organisation can
generate against its total assets. The operating ROA for Berger Paints Bangladesh Limited from
2012 to 2016 is shown in the below graph.
Operating Return on Asset
2012 2013 2014 2015 2016
Figure 24: Operating ROA of Berger Paints Bangladesh Limited
Berger has showed outstanding operating return on their invested total assets in 2015 and 2016.
It is a good sign for the overall profitability of the investments in Berger Paints Bangladesh
Limited.
Return on Asset (ROA): ROA measures the return earned by a company on its assets. The
higher the ratio, the more income is generated by a given level of assets. The ROA for Berger
Paints Bangladesh Limited from 2012 to 2016 is shown in the below graph.
Page 52 of 128

Here, ROA of Berger is showing an increasing trend from 2012 to 2015. However, ROA in
recent year of 2016 has decreased to 24.27%. This increasing trend in ROA is caused by
increasing net profit. Further decomposition of ROA is required to identify the exact reasons.
Return on Total Capital: Return on total capital measures the profits a company earns on all
of the capital that it employs (short-term debt, long-term debt, and equity). The return on total
capital for Berger Paints Bangladesh Limited from 2012 to 2016 is shown in the below graph.
Return on Total Capital
38.04% 38.22%
Return on Total Capital
■2012 ■ 2013 ■ 2014 B 2015 ■ 2016
Figure 25: Return on Total Capital of Berger Paints Bangladesh Limited
The return on total capital is showing an increasing trend. However, the profitability on total invented
capital increased dramatically in 2015 and 2016.
Page 53 of 128
39.00%
38.00%
37.00%
36.00%
35.00%
34.00%
33.00%
32.00%
31.00%
30.00%
29.00%

Return of Equity (ROE): ROE measures the return earned by a company on its equity capital,
including minority equity, preferred equity, and common equity. The ROE for Berger Paints
Bangladesh Limited from 2012 to 2016 is shown in the below graph.
Return on Equity
39.00% ---------------------------------------------------------------38.58% 38.23%
33.00%
32.00%
31.00%
2012 2013 2014 2015 2016
Year
Figure 26: ROE of Berger Paints Bangladesh Limited
The overall ROE in recent years is showing ups and downs. Though the ROE of Berger
increased successively from 2013 to 2015, it faced a decreasing turn in 2016. Further
decomposition is required the factors that influenced these pattern of ROE.
DuPont Analysis: The Decomposition of ROE
ROE measures the return a company generates on its equity capital. To understand what drives
a company’s ROE, a useful technique is to decompose ROE into its component parts.
Decomposing ROE involves expressing the basic ratio as the product of component ratios.
Because each of these component ratios is an indicator of a distinct aspect of a company’s
performance that affects ROE, the decomposition allows us to evaluate how these different
aspects of performance affected the company’s profitability as measured by ROE. The 2
factors, 3 factors, and 5 factors decomposition of ROE of Berger Paints Bangladesh Limited is
shown in the bellow graph.
Page 54 of 128

2 Factors Decomposition
Particulars 2012 2013 2014 2015 2016
ROA 21.53% 21.93% 22.80% 24.40% 24.27%
Leverage 1.62 1.54 1.57 1.58 1.58
ROE 34.92% 33.82% 35.86% 38.58% 38.23%
3 Factors Decomposition
Particulars 2012 2013 2014 2015 2016
Net Profit Margin 9.89% 9.79% 10.09% 11.62% 12.51%
Asset Turnover 2.18 2.24 2.26 2.10 1.94
Leverage 1.62 1.54 1.57 1.58 1.58
ROE 34.92% 33.82% 35.86% 38.58% 38.23%
5 Factor Decomposition
Particulars 2012 2013 2014 2015 2016
Tax Burden 0.74 0.70 0.74 0.74 0.72
Interest Burden 0.98291 0.99128 0.99694 0.99594 0.99879
EBIT Margin 14% 14% 14% 16% 17%
Asset Turnover 2.18 2.24 2.26 2.10 1.94
Leverage 1.62 1.54 1.57 1.58 1.58
ROE 34.92% 33.82% 35.86% 38.58% 38.23%
Sensitivity Analysis of ROE:
In case of 3 factor decomposition, analyst has to determine which factor influence the ROE the
most. They have to find out the ROE sensitivity to net profit margin, asset turnover and
leverage. The ROE sensitivity analysis for Berger Paints Bangladesh Limited is done below:
ROE sensitivity to NPM
Particulars 2012 2013 2014 2015 2016
Asset Turnover 2.18 2.24 2.26 2.10 1.94
Leverage 1.62 1.54 1.57 1.58 1.58
ROE 34.92% 34.18% 35.16% 32.82% 30.23%
Change in ROE -0.74% 0.24% -2.09% -4.69%
Mean Change in ROE -1.82%
Standard Deviation of
change in ROE 0.01853056
CV -0.9815952
Page 55 of 128

ROE sensitivity to Asset Turnover
Particulars 2012 2013 2014 2015 2016
Asset Turnover 2.18 2.18 2.18 2.18 2.18
Leverage 1.62 1.54 1.57 1.58 1.58
ROE 34.92% 32.85% 34.54% 39.99% 42.91%
Change in ROE -2.06% -0.38% 5.08% 7.99%
Mean Change in ROE 2.66%
CV 0.65515164
ROE sensitivity to Leverage
Particulars 2012 2013 2014 2015 2016
Asset Turnover 2.18 2.24 2.26 2.10 1.94
Leverage 1.62 1.62 1.62 1.62 1.62
ROE 34.92% 35.57% 36.97% 39.58% 39.35%
Change in ROE 0.65% 2.05% 4.66% 4.44%
Mean Change in ROE 2.95%
CV 1.76279263
Decision: Here, the coefficient of variation is highest for Leverage. So, the sensitivity of ROE to
Leverage is highest.
Page 56 of 128

3.2 Reformulation of Financial Statements
Reformulated Balance Sheet: In order to reformulate the Balance sheet of Berger Paints Bangladesh
Limited, we have divided the assets and liabilities between two basic parts- operating, and financial.
Assets can be operating assets or financial assets. On the other hand, liabilities can be operating
liabilities or financial liabilities.
Berger Paints Bangladesh Limited
Reformulated Balance Sheet
Amounts BD T’000
Particular 2012 2013 2014 2015 2016
Operating Assets 3470418 4009424 4905504 5449140 6692362
Property, plant and equipment 1001521 1299238 1578664 1843340 2394698
Capital work in progress 125556 100405 171604 390590 328149
Intangible assets 23121 16749 23076 64244 76047
Investment -at cost 39300 39300 39300 89300 89300
Inventories 1190049 1308485 1660913 1513733 1992519
Trade & other receivables 499686 659103 832711 939573 942645
Advances, deposits and prepayments 147167 178725 217539 236617 321538
Working Cash 353,738 333,101 252,505 240,236 397,230
Inter- Company Receivables 90280 67330 125451 128517 150236
Deferred tax assets 0 6988 3741 2990 0
Operating Liabilities 1204282 1440281 1882115 2290619 3012779
Deferred tax liabilities 98374 132934 140851 167599 184611
Trade and other payables 848473 1001498 1426465 1747146 2233856
Provision for royalty 168773 124774 142515 166027 265977
Provision for current tax 83490 152838 157170 197886 315389
Employees’ retirement gratuity 5172 28237 15114 11961 12946
Net Operating Assets (NOA) 2266136 2569143 3023389 3158521 3679583
Financial Assets 97683 272938 441370 889920 1535398
Term deposit 87381 0 0 0 0
Term deposit 0 250000 400000 800000 1450000
Cash Equivalent 10,302 22,938 41,370 89,920 85,398
Financial Liabilities 33318 67838 102581 2006 147
Bank overdraft 33171 67691 102434 1859 0
Liability for unclaimed IPO application money 147 147 147 147 147
Net Financial Assets (NFA) 64365 205100 338789 887914 1535251
CSE 2330501 2774243 3362178 4046435 5214834
Page 57 of 128

Reformulated Income Statement: Reformulated income statements also divides all incomes and
expenses between two basic parts - operating and financial. Moreover, reported tax has been allocated
between operating and financial portion separately. The reformulated income statement for Berger
Paints Bangladesh Limited is shown below:
Berger Paints Bangladesh Limited
Reformulated Income Statement
Amounts BD T’000
Particular 2012 2013 2014 2015 2016
Revenue-net 7,611,213 8,796,778 10,881,046 12,267,996 14,128,113
Cost of Sales (5,086,852) (5,479,651) (6,585,744) (7,012,664) (7,231,444)
Gross profit 2,524,361 3,317,127 4,295,302 5,255,332 6,896,669
Selling, distribution and warehousing expenses (1,282,451) (1,842,940) (2,535,540) (2,921,141) (3,948,392)
Administrative and general expenses (223,197) (321,653) (404,409) (378,465) (496,282)
Core operating income before tax 1,018,713 1,152,534 1,355,353 1,955,726 2,451,995
Tax on core operating income (271,294) (349,538) (357,429) (515,462) (685,878)
Tax as reported (269,553) (367,572) (391,165) (507,499) (682,605)
Tax on net interest income 415 (2,922) (9,231) (9,236) (20,359)
Tax allocated to other operating income 1,326 (15,112) (24,505) 17,199 23,633
Core operating income after tax 747,419 802,996 997,924 1,440,264 1,766,117
Other operating income (expenses) requiring tax allocation:
Other operating expenses (62,069) (68,598) (80,582) (91,995) (104,739)
Other operating incomes 109,379 123,279 168,444 132,670 135,204
Profit on sale of property, plant and equipment
Workers' profit participation and welfare fund
1,063 606 1,789 (2,088) 12,774
(WPPF)
Total other operating income (expenses)
(53,225) 0 0 (101,509) (129,698)
before tax (4,852) 55,287 89,651 (62,922) (86,459)
Tax allocated to other operating income
Total other operating income (expenses) after
1,326 (15,112) (24,505) 17,199 23,633
tax (3,526) 40,175 65,146 (45,723) (62,826)
After tax operating items:
Equity Share in Subsidiary income 10,000 10,000 10,000 6,860 10,000
Operating income after tax
Financial income (expenses):
753,893 853,171 1,073,070 1,401,401 1,713,290
Finance costs (17,772) (10,805) (4,573) (7,884) (2,979)
Interest income 16,254 21,495 38,343 41,674 77,463
Net interest income (1,518) 10,690 33,770 33,790 74,484
Tax on net interest income 415 (2,922) (9,231) (9,236) (20,359)
Net financing income after tax (1,103) 7,768 24,539 24,554 54,125
Comprehensive income 752,790 860,939 1,097,609 1,425,955 1,767,415
Reformulated Cash Flow Statement: The reformulated statement cash flow of Berger Paints
Bangladesh Limited is shown below:
Page 58 of 128

Amounts BDT’000
Particular 2012 2013 2014 2015 2016
Cash flows from operating activities (A)
Cash received from customers 7,586,575 8,635,380 10,709,204 12,162,946 14,137,503
Cash received from other operating income 123,146 145,950 210,448 171,508 210,205
Dividend income from JNBL 10,000
Cash paid to suppliers and employees (6,376,858) (7,521,101) (9,387,465) (9,762,235) (11,552,667)
Income tax paid for operating activites (252,077) (270,652) (376,854) (439,284) (545,916)
Net cash flows from operating activities 1,090,786 989,577 1,155,333 2,132,935 2,249,125
Cash flows from investing activities (B)
Capital expenditures (250,686) (460,100) (592,608) (808,721) (831,164)
Investment in J&N (B) L (50,000)
Investment in Non Current assets (FDRs) (28,984) 87,381
Proceeds from disposal of assets 1,513 7,818 3,196 4,340 14,551
Net cash used in investing activities (278,157) (364,901) (589,412) (854,381) (816,613)
Cash flows from financing activities (C)
Repayment of IPO application money (6)
Dividend paid (416,710) (417,197) (509,676) (741,698) (626,016)
Adjusted Payment of interest 12,983 0 3,152 0 2,165
Investment in Non Current assets (FDRs) (28,984) 87,381
Net cash used in financing activities (432,717) (329,816) (506,524) (741,698) (623,851)
Increase in cash and bank balance (D) =(A+B+C) 379,911 294,860 59,397 536,856 808,660
Opening cash and cash equivalents (E) (52,061) 330,869 538,348 591,441 1,128,297
Closing net cash and cash equivalents (D+E) 327,850 625,729 597,745 1,128,297 1,936,957
Workings to Prepare reformulated cash flow statement: The workings of reformulated cash flow
statement is shown below. s
Particular 2012 2013 2014 2015 2016
Tax Saving -4883.497354 0 -1185.750113 0 -814.280679
Reported income tax paid (247,194) (270,652) (375,668) (439,284) (545,102)
Total income tax paid for operating activites -252077.4974 -270652 -376853.7501 -439284 -545916.281
Tax saving -4883.497354 0 -1185.750113 0 -814.280679
Finance expense paid (17,866) 0 (4,338) 0 (2,979)
Adjusted finance expense paid 12,983 0 3,152 0 2,165
Page 59 of 128

Chapter Four: Financial Statement Analysis of GQ Ball
Pen Industries Limited
4.1 Company Overview:
The company manufactures ball pen and plastic products. The ball pen factory facilities are in
BSCIC Industrial Estate, Jessore. The company has utilized its 72% of yearly production
capacity of 605 lac pcs Ball pen in 2011. The plastic goods manufacturing factories engaged
in manufacturing and marketing of plastic products are at Chhoighoria, Shalikha, Magura and
Khagan in Savar. The present production capacity of “Unit No 1” is 22,431 gross of comb
against which 46% had been utilized in 2011. “Unit No 2” produced 18,620,208 pcs of
Glasses/Plates/Burger Box/Tiffin Box/Lunch Box/Thala/Bati/Container against annual
capacity of 29,700,000 pcs.
4.2 Corporate history of the GQ Ball Pen Industries Limited:
Date of incorporation July 18, 1981
Listed in Dhaka Stock Exchange July 14, 1986
Listed in Chittagong Stock Exchange October 10, 1996
Subscription opened May 06, 1986
Subscription closed May 15, 1986
1st right share issued August 20, 1987
1st bonus share issued August 15, 1994
1st public meeting (AGM) held August 20, 1987
Listed with CDBL January 25, 2009
Page 60 of 128

4.3 Ratio analysis of the GQ ball pen industries limited:
Financial ratios are the most common and widespread tools used to analyze a business' financial
standing. Ratios are easy to understand and simple to compute. They can also be used to
compare different companies in different industries. Since a ratio is simply a mathematically
comparison based on proportions, big and small companies can be use ratios to compare their
financial information. In a sense, financial ratios don't take into consideration the size of a
company or the industry. Ratios are just a raw computation of financial position and
performance.
There are number of financial ratio which is widely used to measure the financial performance
of a company. The financial ratios are described under following segments:
Liquidity
ratio
Act
ra
1
/
1Ratio
analysis
V....... ^ /
Profitability
ratio
Figure 27: RatioAnalysis
In the following a brief description of financial performance of GQ Ball Pen Industries Limited
is given below:
Page 61 of 128

4.3.1 Activity Ratios:
Activity ratios also called efficiency ratios measure how well companies utilize their assets to
generate income. Efficiency ratios often look at the time it takes companies to collect cash from
customer or the time it takes companies to convert inventory into cash— in other words, make
sales. These ratios are used by management to help improve the company as well as outside
investors and creditors looking at the operations of profitability of the company.
In the following the activity ratios of GQ ball pen industries limited are given below:
2010 2011 2012 2013 2014 2015
Activity Ratio:
1. Inventory Turnover
Cost of Goods Sold 173,184,161 174,433,574 166,376,745 130,622,114 143,607,554 194,797,648
Average Inventory 94,866,973 144,132,670 119,086,617 98,955,608 98,149,835 92,928,367
1.83 1.21 1.40 1.32 1.46 2.10
2. D O H
Number of Days 365 365 365 365 365 365
Inventory Turnover 1.83 1.21 1.40 1.32 1.46 2.10
199.94 301.60 261.25 276.51 249.46 174.12
3. Receivable Turnover
Revenue 218159162 218718933 209467882 164957918 180286464 222848292
Average Receivables 17,246,502 15,802,674 13,105,998 9,758,538 14,640,045 22,474,052
12.65 13.84 15.98 16.90 12.31 9 .92
4. DSO
Number of Days 365 365 365 365 365 365
Receivables Turnover 12.65 13.84 15.98 16.90 12.31 9.92
28.85 26.37 22.84 21.59 29.64 36.81
5. Fixed Assets Turnover
Revenue 218159162 218718933 209467882 164957918 180286464 222848292
Average Net Fixed Assets 449,541,489 462,068,833 1,811,861,589 1,881,704,458 1,611,795,577 1,185,836,472
0.49 0.47 0.12 0.09 0.11 0.19
6. Total Assets Turnover
Revenue 218159162 218718933 209467882 164957918 180286464 222848292
Average Total Assets 839,887,366 944,139,436 2,207,810,818 2,218,097,803 2,277,972,409 1,812,269,064
0.26 0.23 0.09 0.07 0.08 0.12
Page 62 of 128

The above financial performance has been also described in graphical form in the following:
Activity Ratio
2.50
2.00
1.50
,.0 0
0.50
0.00
2010 2011 2012 2013 2014 2015
Inventory Turnover Ratio 1.83 1.21 1.40 1.32 1.46 2.10
Fixed Asset Turnover Ratio 0.49 0.47 0.12 0.09 0.11 0.19
_ Total Asset Turnover Ratio 0.26 0.23 0.09 0.07 0.08 0.12
YEAR
wInventory Turnover Ratio * Fixed Asset Turnover Ratio wTotal Asset Turnover Ratio
Figure 28: Activity Ratio ofthe GQBall Pen Limited
Interpretation
In the above chart it is clear that activity ratio or efficiency ratio of GQ Ball pen limited is quite
active and moderate performing. Although a dramatic change after 2013 the firm managed to
decrease the inventory turnover over time that means the firm is efficient in using their
inventory. Fixed asset turnover and total asset turnover are not satisfactory from year 2013 to
2015.
4.3.2 Liquidity Ratios:
Liquidity ratios analyze the ability of a company to pay off both its current liabilities as they
become due as well as their long-term liabilities as they become current. In other words, these
ratios show the cash levels of a company and the ability to turn other assets into cash to pay off
liabilities and other current obligations. Some of liquidity ratios are quick ratio, acid test ratio,
current ratio, working capital ratio.
Page 63 of 128

Financial Statement Analysis and Valuation of Berger Paints Bangladesh Limited

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