Capital Structure of company

Introduction

1.1Introduction:

Every decision made in a business has financial implications, and any decision that involves

the use of money is a corporate financial decision. Broadly everything that a business does

fits under the rubric of corporate finance. All businesses have to invest their resources wisely,

find the right kind and mix of financing to fund these investments, and return cash to the

owners if there are not enough good investments. Principles that govern corporate finance -

The investment principle specifies that businesses invest only in projects that yield a return

that exceeds the hurdle rate. The financing principle suggests that the right financing mix for

a firm is one that maximizes the value of the investments made. The dividend principle

requires that cash generated in excess of good project needs be returned to the owners. These

principles are the core for corporate finance.

To analyze different aspects of corporate finance of a company industry analysis is done to

select the profitable industry. I have taken 3 companies from Fuel & Power sector including

Linde BD, Padma Oil, and Meghna Petroleum. There after all possible aspects of corporate

finance of aforesaid companies are analyzed and evaluated to employ the bookish knowledge

in empirical arena.

1.2 Objectives:

The main objective of the study is to analyze the different corporate finance Aspects of Fuel

& power sector of Bangladesh specially 3 selected companies of identical sector.

The specific objectives are as follows:

To analyze the corporate goal/objectives & CSR activities of the selected Companies.

To calculate the intrinsic value of the share of the companies.

To analyze the financial statements of the selected Companies.

To analyze the capital structure pattern of the aforesaid companies.

To evaluate the divided policy and dividend pattern of the companies.

Page | 1

CHAPTER1

1.3 Methodology

Methodology is the way to come out with solution systematically. This paper has been

completed by following systematic and sequential steps.

1.3.1Data Source:

This report is mostly based annual report and Dhaka Stock Exchange. The data collection

method was based on the secondary data, which were available on the web and also collected

DSE library. My main source of secondary data was the DSE (web& Library) and company’s

web and stockbangladesh.com.

1.3.2 Time Frame

To prepare the report I took the data set of previous 5-6 years data of my selected companies

1.4 Scope of Report

Our main focus of this report is to analyze:

Corporate goal

Valuation

Financial and statement and performance analysis

Cost of capital and capital structure

Dividend policy

Page | 2

Industry Analysis & Selection

2.1 About Fuel & Power Sector:

Energy is the driving force behind all economic activities and most importantly the economy

can be seen as a system of energy flows, as a sequence of energy conversion that culminate in

the production of goods and services. Hence economic growth of a country is directly linked

to energy growth of the country.

Energy Sector Structure of Bangladesh

According to the source of energy, we can represent the sector in the following structure:

2.2 Industry Analysis

2.2.1 Porter’s five forces model

Industry analysis helps to measure the profit potential of the industry in which the firm is

competing because the profitability of various industries differs systematically and

predictability over time. To analyze the industry situation `Porters Five Forces Model’ has

been used. By using this analysis the present Fuel and Power industry situation is determined

to make further decision. The result of industry analysis by using Porters Five Forces Model

is given below:

Page | 3

CHAPTER2

1. Threat from New Entrants:

High capital requirements: High capital requirements positively affect Energy

sector/industry because it limits the competition.

Industry is highly dominated and guided by the government. So, the scope of

private sector companies is limited.

High sunk costs limit competition: High sunk costs make it difficult for a competitor

to enter a new market especially in the energy sector. High sunk costs positively

affect Energy industry because the new entrants must have to spend huge money on

R&D

Industry requires economies of scale

2. Rivalry among Existing Firms:

Degree of product differentiation is low.

Government policies limit competition: Government policies and regulations can

dictate the level of competition within the industry. When they limit competition, this

is a positive for Energy

There are a very good number of big companies in this industry. Their earnings and

market capitalization is very strong.

Competitive Supply businesses were highly susceptible to changes in the price of

electricity

3. Threat from Substitute Products:

Little substitute: The substitute produced by other sector may be coal. In terms of

Gas, petroleum, the substitute is not much alike. Moreover, the collection of coal from

the coalmine is required large investment and it may not be an environmental friendly

investment. So the threat of substitute product produced by other sector is also very

low.

Switching cost: It’s a very essential product and customer switching cost is high

4. Bargaining Power of Buyers:

• Large number of Consumers: There are huge number of consumers of Energy

industry which limit the bargaining power of the consumers

• Low buyer price sensitivity: when buyers are less sensitive to prices, prices can

increase and buyers will still buy the product. Inelastic demand positively affects

Energy

Page | 4

• Product is important to customer: When customers cherish particular products

they end up paying more for that one product. This positively affects Energy.

5. Bargaining Power of the Supplier:

• There are few sellers

• Suppliers have the bargaining power over their buyers and they set the price of petroleum products. Thus, the bargaining power of the suppliers is high.

2.3 Selection Company:

Linde BD: Linde Bangladesh Limited (Formerly BOC Bangladesh Limited) is a part of The

Linde Group, world leading supplier of industrial, process and specialty gases. Linde

products and services can be found in nearly every industry, in more than 100 countries. BOC

Bangladesh re-branded as Linde Bangladesh in November 2011 since its parent company

Germany's Linde Group acquired BOC Group. LindeBD’s principal activities are the

manufacture and supply of industrial and medical gases, anesthesia, welding equipments and

products and ancillary equipments. The product line is categorized into three segments based

on the sectors the company serves its products and services such as Bulk Gases, Package

Gases (PG&P) and Hospital Care. PG&P is the main revenue driver which contributes Appx.

81.64 percent of revenue of Linde BD.

Page | 5

Padma Oil: The Padma Oil Company Limited formerly is a Bangladeshi-state owned

petroleum company. It is a descendant of the historic Burmah Oil Company in the British

Empire. Burmah Oil sold the company to the Bangladesh Petroleum Corporation in 1977. It

was renamed as the Padma Oil Company in 1988 after the Padma River. Today, the company

is one of the largest distributors of petroleum products in Bangladesh, and is listed on the

Dhaka Stock Exchange and the Chittagong Stock Exchange. The prime activities of the

company include the procurement, storage and marketing of petroleum products, lubricants &

greases, bitumen, LPG & manufacturers and marketing of agro chemicals

Meghna Petroleum: The prime activities of the company include the procurement, storage

and marketing of all petroleum oil and lubricating products, Bitumen, Liquefied Petroleum

Gas (LPG) and Battery Water across the national terrains of Bangladesh. The lubricants

products that MPL markets include BP Super V, BP Visco 5000, BP Energol HD 40, BP

Vanellus C3 40, BP Vanellus C3 Multigrade and others.

Page | 6

CHAPTER3

Analysis & Interpretation

3.1 Corporate Goal

A. Corporate Goal:

a) Linde Bangladesh Ltd:

Corporate Vision: We shall be recognized as the leader in all the business sectors in which

we compete in Bangladesh. Our success will be built on our absolute dedication to the

satisfaction of our customers, through constant innovation, operational efficiency, cost

effectiveness and the talents of our people. We shall always apply high standards of integrity

and responsibility in our activities.

b) Padma Oil Company Ltd:

Vision: To build our Company into an efficient, market driven, customer focused institution

with good Corporate Governance structure. Continuous improvement in our business

policies, procedure and operations through Integration of technology at all levels.

Mission: To be the Leader in Oil Marketing Industries in Bangladesh in terms of efficiency,

capital adequacy, asset quality, sound management and profitability having strong liquidity.

Corporate Goals

To ensure steady supplies of POCL products and others commodities of company’s

marketing list to the door-steps of consumers in the best possible way and cost

effective manner.

To maintain the process of attaining excellence for the time honored management

system set by the predecessors who were the pioneers of oil industry in the part of the

world.

To ensure reasonable dividend for the investors and safeguard the interest of the

consumers as well.

To create efficient manpower for country’s oil industry.

Analysis of Goal & Strategies:

Page | 7

Corporate Goal of the Linde BD has well defined but subsequent issues are not well defined

specially the time frame. They should have well time defined objectives and mission that will

entice the most to achieve their goal. The motto of Linde BD is “to ensure optimum

conditions in health, safety and the environment for employees, customers and stakeholders”

which is consistent with their goal.

Padma Oil has well defined corporate goal which is backed by its distinct objectives and

mission. According to its mission statement all except asset quality has been up to the mark.

The company has Appx 95% current asset where only little percent of total asset is fixed

portion.

B. Corporate Social Responsibility:

Corporate responsibility policy of Linde BD:

Linde Group’s Corporate Responsibility policy builds on the values and principles set down

in the Linde Spirit. It outlines our sense of responsibility to our stakeholders, such as business

partners, employees and society. It also addresses our commitment to protecting natural

resources. Linde BD’s corporate responsibility programme “HELP” (ie Healthcare,

Education, Local Community Development & Protecting the Environment).

Analysis of CSR Activities:

Linde BD has performed few CSR activities by their HELP program but Linde didn’t get any

sort of tax benefit for these activities. It’s getting 10% tax rebate for giving more than 20%

divided according to the Income Tax Ordinance. On the other hand, Padma oil and Meghna

petroleum are not directly involved with CSR activities as they are distribution channel of

Bangladesh Petroleum Corporation (BPC). If BPC asked to participate any sort of CSR

activities then they join but according to the ISO 26000 these are not yet CSR rather

philanthropy. I recommend these companies to follow ISO 26000(CSR) to practice true CSR

activities. Because, implementation of 7 core principles of ISO 26000 (CSR) including –

Accountability, Transparency, Ethical Behavior, Respect for Stakeholder Interest, Respect for

rule of Law, Respect for International norms of Behavior and Human Rights – may ensure a

firm’s true intention to practice CSR activities.

2. Valuation

Page | 8

2.1 Book Value of the Firm:

Book value of the firm = Book Value of Equity + Book Value of Interest Bearing Debt

Linde Bangladesh Ltd.

Particulars/Years 2007 2008 2009 2010 2011 2012

Book Value of Equity 1,394 1,511 1,839 1,995 2,165 2,191

Book Value of long term

debt

2 0 0 0 0 0

Total Book Value of the

Firm

1,397 1,511 1,839 1,995 2,165 2,191

No of Shareholders 15.22 15.22 15.22 15.22 15.22 15.22

Book Value Per Share 91.77 99.28 120.81 131.13 142.29 144.00

Padma Oil Company:

Particulars/Years 2008 2009 2010 2011 2012

Book Value of Equity 1342 1769 2358 3235 4330

Book Value of long term

debt

0 0 0 0 0

Total Book Value of the

Firm

1342 1769 2358 3235 4330

No of SH after BSA 9.80 29.40 44.09 66.14 89.32

Book Value Per Share 137.02 60.20 53.49 48.91 48.48

Industry Average 2008 2009 2010 2011 2012

Book Value of Equity 1938 2733 3238 3847 4531

Book Value Firm 4034 5128 6078 7926 6395

(All numbers in Millions)

Interpretation: Book Value of Equity of Linde BD & Padma Oil gradually increased and it

indicate it will increase in future time. BVPS of the Linde BD was in positive trend where as

Padma Oil’s BVPS went down because the company has declared Bonus Share in last couple

of years especially in 2008 to 2013. Industry Avg. Book Value of Equity was in increasing

since 2008

2.2 Market Value of the Firm:

Market value of firm = Market Value of Equity + Market Value of Long Term Debt

Page | 9

Linde Bangladesh Ltd

Particulars/Year 2008 2009 2010 2011 2012 2013

MV Per Share 265.8 486.9 692.30 612.20 549.1 630


MV of Equity 4044 7409 10535 9316 8356 9587

MV of Finance

Lease

2 0 0 0 0 0

Total MV of the firm 4047 7410 10535 9316 8356 9587

Padma Oil Company:

Particulars/Year 2008 2009 2010 2011 2012 2013

Market Value Per Share 727.7 620.2 828.10 509.2 187.5 260.4


Market Value of Equity 7132.

5

18233.

4

36513.9 33679.

4

16747.

0

23254.

4

MV of long Debt - - - - - -

Total MV of the firm 7132.

5

18233.

4

36513.9 33679.

4

16747.

0

23254.

4

Source: DSE (*All numbers in Millions)

Market Capital of Fuel & Power Sector 259964 Million

Industry Avg. MV of Equity 17331

Interpretation: Both Linde BD and Padma Oil’s MV was all time high in 2010 but it’s

reflection of market unrest in 2010-11 market value of equity increased from year 2008 to

2010, it fell in 2011 and 2012.. Then both companies MV were decreasing to adjust the

market actual Value. This declining of market value of equity was due to collapse in capital

market in 2010-11 coupled with the declining of profitability of the companies. According to

the MV of the equity TITAS Gas is the Market leader and Industry Average MV is 17331

Million TK.

3. Price-Earnings Multiple:

Page | 10


Padma Oil 42.8x 56.5x 62.5x 55.3x 18.7x

Meghna Petroleum 22.4x 30.3x 26.7x 13.3x 12.5x

Jamuna Oil 17.8x 21.6x 39.1x 17.9x 10.9x

Linde BD 11.3x 12.2x 15.8x 13.7x 17.3x

DESCO 11.9x 14.0x 26.7x 30.0x 32.5x

BD Welding 83.6x 63.0x 246.8x 118.1x 23.2x

Eastern Lubricants 117.3x 85.0x 144.6x 75.1x 49.5x

Summit Power 46.7x 48.0x 45.5x 14.6x 16.8x

Industry Avg. (P/E

Multiple)

44.2x 41.3x 75.9x 42.3x 22.7x


Industry Avg. (P/E Multiple) 44.2x 41.3x 75.9x 42.3x 22.7x

EPS- Linde BD 23.61 40.08 43.90 44.78 31.71

Stock Price of Linde BD 1044 1657 3334 1892 718

EPS- Padma Oil 23.90 15.36 14.46 13.25 16.38

Stock Price of Padma Oil 1056.49 634.79 1098.18 559.99 371.28

Interpretation: Average P/E of the Industry was 22.7x on December 31, 2012. And the EPS

of the Linde BD was Tk 31.71 per share at that time. Using the industry P/E multiple, we

have found the price of the share of Linde BD is 718 and Padma Oil price is 371.28. P/E

ration of the sector in 2010 was 75.9x which reflect the unusual situation.

4.1 Valuation of Linde BD

In calculation of free cash flow, there are some assumptions that we need to consider. These

are given in tabular form apart the result of valuation also given:

Particulars Amount/Rate

Value of the Firm 10640.2Cash in Hand 412

Debt 0Equity Value 10228.3

No of shareholders 15.2Intrinsic Value Per share 672.1Market Value Per Share 629.1 Undervalued (As on 30th Dec-13)

Terminal Growth rate 0.02Cost of Equity 12.05%

Page | 11

Cost of Debt 0WACC 12.05%

Tax Rate 24.75% (10% tax Rebate for 20% or above Dividend)

Inflation rate 5%Inflation Adjusted Discount rate ((1+.1205)*(1+.05))-1 = 17.65%

Details Calculation: Valuation of Linde Bangladesh Ltd.

Particulars/Years 2012 2013

P

2014 P 2015

P

2016 P 2017 P Inflation G rate GEO

M

Revenue 3,817 4,365 4,992 5,709 6,529 7,467 5% 8.92%

Cost of sales -2,527 -2,722 -3,113 -3,560 -4,071 -4,656 62.4% 62.2%

Gross profit 1,290 1,643 1,879 2,149 2,458 2,811 37.6% 37.5%

Operating expenses -514 -551 -631 -721 -825 -943 13% 12.4%

EBITDA 777 1,092 1,249 1,428 1,633 1,868 25% 25.0%

Depreciation & Amortization 150 191 219 250 286 327 4% 4.4%

EBIT 627 901 1,030 1,178 1,347 1,541 21% 20.5%

Gain on disposal of PPE 0 2 2 3 3 4 0.14% .049%

Interest income, net 33 69 79 90 103 118 2% 1.6%

EBT 660 972 1,111 1,271 1,453 1,662 23% 22.9%

Taxation -178 -240 -275 -315 -360 -41124.75% 6% 5.6%

NOPAT 483 731 836 956 1,094 1,251 17% 17.3%

Add-Dep. & Amortization 191.20 218.66

250.07 285.98 327.05

Changes in Working Capital -42.83 -42.83 -42.83 -42.83 -42.83Operating Cash Flow 879.5

7 1012.1163.

5 1336.8 1534.9Capital Expenditure -286 -353 -435 -536 -661 TV

FCF to Firm 594 659 729 800 873 8863Present Value of FCF 505 560 619 680 742 7533

I have valued Linde BD by applying discounted cash flow (DCF) model with two stages of

growth where I have forecasted free cash flow for equity holder (FCFE) for next five years

over which I have reasonable estimates. By discounting the free cash flow for equity holder

of the forecasted five years and the terminal free cash flow of equity holder at the cost of

equity, I get an intrinsic price of share of the firm. For the valuation date December 30 2013,

Page | 12

the intrinsic value of Linde BD’s stock was tk. 672.1 BDT. But in the market, it was sold at

629.1 BDT. So, we can infer that Linde BD’s stock was underpriced in the market.

3. Financial Statements and Analysis

1. Analysis of Firm & Performance of the Industry:

Performance of Industry:

The Bangladesh economy maintained a growth of about 6% in last fiscal year in the face of

weak global recovery from earlier economic down turn. However it registered lower growth

compared to the previous year (2011). Some improvement in power sector was made through

investment in the quick rental power and private sector power plants. On the other hand

shortage of natural gas and upward price adjustment in fuel and power adversely affected

growth in some sectors. High import cost of food and non food commodities and devaluation

of local currency caused high inflation in the economy. Weighted average costs of the major

raw materials were much higher, compared to the previous year. Selling price of some

products was revised upward to recover high inflation impact on raw materials. But due to

competitive environment, entire inflation impact could not be recovered from the market

through price adjustment.

Analysis of Firms’ Performance:

Linde BD: LindeBD’s principal activities are the manufacture and supply of industrial and

medical gases, anesthesia, welding equipments and products and ancillary equipments. The

product line is categorized into three segments based on the sectors the company serves its

products and services such as Bulk Gases, Package Gases (PG&P) and Hospital Care. PG&P

is the main revenue driver which contributes Appx. 81.64 percent of revenue of Linde BD.

Under these circumstances the turnover registered a net growth of 2% as against operating

profit fall by 29% over the previous year. Operating profit dropped mainly due to inflation

impact on cost of raw materials and higher operating expenses. Interest income for the year

was much lower over last year due to fall in liquidity fund resulting from payment of

dividend, purchase of capital items and excess investment in working capital.

Page | 13

Padma Oil: The Padma Oil is one of the largest distributors of petroleum products in

Bangladesh, the prime activities of the company include the procurement, storage and

marketing of petroleum products, lubricants & greases, bitumen, LPG & manufacturers and

marketing of agro chemicals. The firm’s last 3 years sales growth was 37.78%, 13.22% and

0.05% in 2010, 11, & 12 respectively. 05% growth in to 2012 reflects how adversely this

sector affected by macroeconomic factors.

2. Ratio Analysis of the Companies:

A. Liquidity Ratios:Particulars/Year Firm 2008 2009 2010 2011 2012

Current Ratio (Times) Linde BD 3.47 3.86 3.8 3.64 2.6Padma Oil 1.04 1.05 1.06 1.05 1.05

Meghna Petro 1.08 1.09 1.07 1.11 1.09Industry Avg. 1.75 1.95 1.93 1.88 1.72

Quick Ratio (Times)

Linde BD 1.91 3.21 3.02 2.28 1.35Padma Oil 0.89 0.84 0.84 0.88 0.93

Meghna Petro 0.75 0.58 0.77 0.87 0.86Industry Avg. 1.29 1.45 1.51 1.42 1.30

Interpretation: Current ratio refers how current assets cover short term obligations. All firms

CR are more than 1 which indicates good sign about the company’s current position or current

liquidity. Linde BD’s CR is higher than industry it shows it’s a cash cow company whereas

Padma oil and Meghna petroleum’s CR is below industry average.

Quick Ratio shows the ratio of cash and other liquid resources in comparison to current

liabilities. Quick ratio is an indicator of solvency of an entity and must be analyzed over a period

of time and also in the context of the industry the company operates in. As a Cash Cow company

Linde BD’s QR is more than industry avg. whereas Padma oil & Meghna Petroleum’s liquidity

position also good.

B. Efficiency & Activity Ratios:

Particulars/Year 2008 2009 2010 2011 2012

A/R Turnover (Times) 19.40 18.51 18.05 19.29 16.77

Collection Period (Days) 18.56 19.45 19.95 18.66 21.46

Inventory Turnover (Times) 3.59 3.98 5.80 4.48 3.45

Inventory Conversion time

(Days)

100.36 90.41 62.06 80.44 104.23

Operating Cycle (Days) 118.92 109.87 82.00 99.10 125.69

Payable Turnover (Times) 6.37 5.45 5.78 5.79 4.50

Page | 14

Payment Deferred Time (Days) 56.47 66.03 62.29 62.22 79.92

Cash Conversion Cycle (Days) 62.45 43.84 19.71 36.88 45.77

Industry Average42.99 58.32 76.85 66.02 22.05

Interpretation: Accounts receivable turnover measures the efficiency of a business in

collecting its credit sales. A/R Turnover had been decreasing (increasing) trend from 2008 to

2010 and then had been increasing (decreasing) trend from 2010 to 2012. Credit Collection

period is also good as it took 18 to 21 days to collect its credit sales though its credit policy is

not sturdy.

“Inventory Turnover” indicates that Linde BD had the tendency to heap up its inventory. It is

said earlier that it may be due to the nature of business. Nevertheless, we can see that its

inventory management was becoming improved year to year from 2008 to 2011 though in

2012 it was in down. In 2012, inventory was produced and sold its inventory earlier than all

other. Operating Cycle was decreasing & increasing trend from year 2008 to 2012 (except

2009).

On the other hand, payable payment period has increased from 2008 to 2012 suggesting that

cash leaving the company over the years made slow down & indicates Linde had enough

cash. Overall, the cash conversion cycle (CCC) has been decreasing since 2008 to 2010 but

it was in increasing trend from 2011 to 2012. Compare with industry average we can see that

the Linde BD’s CCC was pretty good in 2010 & 2011.

Activity Ratios:

Particulars/Year Firm 2008 2009 2010 2011 2012

Total Asset Turnover (Times)


Industry Avg.

0.66 0.56 0.51 0.53 0.48Fixed Asset Turnover (Times)

Linde BD 2.59 2.95 3.05 3 2.51Padma Oil 2.49 2.28 3.25 3.63 3.80

Industry Avg.

2.48 2.39 2.48 2.61 2.49

Interpretation: The total asset turnover of Linde BD indicates by using 1tk of asset firm

generate 1.15 tk sales. From the total asset turnover ratio, we can see that Linde can use its

Page | 15

total asset more efficient in 2011 to generate sales than that of all other years. On the other

hand, performance of Padma oil to generate sales by using total asset was tremendously low.

Fixed asset turnover ratios are higher than that of the total asset turnover ratios and following

the same trend from 2008 to 2012 but it was falling since 2011. It indicates that Linde was

more efficient in using its fixed assets to generate sales in 2010 than all over years where as

Padma Oil generate more sales in 2012.

C. Solvency Ratios:

Debt Ratio =

Debt-Equity Ratio =

Particulars Firm 2007 2008 2009 2010 2011 2012

Debt Ratio Linde BD 0.14% 0.10% 0.00% 0.00% 0.00% 0.00%Padma Oil 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%Meghna 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%

Industry Avg. 26.01% 25.29% 22.40% 28.03% 37.44%

D to E Ratio

Linde BD 0.21% 0.15% 0.00% 0.00% 0.00% 0.00%Padma Oil 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%Meghna 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%

Industry Avg. 27% 14% 11% 18% 23%

Interpretation: From this table, we can find that Linde BD is unlevered firm. We can also

find that the peer company i.e. Padma oil & Meghna Petroleum Limited is also all equity firm

but the industry average show few firms in the sector may took debt in their capital structure

but which is not tremendously high because debt capital range is 20-25% only..

D. Coverage Ratios:

Interest coverage ratio =

Interest Coverage Ratio 2008 2009 2010 2011 2012

Page | 16

Linde BD N/A N/A N/A N/A N/APadma Oil Company N/A N/A N/A N/A N/A

Meghna Petroleum Limited N/A N/A N/A N/A N/A

Industry Average0.39 1.22 1.29 0.35 0.70

Interpretation: Interest Coverage ratio is the ratio of Operating Income to Interest Expense against Debt. This indicates a firm’s ability to pay interest on outstanding debt from its operating income. Since Linde BD, Padma Oil Company Limited, Meghna Petroleum Limited and the industry avg. interest coverage ratio is given as few firms taken debt.

Cash Flow Coverage Ratio 2008 2009 2010 2011 2012

Linde BD N/A N/A N/A N/A N/APadma Oil Company N/A N/A N/A N/A N/A

Meghna Petroleum Limited N/A N/A N/A N/A N/A

Industry Average N/A N/A N/A N/A N/A

Interpretation: Cash Flow Coverage ratio is the ratio of Operating Cash Flow to Interest

Expense and Principal Payment against Debt. This indicates a firm’s ability to pay interest on

outstanding debt and principal amounts when they become due from its operating cash flow.

Since Linde BD, Padma Oil Company Limited, Meghna Petroleum Limited and the industry

are unlevered, so the cash flow coverage ratio is not applicable for them.

E. Profitability Ratios:

Particulars Firm 2008 2009 2010 2011 2012

Gross Profit

Margin

Linde BD 33.39% 40.46% 41.94% 38.88% 33.81%

Padma Oil 21.90% 36.06% 47.26% 21.01% 37.23%

Meghna 1.40% 0.94% 1.20% 1.19% 1.03%

OPM

Linde BD 16.85% 22.05% 25.68% 23.26% 16.43%

Padma Oil 43.94% 66.88% 67.59% 80.54% 48.33%

Meghna 1.66% 1.48% 1.01% 0.87% 1.01%

Net Profit

Margin

Linde BD 14.38% 22.24% 20.88% 18.27% 12.64%

Padma Oil 29% 46% 47% 57% 96%

Meghna 1.58% 1.40% 0.96% 0.83% 0.96%

Industry Avg. 27.61% 33.72% 25.16% 24.25% 30.50%

Page | 17

Interpretation: In 2008, GPM of was Linde BD the lowest. This was due to huge COGS. In

2008 revenue was sufficient but COGS was 66.61% of total revenue where in other years

COGS almost same. GPM of Meghna Petroleum is lower the all other peers company.

Operating profit dropped mainly due to inflation impact on cost of raw materials and higher

operating expenses. Interest income for the year was much lower over last year due to fall in

liquidity fund resulting from payment of dividend, purchase of capital items and excess

investment in working capital. OPM & NPM of both Padma oil and Meghna petroleum

increased because of non-operating income of these companies. NPM of Linde BD in downward

since 2011 but it was good in 2009 and 2010.


ROE

Linde BD 23.78% 33.17% 33.48% 31.47% 22.02%

Padma Oil 16.9% 24.8% 26.5% 26.7% 33.4%

Meghna 38.71% 37.57% 31.32% 31.08% 37.36%

Industry Avg. 19.66% 24.60% 22.97% 22.87% 23.15%

ROA Linde BD 16.53% 23.58% 23.84% 22.72% 15.09%

Padma Oil 0.89% 1.74% 1.82% 1.66% 2.10%

Meghna 5.15% 5.58% 3.41% 4.24% 4.71%

Industry Avg. 5.70% 8.47% 7.56% 7.42% 6.44%

Interpretation: The return on equity ratio of Linde BD was the lowest in 2012 and was

increasing since 2008 to till 2010. Peers companies ROE also in good shape. ROA of Linde

BD was better but Padma Oil ROA is reflecting it excess of noncurrent asset. From this table,

we can find that the Return on Operating Asset is comparatively lower for Padma Oil

Company Limited than that of the peer and the industry average. We can also find that the

ROA of Padma Oil, Meghna Petroleum and the industry is showing mostly decreasing trend

over the years.

F. Marketability Ratios: Linde BD ltd.


BV of Equity 99.28 120.81 131.13 142.29 144.00

MV of Equity 265.80 486.90 692.30 612.20 549.10

BV to MV Ratio 0.37 0.25 0.19 0.23 0.26

BV to MV Industry0.27 0.19 0.14 0.20 0.73

P/E Ratio 11.26 12.15 15.77 13.67 17.32

NAV per Share 99.28 120.81 131.13 142.29 144.00

Page | 18

Price to NAV 2.68 4.03 5.28 4.30 3.81

BV to MV Ratio: We know that lower BV/MV ratio indicates that investors are willing to

pay relatively high for the firm’s stock than its book value. We see here that Linde BD’s

BV/MV ratio was lowest in 2010 where Linde BD stock price was highest. However, the fall

of market value, hence, the increase of BV/MV ratio can also be attributed to the overall

capital market condition of the firm.

Price to NAV: Price to NAV shows how many times an investor pay for a stock against it

NAV. NAV reflects an investor will get back this amount of money if company go to

liquidation right now.

4. Du Pont Analysis:


OPM=EBIT/Sales 16.85% 22.05% 25.68% 23.26% 16.43%

TAT=Sales/TA 1.15 1.06 1.14 1.24 1.19

Interest Burden=EBT/EBIT 108.71% 127.77% 109.93% 108.37% 105.34%

Tax Burden= EAT/EBT 78.50% 78.94% 73.96% 72.49% 73.05%

Equity Multiplier=TA/TE 143.89% 140.66% 140.41% 138.55% 145.96%

ROE 23.78% 33.17% 33.48% 31.47% 22.02%

We can see that OPM is the highest in 2010 and the lowest in 2012. In case of tax burden,

Apex paid the highest tax in 2009 and the lowest in 2011. TAT is the highest in 2011

indicating that Linde BD is more efficient in utilizing its asset to generate sales and the

lowest in 2009 indicating lower efficient in its asset utilization. In analyzing ROE, we can say

that Linde BD is in better situation in 2010.

Suggested Actions to Boost up ROE:

Page | 19

To increase ROE, Linde BD should try to increase in ROA more. To do this, the company

can focus on NPM. It can increase its OPM by reduction its COGS. It is now trying to reduce

in COGS. COGS are very high for Linde BD in every year. On the tax burden also increased

from 2011 to 2012. So, it should take some long term debt as industry follows moderate debt

to equity ratio. Currently it doesn’t have any long term debt. It should focus on TAT means

increase its efficiency to generate more sales by using its total Asset.

4. Cost of Capital and Capital Structure

1. Weighted Average Cost of Capital:

Cost of Equity:

1. Cost of Equity using CAPM:Cost of Equity Rate

Ke= Rf+ (Rm -Rf)* β

RF ( 91 days T-bill) 6.40%

RM (Market Return) 13.12%

Beta= (COVlm/VARm)= 0.0048/0.0092 0.5161

Adjusted Beta (.33*historical beta + .67*1) 0.840

CAPM Ke= Rf+ (Rm -Rf)*β = 6.40% + (13.12% -6.40%)* 0.840 12.05%

Risk Free Rate: I have take average Risk free rate of last five Years 91 days T-Bill rate.

Market Return: Market return is calculated from DGEN return.

Calculation beta: we have calculated the covariance between average DSEN return and

average Linde BD’s return and we have also calculated the variance of the Linde BD’s return.

Page | 20

Then, we have divided the covariance by variance. The calculation of beta has been given in

Appendix.

Beta Adjustment: Adjusted Beta = (.33*historical beta + .67*1)

2. Cost of Equity using DDM:Year Cash Dividend Growth2008 17.72009 17.7 =(P1/Po)-1=0.0002010 35 0.9772011 35 0.0002012 31 -0.114

Expected Divided =((17.7+17.7+35+35+31)/5)*(1+.216)=33.17

=(.0+.97+.0-.114)/4=0.216

Current Market Price 630Cost of Equity =(D1/Po)+g=(33.17/630)+.216 =26.84%

Cost of Debt:

Cost of Debt Interest Bearing debtBefore Tax (Kd) 0%

After Tax (Kd) = 0%* (1-.2475) 0%*Marginal Tax rate for Linde BD= .2750*(1-.10) = 24.75%.

Weighted Average Cost of Capital (Hurdle Rate):

WACC= We*Ke + Wd*Kd(1-T)

=1*.1205 + 0 *0

=12.05%

Capital Structure:

Firm Capital Structure

Linde Bangladesh Ltd All-Equity Firm

Padma Oil Ltd All-Equity Firm

Meghna Petroleum All-Equity Firm

2. Analyze Optimum Debt-Equity Ratio of Linde BD using Checklist:

1. Tangibility

Page | 21

Tangibility 2008 2009 2010 2011 2012

Linde BD 44% 36% 37% 41% 46%

Padma Oil 1.25% 1.65% 1.18% 0.80% 0.58%

Meghna Petroleum 3.19% 2.93% 2.04% 1.95% 1.66%

Industry Avg. 16% 13% 13% 15% 16%

Interpretation: From this table, we can find that the tangibility of Linde BD, Padma Oil

Company Limited, Meghna Petroleum Limited and the industry is showing gradually mostly

decreasing trend from time to time and but Linde BD’s tangibility has been increasing since

2009. The percentage of operating fixed asset in terms of total asset of Padma Oil and

Meghna Petroleum are very low because the firms are engaged in marketing (distribution) of

Oil as these firms are subsidy of BPC, so they have no need to acquire large amount of

operating fixed asset. The tangibility of Linde BD is higher than industry avg. and Peer

companies.

2. Growth

2.1 Sustainable Growth (in a Discrete Growth) = ROE*RR


Sustainable Growth Linde BD 5.96% 18.52% 6.78% 6.88% 0.49%

Padma Oil 15.60% 22.71% 20.81% 22.57% 23.86%

Meghna Oil 27.52% 16.72% 17.28% 30.42% 30.81%

Industry 16.09% 17.85% 16.09% 18.77% 16.63%

Interpretation: From this table, we can find that the sustainable growth rate of Linde BD is

around 6% but it was tremendously lower in 2012, Padma Oil Company Limited, Meghna

Petroleum Limited showing gradually increasing trend from time to time that may indicate

these firm may take debt for operating business. Reason: All of our concerned firms in this

industry are unlevered. But the total equity of Padma Oil Company Limited is higher than

that of the Meghna petroleum company and the industry in most of the years. But the Net

Profit after Tax of Padma Oil Company Limited is not that much higher than that of the peer

company and the industry. So the Return on Equity of Padma Oil Company Limited is

comparatively very lower than that of the peer company and the industry. For this reason in

Page | 22

spite of slightly higher retention ratio of Padma Oil Company Limited than that of the peer

company and the industry, the discrete growth of Padma Oil Limited Company is lower than

that of the peer company and the industry because of very lower Return on Equity of Padma

Oil.

2.2 Tobin's Q = Total Market Value of Firm / Total Asset Value of Firm


MV of Equity 4047.18 7409.64 10535.42 9316.46 8356.20

Total Asset 2,174 2,586 2,802 3,000 3,199

Replacement Cost of Asset 1008 966 929 1048 1243

Tobin's Q Linde BD 1.86 2.87 3.76 3.11 2.61

Linde BD 4.02 7.67 11.35 8.89 6.73

Padma Oil0.27 0.70 1.04 0.64 0.24

Meghna Oil 1.58 1.79 1.55 1.31 1.26

Industry Avg.1.95 3.19 4.51 2.84 1.91

Interpretation: We know that Tobin’s Q-ratio greater than 1 indicates the firm has done well

with its investment decisions; thus the firm has significant competitive advantage. In case of

Linde BD, we see that the Q ratio was well above 1 and increased from year 2009 to 2011.

From 2010, it was in a decreasing pattern. This can be due to the capital market collapse.

Padma oil’s Q-ratio is below 1 except in 2010 Meghna petroleum Q-ratio is also above 1 in

last 5 years, High Tobin's q values encourage companies to invest more in capital because

they are "worth" more than the price they paid for them. From the ratio we can see that this

premium is lower for Padma Oil compared to Meghna Petroleum as well as the industry over

the year.

2.3 Growth (continues time Frame) =

Particulars/

Year

2008 2009 2010 2011 2012

NPM 14.38% 22.24% 20.88% 18.27% 12.64%RR 25.04% 55.83% 20.27% 21.85% 2.23%Equity/TA 0.69 0.71 0.71 0.72 0.69

Page | 23

NPM*RR*(E/TA) 0.03 0.09 0.03 0.03 0.00TA/Sales 0.87 0.94 0.88 0.80 0.84Growth 3% 9% 3% 4% .23%

3. Operating Leverage:

DOL (Times) 2008 2009 2010 2011 2012


Meghna Petroleum 4.12 3.91 8.97 1.95 0.40

Industry Avg. 3.63 2.85 4.23 2.77 1.72

Operating Leverage is the ratio of Change in Operating Income (EBIT) to Change in Sales.

The higher the degree of operating leverage, the more volatile the EBIT figure will be relative

to a given change in sales, all other things remaining the same.

4. Sales Growth:

Sales Growth 2009 2010 2011 2012 GEOMEAN

Linde BD 9.77% 16.65% 16.58% 2.34% 8.92%Padma Oil 19.13% 37.78% 13.22% 0.05% 4.55%


From this table, we can find that the sales growth of Linde BD, Padma Oil Company Limited,

Meghna petroleum Limited and the industry is showing gradually mostly increasing trend

from time to time though the sales growth of Padma Oil Company Limited is decreased from

year 2010-2012. The growth rate of sales of the peer company and the industry is higher in

most of the years than that of Padma Oil Company Limited.

5. Size of The Companies:

Market Capital:

Size Price No of Share Market Capital in million

Ranking

Linde BD 619 15,218,280 9420 10

Padma 274.3 89,302,500 24496 2

Meghna 225 81,981,900 18446 5

DESCO 58.9 299,318,506 17630 8

EL 307.5 994,000 306 15

KPCL 49.5 344,080,676 17032 9

BDWELDING 23.5 40,876,290 961 14

POWERGRID 52.8 460,912,991 24336 3

SUMITPOWER

38.7 591,540,246 22893 4

Page | 24

TITASGAS 73.6 989,221,831 72807 1

BEDL 35.4 131,115,600 4641 12

GBBPOWER 30.3 73,312,485 2221 13

JAMUNAOIL 200.8 91,260,000 18325 6

MJLBD 74.3 238,473,200 17719 7

SPPCL 63.2 138164276 8732 11

Market Capital of Fuel & Power Sector 259964 Million

Industry Avg. MV of Equity 17331

6. Ownership:

Sponsor Ownership: Sponsor ownership represents the sponsor’s shareholding position in

percentage form for any firm.

Sponsor Ownership 2008 2009 2010 2011 2012

Linde BD 60% 60% 60% 60% 60%

Padma Oil 50.35% 50.35% 50.35% 50.35% 50.35%


From this table, we can find that the Sponsor shareholding is pretty high for this industry

because government is the sponsor of these companies. Though this ratio is falling for the

peer Meghna Petroleum Limited but steady for Padma Oil Company. The industry average is

also falling for the change in Meghna Petroleum shareholding position.

Free Float Ownership: Free float ownership means the shares other than the sponsor

holding, strategic holding and any government ownership within the company.

Free Float Ownership 2008 2009 2010 2011 2012

Linde BD 40% 40% 40% 40% 40%

Padma Oil 49.65% 49.65% 49.65% 49.65% 49.65%


Industry Average 39.56% 39.86% 39.86% 39.86% 43.63%

From this table, we can find that the free float ownership is overall lower for the industry as

the major shares are hold by the sponsor company, BPC. The government agency holding

may decrease in near future but till that time the tradable shares will be remain low for the

entire industry. We have seen the free float ownership is increasing for Meghna Petroleum

over the time period.

Page | 25

7. Uncertainty of Operating Income: We have measured the uncertainty of income for the

firms by calculating Co-efficient of Variation of EBIT of these firms.

Uncertainty of Operating Income

Linde BD Padma Oil Meghna Petroleum

Industry Average

CV of EBIT .54 0.27 0.36 0.39

From this table, we can find that the Co-efficient of Variation figure is lower for Padma Oil

Company Limited than that of the peer company and the industry. As we know the higher the

CV value the more risk is there for single unit of expected return, so the Linde BD is more is

more risky peer company in this industry.

8. Profitability

Basic Earning Power =EBIT/Total AssetsBasic Profit Margin 2008 2009 2010 2011 2012

Linde BD 19.4% 23.4% 29.3% 28.9% 19.6%Padma Oil 1.31% 2.40% 2.46% 2.22% 3.12%

Meghna Petroleum 4.10% 1.95% 1.84% 2.53% 1.73%Industry Avg. 8.26% 9.24% 11.21% 11.22% 8.15%

Basic earning power (BEP) ratio is a measure that calculates the earning power of a business

before the effect of the business' income taxes and its financial leverage. It is calculated by

dividing earnings before interest and taxes (EBIT) by total assets.

5. Dividend Policy

1. Last 5 years’ Dividend Pattern of Linde BD

Particulars 2008 2009 2010 2011 2012

NI (in Millions) 359.34 609.87 668.02 681.52 482.51No of SH(in Millions) 15.22 15.22 15.22 15.22 15.22

EPS 23.61 40.08 43.90 44.78 31.71Industry Average 38.6 42.9 36.9 29.3 13.7

Dividend 177% 177% 350% 350% 310%Cash Dividend 17.7 17.7 35 35 31

Industry Average 12.6 10.2 14.5 13.3 8.6

Page | 26

Earnings per Share (EPS): Earning per Share is the ratio of net profit after tax to total

number of outstanding common shares of the company. It is a measure of how much earnings

a company can generate for each share after payment of all the current expense. This ratio

provides an idea of the profitability of a firm. A stable growth in EPS indicates a solid

performance of the company. EPS is the portion of a company's profit allocated to each

outstanding share of common stock. EPS serves as an indicator of a company's profitability.

Two companies could generate the same EPS number, but one could do so with less equity

(investment) - that company would be more efficient at using its capital to generate income

and, all other things being equal, it would be a "better" company. From this table, we can see

that Linde BD’s NI was increasing and company increased its dividend though its NI become

down in 2012.

Dividend Payout Ratio (DPR): Dividend Payout Ratio is the ratio of Dividend per Share (DPS) to

Earnings per Share (EPS). It is a measure of how much earnings a company is paying out to its

shareholders as compared to how much it is retaining for reinvestment. This ratio provides an idea of

how well earnings support the dividend payments. A stable Dividend Payout Ratio indicates a solid

dividend policy by the company's board of directors. The dividend payout decision will depend on

personal and corporate tax rates. If personal tax rates are higher than corporate tax rates, a firm will

have an incentive to reduce dividend payout. But if personal tax rates are lower than corporate tax

rates, a firm will have an incentive to pay out any excess cash as dividends.

2. Table on the Computation:

Year 2008 2009 2010 2011 2012

Page | 27

Cash dividend Per Share 17.7 17.7 35 35 31


Stock Dividend Per Share - - - - -


EPS 23.61 40.08 43.90 44.78 31.71

Diluted EPS 0 0 0 0 0

Dividend Payout Ratio 74.96% 44.17% 79.73% 78.15% 97.77%


Retention Ratio 25.04% 55.83% 20.27% 21.85% 2.23%


Dividend Yield 6.66 3.64 5.06 5.72 5.65

Operating CF Per Share 25.1 68.4 45.5 34.6 31.8


Free Cash Flow Per Share 18.9 62.0 28.3 13.5 6.3


Market Price 265.8 486.9 692.3 612.2 549.1

Price-Earnings Ratio (Times) 11.3 12.2 15.8 13.7 17.3

P/E Multiple of the Industry 44.2 41.3 75.9 42.3 22.7

Book Value Per Share 99.28 120.81 131.13 142.29 144.00

Reserve & RE Per Share 89.3 110.8 121.1 132.3 134.0

Sustainable Growth Rate (G) 5.96% 18.52% 6.78% 6.88% 0.49%


Inflation R (Avg. of 12

months)

9.34% 5.20% 8.15% 10.68% 8.79%

GDP Growth Rate 6.19% 5.88% 5.93% 6.71% 6.32%

The stylized facts of the dividend behavior:

Firms smoothen the dividend. From 2008 to 2012, company paid dividend in an

increasing rate in respect to increase in earning. They have created dividend equalization

fund to smooth dividend.

we see the dividend per share of Linde BD which increased every year, we can say Linde

BD’s management are concerned with changes in dividend rather than absolute of

dividend because they believe changes in dividend conveys information of the

marketplace.

Page | 28

Managers are increasing dividend which indicates that earnings are sustainable in long

run.

Managers are reluctant to cut the dividend as we see here all the firms managers were

cutting the divided only it’s required but they tried out to increase the dividend over last

couple of years

3.6 CRG Score of Linde BD I have found the Credit risk score of Linde BD by using Excel software.

Conclusion

4.1 Conclusion:

Energy is the driving force behind all economic activities and most importantly the economy

can be seen as a system of energy flows, as a sequence of energy conversion that culminate in

Page | 29

CHAPTER4

the production of goods and services. This paper is about the different Corporate finance

aspects of a Fuel and power sector of Bangladesh specially analysis of five major areas. For

doing this I have to first analyze the selected industry and then selected 3 companies to

complete aforesaid corporate finance aspects. Firstly, I have analyzed the corporate goal and

CSR activities of the companies. Secondly, MV, BV and Valuation of the companies have

taken place to make out the intrinsic value of the stock of selected companies. Thirdly, firms’

performances are analyzed by using different ratio analysis. Fourthly, cost of capital and

capital structure and checklist of the optimal capital structures are analyzed and finally,

dividend policy and stylized factors of divided policy are analyzed.

References

1. Palepu K. G., Hearly P., and Bernard V. L., Business Analysis & Valuation: Using

Financial Statement (Second Edition), South-Western College Publishing, Ohio, 2000.

2. Ross S. A., Westerfield R. W., and Jaffe J., Corporate Finance (Seventh Edition),

McGraw- Hill/ Irwin, Singapore, 2005.

3. Linde Bangladesh Ltd, Annual Report 2008, Dhaka, 2008.

Page | 30





8. Padma Oil Company Ltd, Annual Report 2008, Dhaka, 2008.





13. Five Years Annual Report of Meghna Petroleum ltd. (2008 to 2012)

14. http://www.dsebd.org

15. http://www.tradingeconomics.com

16. www.stockbangladesh.com

Page | 31

http://www.stockbangladesh.com/

http://www.tradingeconomics.com/

http://www.dsebd.org/

Date post:	20-Dec-2015
Category:	Documents
Upload:	nasif69
View:	6 times
Download:	2 times

Capital Structure of company

Documents