CHAPTER 1: INTRODUCTION

Origin of the Report

This report is prepared to fulfill the partial requirement of the course F-604 of EMBA program of University of Dhaka on the stock valuation of a company. For this purpose, Union Capital Limited and IDLC Finance Limited are chosen and we are discussing on different aspects of these companies. We have tried to reflect our experience on our report in terms of stock valuation of Union Capital Limited and IDLC Finance Limited. The origin of the report also lies to the in depth & coordinated group, as well as individual understanding, participation and sharing through discussion within the group members. This report is also a reflection of the groups collaborative analysis & judgment.

Purpose of the Report

To have a thorough idea about Stock valuation of union Capital Limited and IDLC Finance Limited To gain experience and knowledge of analyzing the economy in the real life which will help us in the practical working environment. To find out the financial situation of Union Capital Limited and IDLC Finance Limited Forecast the value of the stock of Union Capital Limited and IDLC Finance Limited To bridge the gap between practical and theoretical knowledge.

Scope
This report covers all the details of stock valuation process to have a clear & detail overview of it, as well as a brief idea about valuation of stock of a company.
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Research Methodology
Data source
Information used to prepare this report has been collected from both the Secondary source and the primary survey.

Primary data source

An open discussion method was followed to gather primary information by interviewing executive officers of the company

Secondary data source

The secondary sources of information were collected from Union capital limited IDLC Finance Limited, Dhaka Stock Exchange, Annual report of UCL , IDLC & from the website of the company which is :

http://www.unicap-bd.com http://www.idlc.com
Research instrument
According to the nature and type of the research, interview method is used to conduct the survey. Mostly some open-ended questions were asked to bring out the required information.

Limitations
Lack of availability of information and data, The record system of the annual report is not efficient Time is not sufficient to complete the study perfectly.

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CHAPTER 2: STOCK

VALUATION

& ITS TECHNIQUES

Stock Valuation: Basic Definition

In financial markets, stock valuation is the method of calculating theoretical values of companies and their stocks. The main use of these methods is to predict future market prices, or more generally potential market prices, and thus to profit from price movement stocks that are judged undervalued (with respect to their theoretical value) are bought, while stocks that are judged overvalued are sold, in the expectation that undervalued stocks will, on the whole, rise in value, while overvalued stocks will, on the whole, fall. In the view of fundamental analysis, stock valuation based on fundamentals aims to give an estimate of their intrinsic value of the stock, based on predictions of the future cash flows and profitability of the business.

Techniques of Valuation
All the methods of valuation fall into two categories:

The discounted cash flow techniques

Value of stock based upon present value of some measure of cash flowdividend, OCF and free cash flow.

The relative valuation techniques

Value of the stock estimated based upon its current price relative to variables considered to be significant to valuation.

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CHAPTER 3: OVERALL ECONOMY ANALYSIS OF BANGLADESH

Economy of Bangladesh
Agriculture and labor-intensive manufacturing remain the 2 major pillars of the Bangladeshi national economy. Three-fifths of the population engaged in farming. Jute and tea are principal sources of foreign exchange. Other important agricultural products are wheat, pulses (leguminous plants, such as peas, beans, and lentils), sweet potatoes, oilseeds of various kinds, sugarcane, tobacco, and fruits such as bananas, mangoes, and pineapples. The country is the world's largest exporter of jute and jute goods. Tea is also one of the major foreign exchange earners. Bangladesh also exports frozen shrimps, frog legs and handicrafts. There has also been a rapid growth in manufacturing industries, which offer a wide range of exportable goods such as leather goods and ready-made garments. Within the last few years' remittances from Bangladeshis employed abroad have contributed largely toward foreign exchange earnings. The prevailing political and economic stability has greatly encouraged investment in the private sector. For higher GDP growth, investments in both public and private sectors will need to be accelerated. The trend of foreign direct investment is very encouraging. The per capita income in 2010 was est. US$1,500 (adjusted by purchasing power parity). According to the International Monetary Fund, Bangladesh ranked as the 48th largest economy in the world in 2011, with a gross domestic product of US$256 billion. The economy has grown at the rate of 67% p.a. over the past few years. More than half of the GDP belongs to the service sector; nearly half of Bangladeshis are employed in the agriculture sector, with RMG, fish, vegetables, leather and leather goods, Jewish Hats, Swiss cheese, ceramics, rice as other important produce.

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Capital Market Outlook

Capital Market is the barometer of an economy. Looking over the Bangladesh capital market, it would be an understatement to say that the price performance in the last few years has been remarkable. According to the numbers published by the Dhaka Stock Exchange (DSE), the market has generated annual price return of 30 per cent in the last 10 years. Putting that in perspective, it is about two and half times the return generated by banks' fixed deposits. The annual return in the last three years is 42 per cent (since 2009). Year to date (YTD) return in 2010 is 94 per cent, and there is still a month and half to go. We usually become doubly sad if an elderly relative dies at 99; it appears that the Dhaka market would not leave us in any such regrets. The annual return should comfortably exceed 100%. Some people are skeptical about the performance calculations made by the DSE, and rightly so. If correctly calculated, a market-cap weighted index for the last 10 years tells of a more astounding performance. Annualized returns have been 37 per cent in the last 10 years, 60 per cent in the last three years and 92 per cent in YTD 2010. It is not a coincidence that the performance measure for 2010 matched DSE's. Only this year did they figure out how to calculate correctly a market-weighted index. However, index values in previous years were not revised. So what the DSE puts forward as an index value is a meaningless number, calculated differently at different times. It implies as if the DSE portrays a bird that has the legs of a stork, the body of a hen and the wings of a turkey.

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CHAPTER 4: INDUSTRY & COMPANY BACKGROUND

Industry Background: Non-Bank Financial Institutions

In many countries of the world especially the countries of the continental Europe and Japan have started their reforms based on bank-dominated system first. So a full pledged reform program of financial sector includes the development of both bank and non-bank finical institutions in the financial system so that the overall savings and investment activities improve significantly. Non bank financial institutions are permitted to work as merchant banker. In this situation, they have to take a separate license from the Securities and Exchange Commissions (SEC). Merchant banking activities involves activities like a manager of the issue, underwriter, bridge financer and portfolio manager etc. In the Bangladesh context, NBFIs are those institutions that are licensed and controlled by the Financial Institutions Act of 1993 (FIA 93). NBFIs give loans and advances for industry, commerce, agriculture, housing and real estate, carry on underwriting or acquisition business or the investment and reinvestment in shares, stocks, bonds, debentures or debenture stock or securities issued by the government or any local authority; carry on the business of hire purchase transactions including leasing of machinery or equipment, and use their capital to invest in companies. At present, 29 NBFIs are operating their business across the country of which one is government owned, 15 are privately owned local companies, and the remaining 13 are established under joint venture with foreign participation

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Asset Liability Position of NBFIs Total assets of NBFIs showed a growth of 28.2 percent and stood at Tk.90.2 billion in June 2011 compared with Tk.70.4 billion in June 2010. Leased assets constituted about 36.5 percent of total 72 assets of the NBFIs while term financing and working capital generated 27.3 percent and 16.1 percent respectively. 3 out of the existing 29 NBFIs showed negative position of working capital during the period which indicates that they need to be more efficient in their current liabilities and liquidity management. Up to June 2011, Delta Brac Housing (DBH), which holds about 83 percent of total housing finance of NBFIs, ranked the top in terms of share in total assets (11.2 percent) of the sector followed by the IDLC Finance Limited (9.4 percent). There exists considerable variation in terms of asset holding by NBFIs as 57.3 percent of the assets of the entire sector are accounted for by top nine of them while the bottom nine holds only 9.4 percent of total assets. Performance of NBFIs The NBFIs are increasingly coming forward to provide credit facilities for meeting the diversified demand for investment fund in the country's expanding economy. According to the available data (provisional), private sector credit by NBFIs grew at the rate of 38.7 percent and stood at Tk.108.6 billion at the end of December 2011 which was Tk.78.3 billion in December 2010. Role of Bangladesh Bank The Bangladesh Bank (BB), as the regulator of NBFI operations in the country, has expansion of been NBFI pursuing policies and taking measures to ensure healthy and efficient activities in the country. In order to bring the NBFIs under an effective risk management system, BB identified four core risk areas in September 2005 covering credit risk management (CRM), asset and liability management
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(ALM),

internal

control

and

compliance

(ICC),

and

information

and

communication technology (ICT). The BB also provided guidelines for the NBFIs to develop structures and undertake measures to improve their institutional risk management system in core risk areas.

Company Background AT
A

MOMENTARY

LOOK

Name of the company:

UNION CAPITAL LIMITED

Business Segment: Financial Institutions Established in: 1998 Listing with DSE & CSE: 24th July, 2007 Authorized capital: Tk. 2000.00 million Paid up capital: Tk. 544.00 million UNION CAPITAL LIMITED is one of the largest investment banks and fastest growing financial institutions in Bangladesh. Previously, it was known as Peregrine Bangladesh which had its origins and businesses rooted in Hong Kong. Out of the local office of the erstwhile Peregrine Capital Limited of Hong Kong, Union Capital Limited, Dhaka emerged in early 1998 as a Bangladeshbased company led by a group of the foremost entrepreneurs of the country. Union Capital, within a short span of time, has proved its worth as a most forward-working vigorous organization achieving success with its wide international network and strong local base.
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Union Capital is an entrepreneurial company that prides itself on its speed of through and action. Its ability to make decisions quickly and efficiently and to generate value as an agent and executor sets it apart from all other investment banks and financial institutions in Bangladesh. The company's strategy is to focus on Bangladesh and to develop a truly global distribution network through the major investment institutions abroad. SES Company Limited, which is wholly owned by Union Capital, has seats in both the Dhaka and Chittagong stock exchanges. This provides Union Capital with unmatched local distribution capabilities to retail and institutional investors throughout the world in relation to securities originating in Bangladesh. Union Capital is a public limited company having a profitable and dividend payment track record. Union Capital is the only institution having three unique advantages in common, which no other institutions can match in the capital market of Bangladesh. Union Capital is
SEC approved Merchant Banker (Investment Banking concern)

Central Bank (the Bangladesh Bank) licensed Financial Institution, and On-the-ground access to the Stock Exchanges through wholly owned subsidiary company, which has Corporate Memberships both at Dhaka and Chittagong stock exchanges.

Product & services

UCL offers tailored product and services to meet appropriate needs of the customers, which includes:

Financing and investment products

o Lease finance o Term finance
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o Project finance o Corporate finance o Syndication finance o SME finance

Corporate services
o Syndication services o Corporate financial advisory

Merchant banking & portfolio management services

o Issue management o Underwriting

Deposit products
o Term deposit receipts (TDR) o Double Money Deposit (DMD) o Triple Money Deposit (TMD) o Securities trading at DSE & CSE

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Name of the company: IDLC FINANCE LIMITED Business Segment: Financial Institutions Established in: 1985 Listing with DSE & CSE: March 20, 1993 & November 25, 1996 Authorized capital: Tk. 1000.0million Paid up capital: Tk.600 million IDLC Finance Limited is a multiproduct financial institution, established in 1985 with the collaboration of reputed international development agencies such as: Korean Development Leasing Corporation (KDLC), South Korea Kookmin Bank, South Korea International Finance Corporation (IFC) of the World Bank Group Aga Khan Fund for Economic Development (AKFED) German Investment and Development Company (DEG)

The primary goal of IDLC was to help modernize the financial services industry, by introducing modern modes of financing hitherto unknown to Bangladesh. This, we set about to do, by pioneering the launch of a multitude of financial products and services.

Product & services

Capital market products

o Issue Management o Security brokerage
o

IDLC securities limited (IDLCSL)

o Merchant Banking

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Corporate products
o Corporate Division

Lease Financing Sale & Lease Back Term Loan Project financing - Fixed cost Preferred Equity Investments Refinancing of existing liabilities Long Term Finance for Real Estate Developers Common Equity Investments Factoring/Reverse Factoring/Distributor Financing Specialized product: arrange special funds Syndication &Fund Raising Loan Syndication Private Placement of Equity Project Finance Foreign-Currency Loan & Special Funds o Advisory services

For Merger & Acquisition For Joint-Venture Matchmaking and Feasibility Study

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CHAPTER 5: AN OVER VIEW DISCUSSION FROM AN INVESTORS

POINT OF VIEW

Investors who buy shares in a company want to be able to evaluate the benefit from the investment with the amount they have paid, or intend to pay, for their shares. There are two measures of benefit to the investors:
One is the profit of the period And The other is the dividend

Dividend is an amount actually paid to the shareholders. Profit indicates wealth created by the business. That wealth may accumulate in the business or else part of it may be paid out in the form of dividend. There are some ratios, which may consider by the investor. They are as follows: 1. Return on asset 2. Return on equity 3. Earnings per share 4. Dividend per share 5. Asset per share

All of these ratios are related to profitability dimension. An investor wants to invest his money on those organizations, which are profitable for him. So he might give more emphasize on profitability dimension rather than other ratios. So, above ratios might give him a clear view of the company; whether it is profitable or not. By the following ratio we will justify Union Capital Limited and IDLC Finance Limited from an investors point of view.

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Performance valuation of union capital limited

Key Financial Ratios of UCL

Ratio Return on total asset (%) Return on total equity (%) Earnings per Share (tk.) Dividend per share (%) Asset per share Dividend payout ratio (%) 77.72 82.30 96.77 0.00 80.97 15.60 13.94 14.97 13.09 13.42 30 20 30 20 3 .8 6 2.43 3.10 1.91 2.47 24.93 19.08 22.46 15.75 20.33 2.75 2.11 3.21 2.62 3.92 2010 2009 2008 2007 2006

From the above table it is found that in the year 2010 all the profitability ratios gone up from year 2009. As per audited accounts the company has reported Net profit after tax in 2009 is Taka 84.64 million with EPS 2.43 whereas in 2010 net profit after tax taka 163.16 million with EPS 3.86.

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According to chairmans statement, in year 2009 the non banking financial institutions faced challenges like increasing cost of funds, severe market competition and reforms undertaken by the government & regulatory bodies. Despite all the challenges the company has attained a reasonable growth in respect to investments, fund mobilization, revenue etc. In the year under review union capital limited achieved 15% growth they hope that such pace of growth will continue in future years also. Asset per share increased in 2010, we can see asset per share is not in stable position. In 2008 it increased and then again in 2009 it decreased. Asset per share is going through ups and downs. We must concentrate on shareholders equity to understand the current position of the company in the market. The equity was taka 215.95 million in 2005 and it has increased to taka 647.34million in 2009. Few months before on October 2010, Mr. S.M.A.M Reza, one of the Sponsors/Directors of the company, has further reported that he has completed his sale of 25,000 shares of the company at prevailing market price through Stock Exchange as announced earlier. Performance valuation of IDLC finance limited As the financial sector is facing tremendous competition and challenges, continued diversification and increasing the fee based activities are the only ways to survive, grow, be sustainable & become the best performing and most innovative financial service provider in the country while maintaining high quality growth of shareholders wealth. Taking this into consideration, IDLC, in 2010, has continued to concentrate more on diversified investment. Accordingly, the companys diversified operations specially the capital market operations posted substantial growth during the year2010. IDLC has completed a very successful year in 2010, despite an initial setback due to political uncertainty and global economic slowdown. It continued to be
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recognized as the leading multi product NBFI in Bangladesh and is a continuous role model for all competitors.

Key Financial Ratios of IDLC finance limited

Ratio Return on total asset (%) Return on total equity (%) Earnings per Share (tk.) Dividend per (%) Asset per share Dividend payout ratio (%) 40.15 25.83 39.60 73.24 73.73 797.70 537.10 415.81 317.33 283.67 share 110.00 35.00 40.00 38.33 37.50 273.96 135.46 101.00 52.33 50.86 41.05 28.43 27.59 17.45 19.00 4.11 2.50 2.37 1.57 1.96 2010 2009 2008 2007 2006

The steady growth and development of business has placed IDLC in a strong position. The asset size of the Company, at the year-end, stands at Taka 22.7 billion, marking a growth of 30.8% over the previous year. At year-end, the
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balance of term deposits received by the Company was Taka 9.8 billion which is 18.56% higher than previous year. They have also plans for issuance of Zero Coupon bonds in 2010 which will help them reduce funding costs and improve asset liability mismatch. During 2010, IDLC earned a consolidated net profit of Taka 822 million compared to previous years Taka 406 million showing a robust growth of 102.3%. Consolidated earnings per share during the year, 2010 were Taka 273.96 compared to previous years Taka135.46.IDLC continues with its prudential policy of building adequate provisions for doubtful accounts and future losses. This conservative provisioning policy will result in lower provisioning expectations for the future. The equity of IDLC has shown a positive trend which reflects the sound financial position of the company. Equity increased from 851 million in 2006 to 2,393million by 2010. During 2009-2010 equity increased 49%. To make a clear view of shareholders equity we can show a graph with 5 years data. IDLCs total investment portfolio as on December 31, 2010 stood at Tk. 20,099 million which is 26.33% higher than the previous year. Out of the total portfolio, lease, term loan, real estate finance and margin loans, respectively, represent 22.06%, 17.30%, 24.10%, and 29.50% of the total portfolio. During 2010, IDLCs Merchant Banking Operation earned Tk 814.5 million in revenues, which is a hefty 87.2% higher than the previous year. The operation has earned an operating profit of Tk. 189.54 million, compared to previous years Tk. 91.67 million, marking a robust growth of 106.8%. We hope that this operation will earn increasing revenue in the years ahead and will take much stronger position in the market. At the end of December 2010, total portfolio value at cost was Tk. 11,455 million (Tk. 12,637 million at the market price) and balance of margin loan was Tk. 5,862million. During the year this operation has also successfully managed the issue management of Marico
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Bangladesh Limited. Moreover, Merchant banking Operation earned Tk. 201million in capital gains during 2010 through trading of securities in the secondary market.

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CHAPTER: 6 INVESTORS DECISION

BASED ON INTRINSIC VALUE OF STOCK

The Discounted Cash Flow Techniques: Dividend Discount Model

The cleanest & most significant measure of cash flow is dividend because this is clearly cash flows that go directly to the investors. Dividend discount model is very useful valuation approach. Dividend discount model:

To calculate the intrinsic value we need

Dividend Required rate of return (k) Growth rate (g)

Required Rate of Return

Required rate of return is determined by CAPM (capital asset pricing model). It describes the relationship between risk and expected return for the pricing of risky securities and can be expressed in the following manner:

r x = rf + x (rm-rf)
Where, r x = Expected return / required return rf = Risk free return rm = Market return
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x = Beta coefficient of the security Therefore CAPM says that the expected return of a security should be equal to the return on a risk-free security plus a risk premium. Intuitively it implies that the investors need to be compensated for the time value of money (rf) as well as for risk (captured by the risk premium).

Risks Free Return (rf)

Bangladesh bank discount rate is considered as the risk free rate of return. Discount rate is the annualized interest rate a country's central bank charges commercial, depository banks for loans to meet temporary shortages of funds. Bangladesh central bank discount rate is 5% (31 December 2010)

Beta Coefficient of the Security (x)

Beta coefficient of union capital limited is 0.752738605168 0.75 and Beta coefficient of IDLC is 0.566112339362 0.57 Weekly data has been used for calculation.

Market Return (rm)

Expected market return is 27.07.It is calculated by averaging 48 months (4 years) market return.

So, the required return is

Union cap

= 0.05 +0.75 (.2707-0.05) =21.55%

IDLC

= 0.05 +0.57 (.2707-0.05) =17.58%

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Growth Rate
In case of calculating growth rate we have used the method:

g = (Retention rate * Return on equity) Growth rate calculation of UCL

Year 2010 2009 2008 2007 2006 Retention rate (RR) 0.2228 0.1170 0.0323 1.00 0.1903 Total Return on equity (ROE) .2493 .1908 .2246 .1575 .2033 g = (RR* ROE) 0.0555 0.0223 0.0072 0.1575 0.0387

.2813

Average

.0562

Growth rate calculation of IDLC

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Year 2010 2009 2008 2007 2006

Retention rate (RR) .5985 .7417 .6040 .2676 .2627 Total

Return on equity (ROE) .4105 .2843 .2759 .1745 .19

g = (RR* ROE) .2457 .2109 .1666 .0467 .0499

.7198

Average

.1439

Intrinsic Value Union Capital Limited

D2010 = 3.00 Taka k=21.55% g=5.62%

Intrinsic value of share, =19.89 Taka

Market price of the shares of Union Capital Limited on December 09, 2010 is 248.40 Taka and our calculated intrinsic value is 19.89 Taka.

IDLC Finance Limited

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D2010 = 110 taka k=17.58% g=14.40% Intrinsic value of share,

= 3957.23 Taka
Market price of the shares of IDLC finance limited on December 09, 2010 is 4825 Taka And our calculated intrinsic value is 3957.23 Taka.

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The Relative Valuation Techniques: P/E ratio

Computation of the earning multiplier indicates the prevailing attitude of the investors toward a stocks value .Using P/E ratio or earning multiplier we can compute an estimated value of stock and compare it to its market price. The formula is: V= P/E ratio E1 Where, E1 = E o (1+g)

Union Capital Limited

P/E ratio Avrg=31.33 E1=3.86 (1 + .0562) =4.08 V = 31.33 4.08 =127.82 Taka

IDLC Finance Limited

P/E ratio Avrg=32.07 E1=273.96 (1 + .1404) =312.42 V = 32.07 312.42 =10021.49Taka

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CHAPTER 7: FINDINGS
Union Capital Limited is one of the largest investment banks in Bangladesh. There is a high probability of increased profit and earning in the coming year. They are giving high rate of dividend The management of Union Capital Limited is having great quality and it has the ability to face critical situation. Last but not the least; our estimated market value is more than of its current market prices

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CHAPTER 8: BIBLIOGRAPHY

Investment analysis and portfolio management by Reilly & brown http://www.google.com http://www.dsebd.org

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