Financial Statement Analysis and

Valuation
Of
Square Pharmaceuticals Ltd.

i
 “FINANCIAL STATEMENT ANALYSIS AND VALUATION OF
SQUARE PHARMACEUTICALS LTD”

Submitted To -

Hossain Ahmed Enamul Huda

Assistant Professor
Department of Finance
University of Dhaka

Submitted By –
NAME ID

Nasim Mia 29041

Ashiqul Haque 31012

S.M. Nuruzzaman 31014

Md. Tarik Hasan 31016

Fariha Sultana 31017

Sameer Sadman Urfee 31055

Date of Submission: 20th April, 2018

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 Table of Contents
Topic name Page
Introduction 1
Chapter 1
1.1 Objectives of the report 1
Company, Industry and Economic Analysis 2
2.1 Company analysis 2
Chapter 2 2
2.2 Industry analysis
2.3 Economic Analysis 4
Financial Analysis
3.1 Efficiency Ratio 6
3.2 Liquidity Ratio 7
Chapter 3 3.3 Leverage Ratio 7
3.4 Profitability Ratio 8
3.5 Cost of Capital 9

Absolute Valuation approach

4.1 Residual Earnings Valuation Model 11
4.2 Dividend Discount Model 13
Chapter 4
4.3 Free Cash Flow Valuation Model 15

4.4 Residual Operating Income Valuation 17

Model
Relative Valuation Approach
5.1 P/E Ratio 18
Chapter 5
5.2 P/BV Ratio 18
5.3 P/Sales Ratio 19
Conclusion
Chapter 6 Conclusion Limitations 20
Conclusion 20
Appendix 21

iii
 Chapter 1: Introduction
Introduction

With the ever increasing size and complex items of modern business it has become necessary
for every business man to base decisions of facts expressed in quantities form. Many new of
ways of using qualitative data in making business decisions have been developed in recent
year from elementary statistical technique. Financial statement that expresses the relationship
between selected financial statement data to compute ratio and describe their purpose and use
in analyzing a firm’s liquidity, profitability and solvency. Through it we will understand the
concept of earning power and indicate how the materials items not typically of regular
operations are presented. It provides us potential information for decision making over a
company in the current year with the same item or relationship in one or more prior years.

1.1 Objective of the Report

As a business expectative of future, we should have to gather experience beside our study.
We should not concern our lesson only in classroom but to implement it in practical life that
will help us in our future life .A clear objective help in preparation of well decorated report in
which other take the right type of decision .So, we identifying objectives is very much
important. Our purpose of preparing the report is:

 To know about the company and the industry it belongs.

 To know about the company’s financial statements.
 To find out the company’s performance through ratio analysis.
 To extract the value of firm through various valuation model.

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 Chapter 2: Company, Industry and Economic Analysis

2.1Company analysis

SQUARE today symbolizes a name – a state of mind. But its journey to the growth and
prosperity has been no bed of roses. From the inception in 1958, it has today burgeoned into
one of the top line conglomerates in Bangladesh. Square Pharmaceuticals Ltd., the flagship
company, is holding the strong leadership position in the pharmaceutical industry of
Bangladesh since 1985 and is now on its way to becoming a high performance global player.

SQUARE Pharmaceuticals Limited is the largest pharmaceutical company in Bangladesh and

it has been continuously in the 1st position among all national and multinational companies
since 1985. It was established in 1958, converted into a public limited company in 1991 and
listed with stock exchanges in 1995. The turnover of Square Pharma was Taka 30.28 Billion
(US$ 385.22 million) with about 18.64% market share having a growth rate of about 25.36%
(April 2014– March 2015).

2.2 Industry analysis

The Pharmaceuticals and Health Care Industry was incepted in Bangladesh in 1950. After
liberation (1971, market was dominated by MNC’s and were dependent on imports. In 1982
“National Drug Policy” and “Drug Control Ordinance” were introduced. In 1982 there were
133 local firms. Since then the domination of local firm started. Almost 80% of Active
Pharmaceuticals Ingredients are imported.

2.2.1 Dominant Traits of Industry

 Highly competitive and dynamic.

 Too many players in market
 Gradual and visible growth
 Unlimited growth potentiality as there is little or no substitute products
 Easy to access in the industry but difficult to retain due to extensive competition
 Doctors community plays a vital role

2.2.2 Drivers of Changes

The pharmaceuticals industry was dominated by MNC’s before 1982. But now the scenario
has changed. The key drivers for such changes are-

 National Drug Policy, 1982

 Drug Control Ordinance, 1982

Both the laws provided the local companies the opportunity to take over the market of
Bangladesh. Other drivers are-

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  Foreign brands are not allowed to be manufactured in Bangladesh if similar products
are being manufactured in Bangladesh.
 150 drugs were defined as essential drugs. For those level prices are fixed for finished
drugs as well as for their raw materials.
 The huge export opportunity is also a big driver behind the growth of the industry.
 Technological advancement and competitiveness are also key drivers in the industry.

Some important information about the Pharmaceutical industry of Bangladesh are

given below:

 Bangladesh pharmaceuticals industry is controlled by two regulatory bodies:

Directorate General of Drug Administration (DGDA) and Pharmacy
Council of Bangladesh (PCB).
 DGDA is the national drug regulatory authority under Ministry of Health
and Family Welfare and regulates all activities related to import and export
of raw materials, packaging materials, production, sale, pricing, licensing,
registration of all kinds of medicine.
 PCB was established under the Pharmacy Ordinance Act in 1976 to control
the pharmacy practice in Bangladesh. They have put restrictions on the
production of 1,700 non-essential or harmful drugs and strict price controls
on some 117 principal medicines.
 Bangladesh currently has around 150 pharmaceutical companies in
operation
 The top 20 companies generate 85 percent of the revenue.
 According to export.gov, the top ten manufacturers by share of market
revenue are as follows: Square (19 percent), Incepta (9.5 percent), Beximco
(9 percent), Opsonin (5 percent), Renata (4.9 percent), Eskayef (4.7
percent), ACI (4.3 percent), ACME (4.1 percent), Aristopharma (4 percent),
and Drug International (3.7 percent)
 About 90 percent of market share is dominated by local manufacturers
dominate the industry while multinationals hold 10 percent.
 Bangladesh pharmaceutical industry satisfies 97% of domestic demands and
the rest 3% of drugs are imports. Imports are restricted for drugs that are
locally manufactured and available.
 Bangladesh pharmaceutical industry mostly produces generic drugs, in fact,
Bangladesh is now a hub for affordable and high-quality generic medicines.
About 85 percent of the drugs sold in Bangladesh are generic and 15 percent
are patented drugs.
 Bangladesh manufactures more than 450 generic drugs for 5,300 registered
brands, which have 8,300 different forms of dosages and strengths.
 30 pharmaceutical companies export to 113 countries. Not only tablets,
capsules, and syrups but also specialized products like HFA inhalers, CFC
inhalers, suppositories, nasal sprays, injectable, IV infusions are exported
from this industry

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  Free from the obligations to implement patents and data protection for
pharmaceutical products until 2033.
 According to EPB, Bangladesh exported $37.9 million (about Tk.3.0 billion)
worth of drugs in the fiscal year 2015 -2016 (EPB)
 In an industrial park, which is situated at Baushia, Gajaria, Munshiganj and
will cost 4.39 billion BDT, 42 Active Pharmaceutical Ingredients
manufacturing industrial units will be set up there.
 Sales of generic drugs in Bangladesh is estimated to reach BDT 30,300
crore by 2024.
 Generic drugs exported from Bangladesh amounts to 25% of the worldwide
pharmaceutical sales.

2.3 Economic Analysis

The economy continues to show resilience this fiscal year, despite lingering obstacles such
as the effects of country-wide flooding during the end of last year and the ongoing
accommodation of Rohingya refugees in the east. In spite of these, Bangladesh has made
remarkable progress in various sectors, most notable in reducing poverty, supported by
sustained economic growth. Based on the international poverty line of $1.90 per person per
day, it reduced poverty from 44.2 percent in 1991 to 13.8 percent in 2016/17. In parallel, life
expectancy, literacy rates and per capita food production have increased
significantly. Progress was underpinned by 6 percent plus growth over the decade and
reaching to 7.3 percent in 2016/2017, according to official estimates. Rapid growth enabled
Bangladesh to reach the lower middle-income country status in 2015. In 2018, Bangladesh
fulfilled all three eligibility criteria for graduation from the UN’s Least Developed Countries
(LDC) list for the first time and is on track for graduation in 2024.

Sustained economic growth has rapidly increased the demand for energy, transport and
urbanization. Insufficient planning and investment have resulted in increasingly severe
infrastructure bottlenecks. To achieve its growth aspiration of becoming upper-middle
income country by its 50th birthday in 2021, the country needs urgently to implement
structural reforms, expand investments in human capital, increase female labor force
participation, and raise productivity through increased global value chain
integration. Improving infrastructure as well as the business climate would allow new
productive sectors to develop and generate jobs.

Challenges

Bangladesh is both an inspiration and a challenge for policymakers and practitioners of

development. While the income growth, human development and vulnerability reduction
efforts to date have been extraordinary, Bangladesh faces daunting challenges with about

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22 million people still living below the poverty line. The country is at an important juncture,
when with the right policies and timely action, it can move up within the middle-income
bracket. The World Bank has identified job creation as the country’s top development
priority. Bangladesh needs to create more and better jobs for the 2 million youths entering
the job market every year. To do so, Bangladesh will need to remove the barriers to higher
growth posed by low access to reliable and affordable power, poor transportation
infrastructure, limited availability of serviced land, uncertain and complex business
regulation, rapid urbanization and vulnerability to climate change and natural disasters,
among others

The Global Economic Prospects, a flagship report of the World Bank Group, said activity in
Bangladesh would grow at an average of 6.7 percent a year over fiscals 2018-2020,
benefiting from strong domestic demand and strengthening exports. The per capita income
in Bangladesh is $1,466 this fiscal year, according to the Bangladesh Bureau of Statistics.
According to recent statistics, the current inflation in Bangladesh is believed to be 6.57%.

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 Chapter 3: Financial Analysis
3.1 Efficiency Ratio

Efficiency ratios measure a firm's ability to convert different accounts within its balance
sheets into cash or sales. Efficiency ratios measure the relative efficiency of a firm based on
its use of its assets, leverage or other such balance sheet items and are important in
determining whether a company's management is doing a good enough job of generating
revenues and cash from its resources. There are few of ratios among activity ratios and all of
them are comparing with the other asset and days of utilization.

Efficiency Ratio
2012-2013 2013-2014 2014-2015 2015-2016 2016-2017
Inventory Turnover Ratio 7.32 9.47 9.03 11.34 9.80
Days Inventory Hold 49.89 38.54 40.43 32.17 37.26
Account Receivable Turnover 49.71 60.70 59.66 60.52 33.16
Days Sales Outstanding 7.34 6.01 6.12 6.03 11.01
Account Payable Turnover 3215.15 118.98 117.30 60.40 43.31
Days Payable Outstanding 0.11 3.07 3.11 6.04 8.43
Cash Conversion Cycle 57.34 47.62 49.66 44.25 56.69
Fixed Asset Turnover 4.08 3.34 2.96 4.29 3.78
Total Asset Turnover 1.47 1.50 1.52 1.82 1.39

Efficiency Ratio indicates operating efficiency and asset utilization. In case of Inventory
turnover and Days Inventory Hold, In five year span we see that firm’s operation is getting
efficient. In the last year performance was not good as previous year. On the other hand firm
shows better less in collecting their account receivables. If we focus on Asset Utilization we
see that FAT and TAT is gradually decreasing so so firm can’t efficiently utilize its asset.

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3.2 Liquidity Ratio

Liquidity ratios measure a company's ability to pay debt obligations and its margin of
safety through the calculation of metrics including the current ratio, quick ratio and operating
cash flow ratio. Current liabilities are analyzed in relation to liquid assets to evaluate the
coverage of short-term debts in an emergency. Bankruptcy analysts and mortgage
originators use liquidity ratios to evaluate going concern issues, as liquidity measurement
ratios indicate cash flow positioning.

Liquidity Ratio
2012-2013 2013-2014 2014-2015 2015-2016 2016-2017
Current Ratio 2.12 3.13 3.82 6.34 9.81
Quick Ratio 1.65 2.56 3.17 5.65 9.02

From analysis we can easily understand that firms liquidity position is gradually increasing
from 2013 to 2017 which is good sign for the firm. Its quick ratio is also higher than one. But
firm should consider that higher liquidity can decrease the profitability of the firm.

3.3 Leverage Ratio

Leverage Ratio is a key metric used to measure an enterprise’s ability to meet its debt and
other obligations. The leverage ratio indicates whether a company’s cash flow is sufficient to
meet its short-term and long-term liabilities. The lower a company's solvency ratio, the
greater the probability that it will default on its debt obligations.

Solvency ratio
2012-2013 2013-2014 2014-2015 2015-2016 2016-2017
Financial Leverage 1.22 1.16 1.13 1.09 1.07
Debt to Total Asset 0.11 0.06 0.03 0.01 0.00
Debt to Equity 0.13 0.07 0.03 0.01 0.00
Interest Coverage Ratio 1.89 3.60 7.87 5083.57 0.00

The more debt financing a company uses, the higher its financial leverage. A high degree of
financial leverage means high interest payments, which negatively affect the company's
bottom-line earnings per share. It is clear from the graph that the company is trying to reduce
total debt Compare to its equity. As a result in the last year of 2016-2017 firm didn’t take any
debt.

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3.4 Profitability Ratio

Profitability ratios are a class of financial metrics that are used to assess a business's ability to
generate earnings compared to its expenses and other relevant costs incurred during a specific
period of time. For most of these ratios, having a higher value relative to a competitor's ratio
or relative to the same ratio from a previous period indicates that the company is doing well.

Profitability Ratio
2012-2013 2013-2014 2014-2015 2015-2016 2016-2017
OPM 19.82% 19.45% 20.25% 24.98% 26.80%
NPM 18.01% 18.27% 19.44% 24.35% 26.60%

As we are seeing the table both Operating Profit Margin and Net Profit Margin are increasing
day by day, so the company are enjoying more and more profit every year. In terms of
Profitability firm is doing great.

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3.5 Cost of Capital
The cost of capital is the cost of a company's funds (both debt and equity), or, from an
investor's point of view "the required rate of return on a portfolio company's existing
securities". It is used to evaluate new projects of a company. It is the minimum return that
investors expect for providing capital to the company, thus setting a benchmark that a new
project has to meet. Cost of capital depends on the mode of financing used – it refers to the
cost of equity if the business is financed solely through equity, or to the cost of debt if it is
financed solely through debt.

 cost of equity
 cost of debt

1) Cost Of Equity:
A) Capital Asset Pricing Model(CAPM)

Cost of equity = Risk free rate of return + Beta × (market rate of return – risk free rate of
return)

Calculation of Beta: Beta is the measure of the volatility, or systematic risk, of a security or
a portfolio in comparison to the market as a whole. Beta is used in the capital asset pricing
model (CAPM), a model that calculates the expected return of an asset based on its beta
and expected market returns.

Beta is calculated using regression analysis, and beta is the tendency of a security's returns
to respond to swings in the market. A beta of 1 indicates that the security's price will move
with the market. A beta of less than 1 means that the security will be less volatile than the
market. A beta of greater than 1 indicates that the security's price will be more volatile than
the market. For example, if a stock's beta is 1.2, it's theoretically 20% more volatile than the
market.

Covariance 0.001125092
Variance of market return 0.002575612
Beta 0.43682498
Blumes adjustment 0.622672737
Market return 0.01
Market return -yearly 0.12

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Cost OF Equity

Risk-free rate 0.05

Market return 0.12
Cost of equity 0.093587092

Cost of Debt

Cost of debt refers to the effective rate a company pays on its current debt. In most cases, this
phrase refers to after-tax cost of debt, but it also refers to a company's cost of debt before
taking taxes into account. The difference in cost of debt before and after taxes lies in the fact
that interest expenses are deductible. Cost of debt refers to the effective rate a company pays
on its current debt. In most cases, this phrase refers to after-tax cost of debt, but it also refers
to a company's cost of debt before taking taxes into account. The difference in cost of debt
before and after taxes lies in the fact that interest expenses are deductible.

Particulars Historical - Year Historical - Historical - Historical - Historical -

1 Year 2 Year 3 Year 4 Year 5
Total loan 2,948,796,897 1,776,166,562 916,302,487 2,693,932 0
Average loan 2362481730 1346234525 459498209.5 1346966
Interest rate 0.074976832 0.11782071 0.042336463 0.11461982
Average intererst 8.74%
rate

Market price 283.7

Number of shares 685945200
Market value of equity 194,602,653,240.00
Book/market value of debt 0
Weight - equity 1
Weight -debt 0
Cost of capital 0.071051943

As the firm didn’t have any debt in2016-2017 income year so weight of debt in the capital
structure is zero. And final cost of capital is 7.10 %.

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 Chapter 4: Absolute Valuation approach

4.1 Residual Earnings Valuation Model

When most hear the term residual income, they think of excess cash or disposable income.
Although that definition is correct in the scope of personal finance, in terms of equity
valuation residual income is the income generated by a firm after accounting for the true cost
of its capital. The residual income model attempts to adjust a firm's future earnings estimates,
to compensate for the equity cost and place a more accurate value to a firm. Although the
return to equity holders is not a legal requirement like the return to bondholders, in order to
attract investors firms must compensate them for the investment risk exposure.

Value = BV + Expected present value of Residual earnings

Residual Earnings = earnings t-(cost of equity*Book Value t-1)

Comparison with other valuation methods

As can be seen, the residual income valuation formula is similar to the dividend discount
model (DDM) (and to other discounted cash flow (DCF) valuation models), substituting
future residual earnings for dividend (or free cash) payments (and the cost of equity for the
weighted average cost of capital).

However, the RI-based approach is most appropriate when a firm is not paying dividends or
exhibits an unpredictable dividend pattern, and / or when it has negative free cash flow many
years out, but is expected to generate positive cash flow at some point in the future. Further,
value is recognized earlier under the RI approach, since a large part of the stock's intrinsic
value is recognized immediately – current book value per share – and residual income
valuations are thus less sensitive to terminal value.

At the same time, in addition to the accounting considerations mentioned above, the RI
approach will not generally hold if there are expected changes in shares outstanding or if the
firm plans to bring in "new" shareholders who derive a net benefit from their capital
contributions.

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 Particulars Time 0 Project Projected Projected Projected Projected
ed Year Year 2 Year 3 Year 4 Year 5
1
Sales 430989 50830936 59950006 70705037 83389521
79441 353 334 471 193
PM ( Net profit 21.33% 21.33% 21.33% 21.33% 21.33%
margin)
Earnings 919390 10843292 12788579 15082850 17788714
6170 937 690 886 336
DPR - dividend payout 0.2208 0.220886 0.220886 0.220886 0.2208860
ratio 86053 053 053 053 53
Transfer to the equity 716310 84481607 99637608 11751259 13859435
0526 60 00 488 440
CSE 50,169,608,1 57,332, 65,780,86 75,744,63 87,495,88 101,355,3
97 708,72 9,482 0,282 9,770 25,210
3
Cost of equity 0.0935 0.094 0.094 0.094 0.094
87
Benchmark income 469522 53656014 61562402 70887196 81884858
7716 61 56 50 48
Residual income 449867 54776914 66323394 79941312 96002284
8454 76 35 37 88
Year 1 2 3 4 5
PV of discount factor 0.9144 0.836167 0.764609 0.699175 0.6393418
21913 434 825 978 36
PV of residual income 411369 45802672 50711518 55893045 61378277
0157 28 93 29 03
Summation of PV of 2549224151
residual income 1
Terminal growth rate 0.07
Continuing value 27843516
1203.07
PV of terminal value 1780152470
48.23
Book value of equity - 50,169,608,1
existing value 97
Equity value 2536770967
55.98
Number of shares 685945200
outstanding
Value per share 369.8212288

As the Market Price of Square Pharma is 284 but by using Residual earnings Valuation
model we see that value per share is 369.82. As market price is underpriced so we should buy
the stock. If we have existing share on hand we should retain it.

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4.2 Dividend Discount Model

The Dividend discount model (DDM) is a method for assessing the present value of a stock
based on the growth rate of dividends. The Dividend discount model seeks to estimate the
current value of a given stock on the basis of the spread between projected dividend growth
and the associated discount rate.

The dividend discount model (DDM) is a method of valuing a company's stock price based
on the theory that its stock is worth the sum of all of its future dividend payments,
discounted back to their present value. In other words, it is used to value stocks based on
the net present value of the future dividends.

Various challenges of DDM:

Dividend:

Dividend depends on future earnings/expected earnings. This is a great challenge for analyst to
forecast the future earnings which is largely depends on sales revenue. We can use

 Soft Analysis
 Hard Analysis

Soft Analysis: Analyzing other than financial statement.

Hard Analysis: Analyzing financial statement information.

Dividend Payout Ratio:

It is a great challenge to forecast future DPR ratio. For example current DPR is 60%, what will be the
future DPR? It is really difficult to forecast. We can use

 Historical Average of DPR

 Historical Average growth of DPR

Cost of Equity:

In DDM, dividend is discounted through cost of equity. It is difficult to identify cost of equity because
there are several methods to determine cost of equity.

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Growth Rate:
It is a great challenge to identify the terminal growth rate. It can be
g= Real growth+ inflation

Particulars Time 0 Project Projected Projecte Projected Projected

ed Year Year 2 d Year 3 Year 4 Year 5
1
Dividend 203080 2395132177 2824818 3331591399 3929278896
5645 890
Cost of equity 0.09358 0.09358709 0.093587 0.09358709 0.093587092
7092 2 092 2
Year 1 2 3 4 5
PV of discount 0.91442 0.83616743 0.764609 0.69917597 0.639341836
factor 1913 4 825 8
PV of dividend 185701 2002731528 2159884 2329368676 2512152382
3182 277
Summation of PV of 108611500
dividend 44
Terminal growth 0.07
rate
Continuing value 11396076709
3.47
PV of terminal 728598860
value 15
Equity value 837210360
60
Number of shares 685945200
outstanding
Value per share 122.052076

As the Market Price of Square Pharma is 284 but by using Dividend Discount Valuation
model we see that value per share is 122.05. As market price is overpriced so we should not
buy the stock. If we have existing share on hand we should sell it.

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4.3 Free Cash Flow Valuation Model

Free cash flow (FCF) is a measure of a company's financial performance, calculated as

operating cash flow minus capital expenditures. FCF represents the cash that a company is
able to generate after spending the money required to maintain or expand its asset base.
FCF is important because it allows a company to pursue opportunities that enhance
shareholder value.

FCF is an assessment of the amount of cash a company generates after accounting for all
capital expenditures, such as buildings or property, plant and equipment. The excess cash is
used to expand production, develop new products, make acquisitions, pay dividends and
reduce debt. Specifically, FCF is calculated as:

FCF = EBIT (1-tax rate) + (depreciation) + (amortization) - (change in net working capital) -
(capital expenditure).

Some important features of FCF:

 It is important to note that negative free cash flow is not bad in itself. If free cash
flow is negative, it could be a sign that a company is making large investments. If
these investments earn a high return, the strategy has the potential to pay off in the
long run.
 FCF is also better indicator than the P/E ratio.
 FCF is a good indicator of the performance of a public company.

Some challenges of FCF:

Free cash flow is not really a concept about adding value in operation. It has some confusing
situation:

 It gives confusing result when cash flow is negative but negative cash flow does not
mean that the firm has a bad news of operating efficiency.

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  Free cash flow would be a measure of the value of the firm if cash receipts were
matched in the same period with the cash investment that generates them.
 This model works best in long run but not in short run.

Particulars Time 0 Projected Projected Projected Projected Projected

Year 1 Year 2 Year 3 Year 4 Year 5
Operting income 95933663 11314416 13344222 15738176 185616048
24 243 517 036 17
NOA 50,148,221, 46275352 49618377 58519914 69018387 814002859
907 098 663 616 298 79
Change in NOA - 3,343,025, 8,901,536, 10,498,47 12,381,898,
3,872,869, 565 953 2,682 681
809
FCF 13,466,23 7,971,390, 4,442,685, 5,239,703, 6,179,706,1
6,133 678 564 354 36
Cost of capital 0.0710519 0.0710519 0.0710519 0.0710519 0.07105194
43 43 43 43 3
Year 1 2 3 4 5
PV of discount 0.9336615 0.8717238 0.8138950 0.7599024 0.70949172
factor 34 6 36 87 2
PV of FCF 12572906 69488514 36158797 39816636 438445034
682 49 26 13 8
Summation of PV 315037518
of FCF 18
Terminal growth 0.07
rate
Continuing value 628578220
4475.08
PV of terminal 445971044
value 0294.13
Enterprise value 449121419
2112.39
Less: Interest 0
bearing debt
Equity value 449121419
2112.39
Number of shares 685945200
outstanding
Value per share 6547.48249
9

As the Market Price of Square Pharma is 284 but by using FCF Valuation model we see that
value per share is 6547.48. As market price is underpriced so we should buy the stock. If we
have existing share on hand we should retain it.

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4.4 Residual Operating Income Valuation Model
Residual Operating Income indicates the sustainable economic profit of the company earn
from its operation.

c Time 0 Projected Projected Projected Projected Projected

Year 1 Year 2 Year 3 Year 4 Year 5
Sales 43098979 50830936 59950006 70705037 833895211
441 353 334 471 93
PM 0.2226 0.2226 0.2226 0.2226 0.2226
Operating income 95933663 11314416 13344222 15738176 185616048
24 243 517 036 17
ATO 1.0244 1.0244 1.0244 1.0244 1.0244
NOA 50,148,221,9 46275352 49618377 58519914 69018387 814002859
07 098 663 616 298 79
Cost of operation 0.082981 0.082981 0.082981 0.082981 0.0829819
922 922 922 922 22
Benchmark 41613958 38400176 41174283 48560949 572727841
operating income 27 47 33 76 5
Residual operating 54319704 74743985 92267941 10882081 128343264
income 98 96 84 060 02
Year 1 2 3 4 5
PV of discount 0.923376 0.852624 0.787292 0.726967 0.6712649
factor 448 064 98 795 4
PV of residual 50157536 63728521 72641902 79109224 861523334
operating income 23 10 88 76 9
Summation of PV 3517895184
of ROI 6
Terminal growth 0.07
rate
Continuing value 710087447
080.89
PV of terminal 4766568079
value 03.84
Base value - Last 50,148,221,9
year's NOA 07
Less - Book value of -21,386,290
NFO
Equity value 562,005,367,
946.823
Number of shares 685945200
outstanding
Value per share 819.3152572

As the Market Price of Square Pharma is 284 but by using Residual Operating Income
Valuation model we see that value per share is 819.31. As market price is underpriced so we
should buy the stock. If we have existing share on hand we should retain it.

17 | P a g e
 Chapter 5: Relative Valuation Approach
For relative valuation we selected Ibn Sina Pharmaceuticals as peer firm of Square Pharma.
IBn Sina is another renowned pharmaceutical firm which is operating the same industry as
Square Pharma.

We will compare both firms value in terms of P/E Ratio, P/BV Ratio and P/Sales Ratio.

5.1 P/E Ratio

The price-earnings ratio indicates the dollar amount an investor can expect to invest in a
company in order to receive one dollar of that company’s earnings. This is why the P/E is
sometimes referred to as the price multiple because it shows how much investors are willing
to pay per dollar of earnings.

In general, a high P/E suggests that investors are expecting higher earnings growth in the
future compared to companies with a lower P/E. A low P/E can indicate either that a
company may currently be undervalued or that the company is doing exceptionally well
relative to its past trends. When a company has no earnings or is posting losses, in both cases
P/E will be expressed as “N/A.” Though it is possible to calculate a negative P/E, this is not
the common convention.

P/E Ratio
2012-2013 2013-2014 2014-2015 2015-2016 2016-2017

Square Pharma 25.17162 27.50487 24.27778 15.46566 18.29142

Ibnsina Pharma 18.03571 17.29412 11.18537 29.61783 26.97572

As we are seeing in the table the investors of Ibn Sina are expecting higher earnings growth
in the future. Lower P/E result of square pharma indicating that its shares are undervalued.

5.2 P/BV Ratio

The price-to-book ratio (P/B Ratio) is a ratio used to compare a stock's market value to its
book value. It is calculated by dividing the current closing price of the stock by the latest
quarter's book value per share.

Also known as the "price-equity ratio".

Calculated as:

P/B Ratio = Market Price per Share / Book Value per Share

18 | P a g e
where Book Value per Share = (Total Assets - Total Liabilities) / Number of shares
outstanding

A lower P/B ratio could mean that the stock is undervalued. However, it could also mean that
something is fundamentally wrong with the company. As with most ratios, this varies by
industry.

This ratio also gives some idea of whether you're paying too much for what would be left if
the company went bankrupt immediately.

P/BV Ratio
2012-2013 2013-2014 2014-2015 2015-2016 2016-2017

Square Pharma 4.053047 4.370702 4.049809 3.753763 3.625127

Ibnsina Pharma 2.231456 3.240134 2.391075 6.908908 5.708529

As we are seeing in the table the Lower P/bv result of square pharma indicating that its shares
are undervalued.

5.3 P/Sales Ratio

The price-to-sales ratio is a valuation ratio that compares a company’s stock price to its
revenues. The price-to-sales ratio is an indicator of the value placed on each dollar of a
company’s sales or revenues. It can be calculated either by dividing the company’s market
capitalization by its total sales over a 12-month period, or on a per-share basis by dividing the
stock price by sales per share for a 12-month period.

Abbreviated as the P/S ratio or PSR, the price-to-sales ratio is also known as a “sales
multiple” or “revenue multiple.”

P/sales Ratio
2012-2013 2013-2014 2014-2015 2015-2016 2016-2017

Square Pharma 4.532932 5.02448 4.71865 3.766218 4.864869

Ibnsina Pharma 0.711859 0.821666 0.629741 1.720758 1.573328

We are seeing that Square has higher value placed on each Dollar of sales and ibn SIna has
lower value placed on each dollar of sales.

19 | P a g e
 Chapter 6: Conclusion

Limitations
The insight information about the company was hard to get

Industry analysis was not properly done because of availability of information.

Conclusion
Square pharmaceutical is one of the biggest name of our pharmaceutical industry. It has a
strong financial structure because of its vast operations in home abroad. In the very year they
didn’t use any debt in their capital structure. This has both advantage and disadvantage
because if they used debt than they will enjoy tax benefit over the interest payment. The
market value of the shares is undervalued according to relative earning model and relative
operative income model.

20 | P a g e
 Appendix

Income Statement

Particular Historical - Year 1 Historical - Year 2 Historical - Year 3 Historical - Year 4 Historical - Year 5

Turnover 20,202,005,922 23,268,413,217 26,684,573,116 40,423,958,859 36,543,140,106

Cost of goods sold 11,308,857,708 12,960,738,683 14,942,870,155 20,957,265,251 18,274,858,914

Gross profit 8,893,148,214 10,307,674,534 11,741,702,961 19,466,693,608 18,268,281,192

Operating expenses 3,694,443,818 4,162,889,868 4,533,477,076 6,531,608,135 5,972,062,210.00

Selling and 2,955,935,819 3,431,938,716 3,757,838,863 5,444,568,339 5,056,851,926.00

distribution expenses
Administrative 738,507,999 730,951,152 775,638,213 1,087,039,796 915,210,284.00
expenses
Profit from 5,198,704,396 6,144,784,666 7,208,225,885 12,935,085,473 12,296,218,982
operations
Other income 377,846,808 245,133,874 293,730,506 759,699,382 1,093,575,634.00

Financial expenses 357,151,743 177,131,396 158,614,307 19,453,529 154,389.00

Net profit before 5,219,399,461 6,212,787,144 7,343,342,084 13,675,331,326 13,389,640,227.00

WPPF
Allocation for WPPF 246,729,864 300,438,842 379,795,062 657,734,060 646,577,651.00

Net profit before tax 4,972,669,597 5,912,348,302 6,963,547,022 13,017,597,266 12,743,062,576

Provision for income 1,237,851,545 1,518,801,391 1,679,877,193 2,935,192,288 2,949,150,787.00

tax
Provision for 96,820,479 142,966,048 172,400,209 -238,307,552 -74,735,584.00
deferred income tax
Profit/(loss) brought -- -- 75,167,249 -- --
forward
Net profit after tax 3,637,997,573 4,250,580,863 5,186,436,869 9,844,097,426 9,719,176,205

Profit/(loss) from -- -- -- -- 928,615,539

associate
undertakings
Profit for the year -- -- -- -- 10,637,215,898

Earnings Per Share 8.74 10.26 10.8 17.18 15.51

EBIT 5,576,551,204 6,389,918,540 -- 13,694,784,855 13,389,794,616.00

Number of Shares 416246861.9 414286633.8 480225636 572997521.9 626639342.7

Dividend paid 662,086,900 926,921,660 1,445,997,789 1,662,897,456 2,494,346,184

Transfer to the reserve 2,975,910,673 3,323,659,203 3,740,439,080 8,181,199,970 7,224,830,021

Sales growth rate 15.18% 14.68% 51.49% -9.60%

Average sales growth rate 17.94%

DPR 18.20% 21.81% 27.88% 16.89% 25.66%

Average DPR 22.09%

21 | P a g e
Balance Sheet

Particular Historical - Historical - Historical - Historical - Historical - Reformul

Year 1 Year 2 Year 3 Year 4 Year 5 ation
Non 20,605,30 23,546,70 25,458,98 27,240,40 29,355,222
Current 9,448 1,250 6,164 2,799 ,227
Assets
Property, 9,908,013,5 13,933,689, 18,009,200, 18,848,282, 19,323,568,1 OA
Plant and 92 469 507 139 64.00
Equipment
Capital 4,907,039,7 3,256,802,1 207,629,864 -- -- OA
work in 56 71
progress
Investment 157,694,430 5,364,154,7 6,036,139,9 6,764,511,3 7,504,636,42 OA
in 08 63 25 0.00
Subsidiary
Investment 4,914,958,9 147,694,430 251,599,097 555,873,893 588,808,565. OA
in long 33 00
term assets
Other 686,985,768 844,360,472 879,249,484 -- -- OA
Investment
Pre 30,616,969 -- -- -- -- OA
Operating
and
Preliminary
Expense
Deferred -- -- 75,167,249 -- -- OA
Tax assets
Other -- -- -- 1,071,735,4 1,938,209,07 OA
Assets 42 8
Current 6,946,361, 7,499,373, 9,732,170, 17,063,36 23,175,830
Assets: 767 281 099 6,651 ,022
Inventories 3,091,263,7 2,737,085,7 3,310,086,6 3,694,711,0 3,730,808,24 OA
12 79 68 88 3.00
Trade 812,741,029 766,634,978 894,543,303 1,335,829,9 2,204,014,90 OA
Debtors & 14 0.00
Other
Receivables
Advance, 952,411,276 671,749,541 750,169,066 1,131,340,5 1,450,936,73 OA
Deposits 60 5.00
and
Prepaymen
ts
Short term 1,108,757,9 1,161,185,7 885,185,428 2,378,929,9 21,386,290.0 FA
loan/Invest 14 76 58 0
ment
Cash and 981,187,836 2,162,717,2 3,892,185,6 8,522,555,1 15,768,683,8 OA
Cash 07 34 31 54.00
equivalents
Total 27,551,67 31,046,07 35,191,15 44,303,76 52,531,052
Assets 1,215 4,531 6,263 9,450 ,249
BS63033 -- 1 -- -- --
Shareholde 22,593,94 26,748,95 31,091,63 40,558,08 49,040,374
rs' Equity 4,897 1,732 2,420 8,534 ,351
Share 3,707,686,6 4,819,992,6 5,542,991,5 6,235,865,4 6,859,452,00

22 | P a g e
Capital 40 30 20 60 0.00
Share 2,035,465,0 2,035,465,0 2,035,465,0 2,035,465,0 2,035,465,00
Premium 00 00 00 00 0.00
General 105,878,200 105,878,200 105,878,200 105,878,200 105,878,200.
Reserve 00
Tax Holiday 406,231,702 406,231,702 -- 301,826,665 852,508,043.
Reserve 00
Other 313,532,224 449,255,557 265,332,813 266,786,579 596,561,713.
Reserve 00
and surplus
Retained 16,017,431, 18,922,758, 23,143,634, 31,611,672, 38,577,835,2
Earnings 580 840 751 794 54.00
Non 7,719,551 9,369,803 -1,669,864 593,836 12,674,141.0
Controlling 0
Interest
Non 1,682,318, 1,902,585, 1,550,505, 1,054,498, 1,129,233,
Current 885 673 777 262 846
Liabilities
Long term 1,106,327,1 1,183,627,9 659,147,818 -- -- FL
loans 83 23
secured
Deferred 575,991,702 718,957,750 891,357,959 1,054,498,2 1,129,233,84 OL
tax liability 62 6.00
Current 3,275,407, 2,394,537, 2,549,018, 2,691,182, 2,361,444,
Liabilities 433 126 066 654 052
Creditors 7,034,724 217,855,755 254,773,030 693,982,698 843,937,277. OL
for goods 00
Short term 1,302,048,3 131,104,817 -- 2,693,932 -- FL
borrowing 78
Accrued -- 20,518,598 43,002,246 -- -- OL
Expense
Liabilities 1,425,902,9 1,563,624,1 1,994,088,1 1,951,634,8 1,489,930,23 OL
for other 95 34 21 06 3.00
finance
Long term 540,421,336 461,433,822 257,154,669 -- -- FL
borrowings
Current
maturity
Others -- -- -- 42,871,218 27,576,542 OL
Liabilities
Book Value 60.94 55.5 56.09 65.04 71.49
Per Share
Total 27,551,67 31,046,07 35,191,15 44,303,76 52,531,052
Liabilities & 1,215 4,531 6,263 9,450 ,249
Shareholde
rs Equity

23 | P a g e
PM Calculation

Particular Historical - Historical - Historical - Historical - Historical -

Year 1 Year 2 Year 3 Year 4 Year 5
Sales 20,202,005, 23,268,413, 26,684,573, 40,423,958, 36,543,140,
922 217 116 859 106
Less: COGS 11,308,857, 12,960,738, 14,942,870, 20,957,265, 18,274,858,
708 683 155 251 914
Gross profit 8,893,148,2 10,307,674, 11,741,702, 19,466,693, 18,268,281,
14 534 961 608 192
Less: Operating 3,694,443,8 4,162,889,8 4,533,477,0 6,531,608,1 5,972,062,2
expense 18 68 76 35 10
Core operating profit 5,198,704,3 6,144,784,6 7,208,225,8 12,935,085, 12,296,218,
96 66 85 473 982
Plus: Other income 377,846,808 245,133,874 293,730,506 759,699,382 1,093,575,6
34
Less: Contribution to 246,729,864 300,438,842 379,795,062 657,734,060 646,577,651
WPPF
Operating profit 5,329,821,3 6,089,479,6 7,122,161,3 13,037,050, 12,743,216,
40 98 29 795 965
Tax reported 1,237,851,5 1,518,801,3 1,679,877,1 2,935,192,2 2,949,150,7
45 91 93 88 87
Tax on interest 88,906,135 45,502,632 38,263,913 4,386,358 35,731
expense
Tax on operating 1,326,757,6 1,564,304,0 1,718,141,1 2,939,578,6 2,949,186,5
profit 80 23 06 46 18
After tax operating 4,003,063,6 4,525,175,6 5,404,020,2 10,097,472, 9,794,030,4
profit 60 75 23 149 47

PM - operating income 19.82% 19.45% 20.25% 24.98% 26.80%

Average PM - 22.26%
operating income

Tax rate 24.89% 25.69% 24.12% 22.55% 23.14%

Average rate rate 24.08%

NPM - net profit 18.01% 18.27% 19.44% 24.35% 26.60%

margin
Average NPM 21.33%

24 | P a g e
ATO Calculation

Particular Historical - Historical - Historical - Historical - Historical -

Year 1 Year 2 Year 3 Year 4 Year 5
OA - operating asset 26,412,296,3 29,884,888,7 34,305,970,8 41,924,839,4 52,509,665,9
32 55 35 92 59
OL - operating 2,008,929,42 1,801,998,48 2,291,863,39 2,688,488,72 2,361,444,05
liability 1 7 7 2 2.00
NOA 24,403,366,9 28,082,890,2 32,014,107,4 39,236,350,7 50,148,221,9
11 68 38 70 07
Change in NOA 3,679,523,35 3,931,217,17 7,222,243,33 10,911,871,1
7 0 2 37
FA - financial asset 1,108,757,91 1,161,185,77 885,185,428 2,378,929,95 21,386,290
4 6 8
FO - financial 2,948,796,89 1,776,166,56 916,302,487 2,693,932 0
obligation 7 2
NFO - net financial 1,840,038,98 614,980,786 31,117,059 - -21,386,290
obligation 3 2,376,236,02
6
CSE 22,563,327,9 27,467,909,4 31,982,990,3 41,612,586,7 50,169,608,1
28 82 79 96 97

ATO 0.95 0.95 1.26 0.93

Average ATO 1.02

Discount Rate
Time Monthly closing Index Cash Bonus Stock - Index
stock price dividend informatio return return
n
30.04.2017 283.7 5,475.55 35.00 1 14.68% -4.27%
30.03.2017 277.9 5,719.61 0 1 3.62% 1.90%
28.02.2017 268.2 5,612.70 0 1 3.19% 2.64%
31.01.2017 259.9 5,468.34 0 1 4.34% 8.58%
29.12.2016 249.1 5,036.05 0 1 1.71% 4.89%
30.11.2016 244.9 4,801.24 0 1 -8.55% 4.55%
31.10.2016 267.8 4,592.18 0 1 -0.30% -2.19%
29.09.2016 268.6 4,695.19 40.00 1 17.65% 3.72%
31.08.2016 262.3 4,526.58 0 1 -1.80% 0.03%
31.07.2016 267.1 4,525.35 0 1 0.53% 0.39%
30.06.2016 265.7 4,507.58 0 1 2.07% 2.00%
31.05.2016 260.3 4,419.39 0 1 2.72% 5.33%
28.04.2016 253.4 4,195.70 0 1 1.08% -3.71%
31.03.2016 250.7 4,357.54 0 1 -4.86% -3.42%

25 | P a g e
29.02.2016 263.5 4,511.97 0 1 1.78% -0.64%
31.01.2016 258.9 4,540.89 0 1 2.05% -1.92%
31.12.2015 253.7 4,629.64 0 1 -0.16% 1.06%
30.11.2015 254.1 4,581.00 0 1 4.57% 0.36%
29.10.2015 243 4,564.49 0 1 -2.57% -5.93%
30.09.2015 249.4 4,852.08 0 1 -1.38% 1.75%
31.08.2015 252.9 4,768.67 0 1 -7.26% -0.49%
30.07.2015 272.7 4,792.31 30.00 1 15.45% 4.56%
30.06.2015 262.2 4,583.11 0 1 6.33% -0.08%
31.05.2015 246.6 4,586.95 0 1 0.24% 13.33%
30.04.2015 246 4,047.29 0 1 -6.50% -10.6%
31.03.2015 263.1 4,530.48 0 1 -0.27% -4.89%
26.02.2015 263.8 4,763.22 0 1 3.74% 0.83%
29.01.2015 254.3 4,724.05 0 1 -1.62% -2.90%
30.12.2014 258.5 4,864.96 0 1 2.62% 2.00%
30.11.2014 251.9 4,769.43 0 1 -9.62% -7.81%
30.10.2014 278.7 5,173.23 0 1 6.95% 1.95%
30.09.2014 260.6 5,074.31 30.00 1 23.98% 11.54%
31.08.2014 234.4 4,549.52 0 1 -8.19% 2.76%
24.07.2014 255.3 4,427.16 0 1 -9.53% -1.19%
30.06.2014 282.2 4,480.52 0 1 4.52% 1.13%
29.05.2014 270 4,430.48 0 1 -4.15% -2.99%
30.04.2014 281.7 4,566.86 0 1 5.51% 1.67%
31.03.2014 267 4,491.98 0 1 0.49% -5.43%
27.02.2014 265.7 4,749.87 0 1 16.33% -0.07%
30.01.2014 228.4 4,753.17 0 1 20.08% 11.41%
30.12.2013 190.2 4,266.55 0 1 -1.60% 0.85%
28.11.2013 193.3 4,230.73 0 1 7.45% 6.63%
31.10.2013 179.9 3,967.73 0 1 3.45% 0.76%
30.09.2013 173.9 3,937.68 0 1 2.35% -4.60%
29.08.2013 169.9 4,127.48 0 1 -19.63% 4.74%
31.07.2013 211.4 3,940.81 25.00 1 7.45% -3.99%
30.06.2013 220 4,104.65 0 1 12.02% 0.10%
30.05.2013 196.4 4,100.51 0 1 9.42% 13.32%
30.04.2013 179.5 3,618.49 0 1 0.50% -2.79%
31.03.2013 178.6 3,722.41 0 1 1.71% -8.03%
28.02.2013 175.6 4,047.23 0 1 1.33% -4.34%
31.01.2013 173.3 4,230.69 0 1 2.79% 0.27%
30.12.2012 168.6 4,219.31 0 1 0.12% 0.21%
29.11.2012 168.4 4,210.58 0 1 -5.97% -6.30%
31.10.2012 179.1 4,493.92 0 1 0.62% -1.11%
30.09.2012 178 4,544.41 0 1 -4.09% 2.19%
30.08.2012 185.6 4,446.87 0 1 -27.22% 6.92%

26 | P a g e
 30.07.2012 255 4,159.17 0 1

Covariance 0.001125092 0.0011250

92
Variance of 0.002575612
market return
Beta 0.43682498
Blumes 0.622672737
adjustment
Market return
0.01
Market return
-yearly 0.12

Risk-free rate 0.05

Market return 0.12
Cost of equity 0.093587092

Particulars Historical - Year 1 Historical Historical Historical - Historical

- Year 2 - Year 3 Year 4 - Year 5
Total loan 2,948,796,897 1,776,166, 916,302,4 2,693,932 0
562 87
Average loan 23624817 13462345 459498209 1346966
30 25 .5
Interest rate 0.0749768 0.1178207 0.0423364 0.1146198
32 1 63 2
Average 8.74%
intererst rate

Market price 283.7

Number of 685945200
shares
Market value of 194,602,653,240.
equity 00
Book/market 0
value of debt
Weight - equity 1
Weight -debt 0

Cost of capital 0.071051943

27 | P a g e
Real economic 0.01
growth
Inflation 0.06
expected
Terminal 0.07
growth rate

Debt - equity
ratio
Average tax 24.08%
rate
Cost of 0.622672737
unlevered beta
Beta of 0.471170311
operating assets
Cost of 8.30%
operation

28 | P a g e