Valuation of

Square
Pharmaceuticals
Ltd.

United International University

School of Business and Economics
Spring 2016
Security Analysis and Portfolio Management
Course Code: FIN- 4219

Report on
Valuation of Square Pharmaceuticals Ltd.
Submitted to:
Dr Mohan Uddin
Assistant Professor
United International University

Sl.

Name

ID

No
1.

Shahida Akter Rumi

111 121 148

2.
3.
4.

Md. Soleman Ali

Anamica Karmaker
Faria Sumsad Suha

111 122 006

111 121 470
111 121 510

5.

114 123 011

Sumaiya Ferdaus

Signature

Date of
Submission: 27th April, 2016

Letter of Transmittal

27th April, 2016

Dr. Mohan Uddin
Assistant Professor
School of Business and Economics
United International University
Dhanmondi, Dhaka- 1209

Subject: Request to accept the report on Valuation of Square Pharmaceuticals Ltd.

Dear Sir,
We are very pleased to submit the report on Valuation of Square Pharmaceuticals Ltd. We were assigned
to prepare and submit this report as the partial fulfillment of the course entitled Security Analysis and
Portfolio Management .We have tried our level best to prepare this plan perfectly. Nevertheless, this
paper has been suffered by time and cost limitation.
We will be obliged, if you kindly accept this report.
Sincerely yours,

Md. Soleman Ali

On behalf of the group members
Section: B

Acknowledgement

A report that requires a lot of information from various corners is not the works of its authors or
preparers only. To prepare a report by collecting the data of many kinds, one is to depend upon
many people and many others information.
First of all, we would like to thank Almighty Allah whose gracefulness let us complete this
report. Besides a comprehensive work like this must owe credit to many people. We thank those
kind ones whose help & kind support enable us to complete this report.
We have worked really hard for this report. Specially, we are thankful to our honorable faculty
Dr. Mohan Uddin who helped us in every step of starting and completing our report promptly.
We also pay our indebtedness to those websites that helped us by providing a lot of information.
Without these help & support we could not be able to complete this report successful.

Contents
Introduction:............................................................................................................... 2
Sources of Data:......................................................................................................... 2
Primary sources:...................................................................................................... 2
Secondary source:................................................................................................... 2
Objective:................................................................................................................... 2
Limitations:................................................................................................................. 2
Background of Square Pharmaceuticals Limited..........................................................3
Valuation.................................................................................................................... 3
Valuation Methods:..................................................................................................... 4
1. Discounted dividends:......................................................................................... 5
2. Discounted abnormal earnings:...........................................................................5
3. Valuation based on price multiples:.....................................................................5
4. Discounted cash flow analysis:............................................................................5
Discounted Cash Flow - DCF:...................................................................................... 5
Dividend Discount Model (DDM):................................................................................6
Calculation of expected HPR:...................................................................................... 6
The intrinsic value (V0) of a share of stock:...............................................................7
Calculation of constant growth DDM for Square Pharmaceuticals:.............................8
Preferred stock and the DDM:..................................................................................... 8
Price Earnings ratio:.................................................................................................. 9
Price earnings growth ratio......................................................................................... 9
Present value of growth opportunity:..........................................................................9
Informations:............................................................................................................ 11

Conclusion................................................................................................................ 12
References:............................................................................................................... 13

Introduction:
Assessing the value of a firm is a useful tool to measure the overall working progress of the
whole organization. It helps to know, How the firm is performing over the market. The most
advantage of this method is that the general public can get all the ideas clearly from the provided
information, at a glance. In our report, we tried to calculate all the necessary information of a
specified company.

Sources of Data:
Primary sources:

Observation
Secondary source:

Going to the Dhaka Stock Exchange (DSE) website for collecting the annual report
(2014-2015) of Square Pharmaceuticals Ltd.
Other Websites (mentioned in the reference)

Objective:
The Valuation Model based on the current and prospective profitability of a company to assess its
fair market value.

Limitations:
In the efficient market hypothesis, finding undervalued securities is hardly easy. Moreover, it is
the ongoing search for mispriced securities that maintains a nearly efficient market. Even
infrequent discoveries of minor mispricing world justify the salary of a stock market analyst.

Background of Square Pharmaceuticals Limited

In the Bangladeshi pharmaceutical industry we have focused on Square Pharmaceuticals in our report. Square
pharmaceuticals ltd. maintains a vast array of partnerships with virtually every major company chain and most
independent properties both domestically and internationally.
The company was founded in 1958 by Samson H. Chowdhury along with three of his friends as a private firm.
It went public in 1991 and is currently listed on the Dhaka Stock Exchange. Square Pharmaceuticals Ltd., the
flagship company, is holding the strong leadership position in the pharmaceutical industry of Bangladesh since
1985 and it has been continuously in the 1st position among all national and multinational companies since
1985. Square Pharmaceuticals Ltd. is now on its way to becoming a high performance global player.
Square Pharmaceuticals Limited is an organization with equal emphasis on Leadership, Technology, Quality
and Passion. Square Pharmaceuticals Ltd. is the leading branded generic pharmaceutical manufacturer in
Bangladesh producing quality essential and other ethical drugs and medicines. It was established in 1958 and
has been continuously in the 1st position among all national and multinational companies since 1985. And now
Square Pharmaceuticals is set on becoming a high performance global player in the field.

Valuation:
Valuation is about how to create shareholder value, which is what makes companies thrive. It
shows executives and corporate finance practitioners how to value companies using the
discounted cash flow (DCF) approach and apply that information to make wiser business and
investment decisions, such as corporate portfolio strategy, acquisitions, or performance
management.
In finance, valuation is the process of estimating the potential market value of a financial asset
or liability. Valuations can be done on assets or on liabilities. Valuations are required in many

contexts including investment analysis, capital budgeting, merger and acquisition transactions,
financial reporting, taxable events to determine the proper tax liability, and in litigation.
Executives must not only have a theoretical understanding of value creation, but must be able to
create tangible links between their strategies and value creation. This means, focusing less on
recent financial performance and more on what they are doing to nurture a "healthy" company
that can create value over the longer term.

Valuation Methods:
Business Valuation has become an intrinsic part of the corporate landscape. The corporate
landscape has witnessed dynamic changes in the recent years as mergers and acquisitions,
corporate restructurings, and share repurchases are happening in record numbers, both in the
United States and abroad. At the core of the dynamics of all these activities stands some notion
of valuation. The valuation methods are not only necessary for accounting purposes but they also
serve as roadmaps for the angel investors, venture capitalists and corporate acquirers in order to
know the true value of a company's assets. Although there are numerous individual valuation
techniques, these are categorized into four standard business valuation approaches applying
standard formulas:
1. Discounted dividends:

This approach expresses the value of the firm's equity as the present value of forecasted future
dividends.
2. Discounted abnormal earnings:

Under this approach the value of the firm's equity is expressed as the sum of its book value and
discounted forecasts of "abnormal" earnings.
3. Valuation based on price multiples:

This approach a current measure of performance or single forecast of performance is converted

into a value through application of some price multiple for other presumably comparable firms.
4. Discounted cash flow analysis:

This approach involves the production of detailed, multiple-year forecasts of cash flows. The
forecasts are then discounted at the firm's estimated cost of capital to arrive at an estimated

present value.

Discounted Cash Flow - DCF:

A valuation method used to estimate the attractiveness of an investment opportunity. Discounted
cash flow (DCF) analysis uses future free cash flow projections and discounts them (using the
weighted average cost of capital) to arrive at a present value, which is used to evaluate the
potential for investment. If the value arrived at through DCF analysis is higher than the current
cost of the investment, the opportunity may be a good.

CF 1
CF 2
CFn
+
1
2
Formula: DCF= (1+r ) (1+r ) +. + (1+r )n
CF= Cash flow
r = discount rate
This valuation method based on free cash flow is considered a strong tool because it concentrates
on cash generation potential of a business. This valuation method uses the future free cash flow
of the company (meeting all the liabilities) discounted by the firm's weighted average cost of
capital (the average cost of all the capital used in the business, including debt and equity), plus a
risk factor measured by beta. Since risks are not always easy to determine precisely, Beta uses
historic data to measure the sensitivity of the company's cash flow, for example, through business
cycles.
For a valuation using the discounted cash flow method, one first estimates the future cash flows
from the investment and then estimates a reasonable discount rate after considering the riskiness
of those cash flows and interest rates in the capital markets. Next, one makes a calculation to
compute the present value of the future cash flows.

Dividend Discount Model (DDM):

The intrinsic value of the share (Vo) is the present value of the dividend to be received at the end
of the first year (D1) and the expected sales price (P1).
So, Vo= D1/(1+k) + D2/ (1+k)^2 +D3 / (1+k)^3+.

The above equation states that the stock price should equal the present value of all expected
future dividend into perpetuity. This formula is called the dividend discount model (DDM).
Dividend discount model for square pharmaceuticals:
Here, K= the return that investors will require of any investment equivalent risk or require rate of
return
= K = r(f)+[E r(m)- r(f)]
= .0515 + .72 (.48 - .0515)
= .32402
Dividend received at the end of the first year, D1 =TK. 30
P1=expected sales price = TK. 258.70

Calculation of expected HPR:

E(r) = [E(D1 )+E(P1- P0 )]/P0
= (3.40+ (258.70-257.90))/257.90
= 0.0163 or 1.63%
Explanation:
The stocks expected HPR is the sum of he expected dividend yield: E(D1) /P0. The expected
capital gains yield (i.e. the expected rate of price appreciation):[E(P_1)-P_0]/P_0
Where,
P1 = Ending Value of Investment
P0 = Beginning Value of Investment
D0= Last Year Dividend
D1 = Next Year Dividend

In our findings, we get the required rate of return (k), which is 0.32402, is more than E(r); means
0.32402<0.0163. So, it creates a margin of (0.32402-0.0163) = 30.8%. Therefore, we can
conclude that the stock is overpriced.

The intrinsic value (V0) of a share of stock:

V0= [E(D1)+ E(P1)]/(1+k)
= (3.40+258.70)/ (1+0.32402)
=197.96
Explanation:
Here, p_ (0>) v_0. So, it has created overvalued price for the firm. Whenever the intrinsic value
(i.e. the investors own estimate of what the stock is really worth) exceeds the market price, the
stock is considered undervalued and a good investment. But this incident is just the opposite.
Hence, it is not beneficial to buy the stock.

Calculation of constant growth DDM for Square

Pharmaceuticals:
Growth rate, g= ROE * b
= .19*.70
= .133 OR 13.30%
So according to constant growth rate DDM, Vo = Do (1+g)/(k-g)
= D1 / (k-g)
=30/ (.32402 - .133)
=TK. 157.06

The constant growth DDM or the Gordon model is only valid when g is less than k. the constant
growth rate DDM assumes that the companys dividends increase at a constant rate indefinitely.

Preferred stock and the DDM:

Vo= fixed dividend / (discount rate growth rate, g)
=TK. 107.20 / (.50 -0)
=TK. 214.4
Preferred stock that pays a fixed dividend can be valued using the constant growth DDM and
here for the companys preferred dividends value is TK.214.4.

Price Earnings ratio:

1) P/E = 1-b /K-g
= 1-.70/.3242-.1333
= 1.57
Square Parmas 2014-2015 Price Earnings ratio is 1.57. Square Pharmas growth (.1333) and
require return (.3242), reinvest (.70). Price Earnings ratio is smaller because K is greater than
ROE.

Price earnings growth ratio

P/E Growth ratio= (P/E)/Annual EPS growth
= 1.57/.22
=7.136

Square Pharmas 2014-2015 price earnings growth ratios 7.138%. Where Square Pharmas
annual EPS growth is 22% and price earnings ratio is 1.57 & its measures the high rate than the
previous year.

Present value of growth opportunity:

g= ROE * b = .19*.70
= .133 OR 13.30%
ROE = NI/ Total equity = 5081928495/26739581929
= .19
b= 1- Dividend payout ratio = 1 - 152478549/5081928495
= 1 - .30
= .70
E (r m) = (ACTUAL PRICE-INITIAL PRICE)/(INITIAL PRICE)
= (266-178.60)/178.60
= .48
K = rf+ [E(r m)- rf]
= .0515 + .72 (.48 - .0515)
= .32402
Present value of growth opportunity = price per share no growth value per share
= Po- (E1/K)
= 257.90 10.26/.32402
= TK. 226.23

Company growth is desirable only if it increases their return on investmenteither its stock
price and/or its dividends increase. According to the dividend discount model, it is possible for a
company to grow while its stock price declines. A companys stock price will increase only if the
company can reinvest the money and earn a higher rate of return than the required rate of return
demanded by investors. The additional growth of a companys earnings has net present value of
growth opportunities (PVGO).
PVGO of square pharmaceuticals is positive. PVGO exceeds zero, and the stock price will
increase if the company reinvests some of its earnings for further growth. This company would
not be a subject to takeover by other companies.

Informations:

Conclusion
This report has two identical parts. In the first part we have calculated three years ratio Of Square pharma
annual report of financial year 2007-2010. We have calculated their ratios and shown DuPont analysis.
Analyzing companies' performance compare to the square pharmaceutical company also measured in this
part of the report.
In the liquidity ratio we can see that both current ratio and quick ratio improved over time marginally. The
situation was almost stable. Inventory turnover, Total Asset Turnover, Fixed Asset Turnover all had been
relatively stable throughout the three years. Average Collection period is also very good. The only
problem here is the Average collection period which is way high. However, such a situation is actually
pretty much normal for big companies.
Here Debt ratio has improved over time and TIE has remained pretty much stable. Apart from Gross
Profit Ratio, most of the Profitability ratios have actually decreased in 2006-07. Although the decrease
rate is very minimal still it is a problem for Square and they need to try to improve these ratios. Both P/E
ratio and M/B ratio declined in the year 2006-07. But this happened mostly not because of the company's
failure but for the fact that the whole market was not so friendly for investment in that year.
From the total analysis, we can summarize that Square Pharmaceuticals Ltd. has been doing pretty good
throughout the years. It is true that last year there return did decline but it is still pretty much satisfactory.
Therefore, we can conclude that Square Pharmaceuticals Ltd. is a good enough company to invest on.

References:

http://www.tradingeconomics.com/bangladesh/interest-rate
http://www.tradingeconomics.com/search.aspx?q=T-bill%20rate%20in
%20bangladesh
http://www.tradingeconomics.com/bangladesh/stock-market
http://www.tradingeconomics.com/bangladesh/news
https://www.bb.org.bd/monetaryactivity/treasury.php
http://businessnews-bd.com/news/treasury/t-bills/
https://www.bb.org.bd/econdata/intrate.php
http://www.squarepharma.com.bd/price-sensitive-information.php#!
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