Beximco Pharma Analysis 2022

Executive Summary
Valuation is a must requirement for assessing an asset of a company in the market
before making any investment or other purposes. For valuation purposes, an analyst
needs to understand risk and return relationship, tailors required rate of return, uses
this rate as discount rate for assuming the value of a stock and determines a price
which might be different from market price.
Undiversifiable risk is the main concern of majority of people while deciding required
rate of return of a stock. BETA, measuring that risk, is 1.37 based on historical
monthly data of 5 years for BXPH stock, showing higher volatility corresponding to
market volatility. CAPM Method suggests that required return rate be 7.11%. Current
price of this stock is 120 Taka found using constant dividend growth model. Growth
rate is 5.93% found on the basis of 17% payout ratio and 7.14% ROE. Value per
share of Beximco Pharma is assumed through comparables methods. Using P/E
ratio, price of the share is 146 Taka. P/B ratio of 0.87 implies Beximco Pharma is
undervalued while P/S ratio of 1.49 says Beximco Pharma is overvalued. Calculated
price and market price do not match because constant growth rate model has
limitations like being inflexible with dynamic economy, disregarding non-dividend
factors. Quality of information disclosed by companies is also a factor for
mismatching calculation and market price.
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Table of Contents
Executive Summary......................................................................................................ii
Chapter One: Introduction............................................................................................1
1.1 Objectives of the Study.......................................................................................1
1.2 Description of the study......................................................................................1
1.3 Methodology........................................................................................................1
1.4 Limitations...........................................................................................................2
Chapter Two: Company overview................................................................................3
Chapter Three: Valuation Exercise..............................................................................4
3.1 BETA...................................................................................................................4
3.2 CAPM Method...................................................................................................12
3.3 Estimation of the constant dividend growth rate of Beximco Pharmaceutical..14
3.4 Estimation of Current Stock Price of Beximco Pharmaceuticals......................16
3.5 “Method of Comparables” stock valuation approach........................................17
3.6 Critical analysis of the difference between calculated price and market price of
Beximco Pharma stock...........................................................................................24
Chapter Four: Conclusion...........................................................................................27
References.................................................................................................................28
Appendix.....................................................................................................................30
vii

Chapter One: Introduction
Valuation is the analytical process of determining the current (or projected) worth of
an asset or a company. Business management, capital structure, earnings prospect,
market value, economic condition, business cycle are some important factors for
placing a value on any company. Although many methods are available for valuation,
no single method can suit every stock. Different methods can result in different
values which may suggest different price of an asset compared to market price. And
again, valuation can be changed frequently with the change in corporate earnings
and economic events, making Analysts remodeling their methods. Analyst has to
employ a suitable set of valuation methods complying each situation to find the
appropriate result before making or suggesting an investment decision.
1.1 Objectives of the Study
The report is mainly made for academic purposes. It serves for students to apply the
knowledge achieved throughout the course to calculate and understand the risk
associated, return movement with respect to market, price and value of a particular
company stock.
1.2 Description of the study
This report contains application of various valuation methods on the Beximco
Pharma stock. CAPM BETA and CAPM method are applied on market return and
Beximco Pharma stock return of 5 consecutive historical years' monthly data, horizon
and frequency have been carefully chosen based on our best judgement we
developed throughout the course lessons. Constant dividend growth model is used
to calculate the stock price of Beximco Pharma based on a growth rate derived from
using payout ratio of Beximco Pharma. P/E ratio, P/B ratio, P/S ratio of 'methods of
comparables' are calculated for Beximco Pharma using most recent historical data
from financial statements. Finally, calculated price and market price of Beximco
Pharma stock differed and the reasons have been critically evaluated.
1.3 Methodology
 Tasks were divided based on each team member’s skills and convenience.
 Everything learned during course F-203 were reviewed.
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 A listed company based on regular cash dividend payment history was
selected.
 Relevant information to required valuation methods was accumulated.
 Valuation methods were exercised on company stock by assigned group
member.
 Calculation and evaluation were structured in presentable manner with proper
reference.
1.4 Limitations
 Lack of experience.
 Lack of in-depth knowledge of valuation and market.
 Constraints due to pandemic.
 Complications in choosing the appropriate data set to use.
 Assumption for proxy components.
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Chapter Two: Company overview
Figure 1: Logo of Beximco Pharmaceuticals Ltd. Source: Ahamed, 2020
Beximco Pharmaceuticals Ltd (Beximco Pharma) is one of the largest
pharmaceutical companies in Bangladesh. The company was established in 1976 in
Bangladesh and started commercial drug production in 1980.
'Life's all about staying healthy and enjoying the good things in life! However, illness
is inevitable at all stages of life'- with this viewpoint, the company is an emerging
generic drug player committed to providing access to affordable medicines. Currently
they are producing more than 500 products.
Beximco Pharma is accredited by many renowned regulatory authorities of world.
Rising cost of healthcare and medicines is a global concern. In order to reduce cost
across the value chain, pharmaceutical companies from developed markets are
partnering with Bangladeshi drug player Beximco Pharma for outsourcing their
production, as our country possesses probably the lowest labor cost. Beximco
Pharma has so far exported medicines to more than 40 countries around the world
(Rahman and Saha, 2015).
For relevance of our study, Beximco Pharma was listed in Dhaka Stock Exchange
(DSE) in 1985, later in Chittagong stock exchange of Bangladesh and in alternative
investments market (aim) of London stock exchange. Their paid-up capital amounts
Taka 4,461.1 million, number of shareholders Around 56,000; total shares
446,112,089. Shares listed with local Stock Exchanges of Bangladesh (ordinary
share) are 346,074,100 (77.58%). No. of GDRs listed on AIM in London Stock
Exchange 100,037,989 (22.42%), these shares are not traded in DSE and CSE.
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Chapter Three: Valuation Exercise
3.1 BETA
People believing in portfolio theory, find risk as diversifiable and non-diversifiable.
Diversifiable risk can be mitigated by investment portfolio (Calin et al., 2013). It is
non-diversifiable risk that actually concerns the investors as it cannot be avoided.
Most Investors consider systematic risk as the actual measurement of an asset's
risk. This systematic risk is measured by BETA.
CAPM BETA is a theoretical measure of the way how a single stock moves with
respect to the overall market, by taking correlation between the both; market
represents the unsystematic risk and beta represents the systematic risk.
Calculation of BETA for Beximco Pharma Stock;
BETA calculation formula can be stated- covariance of market return and stock
return divided by variance of market return.
To calculate the BETAB of Beximco Pharma stock we need:
> Market return index
> Beximco Pharma Stock return index
Analyst decides for which period of time and how frequent data he or she wants to
use for BETA calculation.
BETA is dependent on time horizon and data frequency (Calin et al., 2013). BETA
calculated using daily data of one year and using monthly data of five years will not
be same. These choices make BETA more appropriate and tailored when they are
right. But these choices are also the weakness of this measurement if chosen
wrongly.
Besides, analyst has to choose the stock market proxy from all available indexes in
the market while different prices like closing price, maximum and minimum prices of
the day, avg price of the day are available there.
We used our best judgement developed based on course lessons and available
study materials to make the choices of time horizon and sample frequency.
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Time horizon
We have taken 5 years market return index and Beximco Pharma stock index. Since
the longer the time horizon for data is, the more accurate calculated BETA will be.
This 5-year time horizon covers pre-pandemic boosting cycle of market in the last
two months of 2017 and half of 2018; as well as during pandemic weak performance
of market, huge fall of mid 2020; and current rapid rising index since the start of 2021
by around 13% too. Thus, business cycle is covered well by this time period and
calculation will be closer to accuracy.
Sample frequency
We have chosen monthly data for market return index and Beximco Pharma stock
return index. The reason behind making this choice is mainly avoiding data noise.
Using daily data of 5 years would have been closest to accuracy but we hoped that
from students view point, we would be able to handle monthly data frequency for 5
years better and monthly data will be representative enough for the whole month's
transactions without much deviation. We have taken adjusted closing price so that
impact of cash dividend and stock dividend are also included in calculation.
Stock market proxy
There are two secondary markets: Dhaka Stock Exchange (DSE) and Chittagong
Stock Exchange (CSE). There are three indexes associated with the DSE. The DSE
Broad Index (DSEX) includes all the companies listed on the exchange. The DSE 30
Index (DS30) tracks the 30 largest companies by market capitalization. The DSE
Shariah Index (DSES) includes DSEX stocks that comply with Shariah law. We
chose DSEX that is DSE broad index as stock market proxy since it is representative
of the trend of whole market, not just good performing companies. That way we can
get result closer to reality. We have collected all the relevant data from a website
investing.com according to our need.
We know,
BETA formula
B= (Covariance of stock return with the market return)/ Variance of market return
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BETA Calculation in Excel
BETA is a measure of stock price variability in relation to the overall stock market.
BETA is calculated by covariance of stock return and market return divided by
variance of market return.
Step 1: Download the Stock Prices & Index Data for the past 5 years
Step 2: Sort the Dates & Adjusted Closing Prices for downloaded data set. Open,
High, Low, Close & Volume are not required for BETA Calculations.
Step 3: Prepare a single sheet of Stock Prices Data & Index Data.
Step 4: Calculate the Fractional Monthly Return by any return less previous return
divided by previous return for both the stock return and market return.
Step 5: Calculate BETA – Three Methods
Either of the three methods can be used to calculate BETA – 1) Variance/Covariance
Method 2) Slope Function in excel 3) Data Regression
In our study, we used 1st method- variance/covariance method where covariance of
fractional market return and BXPH stock return and variance of fractional market
return are separately calculated using Excel formulas and finally divided to find the
BETA coefficient.
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Date Price
BXPH Stock -
return DSEX Index DSEX Index Return
21-Jun 171 -0.41% 2,172.97 -1.49%
21-May 171.7 -10.57% 2,205.81 4.50%
21-Apr 192 3.56% 2,110.91 5.84%
21-Mar 185.4 5.16% 1,994.40 -3.04%
21-Feb 176.3 -4.29% 2,056.83 -4.79%
21-Jan 184.2 -3.31% 2,160.39 10.00%
20-Dec 190.5 32.85% 1,963.96 16.39%
20-Nov 143.4 33.33% 1,687.40 0.43%
20-Oct 107.55 0.43% 1,680.13 -0.94%
20-Sep 107.09 1.99% 1,695.99 -0.21%
20-Aug 105 43.13% 1,699.54 19.63%
20-Jul 73.36 16.61% 1,420.63 5.94%
20-Jun 62.91 3.74% 1,340.98 -1.79%
20-May 60.64 -0.10% 1,365.37 2.60%
20-Apr 60.7 10.00% 1,330.83 0.00%
20-Mar 55.18 -16.85% 1,330.83 -10.82%
20-Feb 66.36 -0.96% 1,492.37 -2.08%
20-Jan 67 6.20% 1,524.04 0.71%
19-Dec 63.09 -13.47% 1,513.34 -8.15%
19-Nov 72.91 3.62% 1,647.70 1.23%
19-Oct 70.36 -7.97% 1,627.74 -7.51%
19-Sep 76.45 0.12% 1,759.96 -2.23%
19-Aug 76.36 1.94% 1,800.05 -1.52%
19-Jul 74.91 -1.32% 1,827.90 -5.25%
19-Jun 75.91 6.92% 1,929.09 2.80%
19-May 71 -3.34% 1,876.59 1.62%
19-Apr 73.45 -4.05% 1,846.67 -6.13%
19-Mar 76.55 -7.47% 1,967.21 -1.57%
19-Feb 82.73 4.60% 1,998.65 -0.46%
19-Jan 79.09 9.98% 2,007.96 6.76%
18-Dec 71.91 0.25% 1,880.78 1.03%
18-Nov 71.73 3.96% 1,861.56 -0.88%
18-Oct 69 -7.44% 1,878.03 -0.62%
18-Sep 74.55 -7.76% 1,889.70 -3.62%
18-Aug 80.82 0.80% 1,960.71 4.21%
18-Jul 80.18 -6.07% 1,881.46 -4.00%
18-Jun 85.36 -4.48% 1,959.94 -0.76%
18-May 89.36 -6.83% 1,974.99 -7.86%
18-Apr 95.91 2.63% 2,143.54 1.78%
18-Mar 93.45 -2.29% 2,106.02 -1.88%
18-Feb 95.64 -1.13% 2,146.37 -4.13%
18-Jan 96.73 2.51% 2,238.95 -1.94%
17-Dec 94.36 -0.10% 2,283.22 0.58%
17-Nov 94.45 6.66% 2,270.13 4.71%
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17-Oct 88.55 -8.80% 2,168.03 -0.44%
17-Sep 97.09 -1.48% 2,177.61 1.82%
17-Aug 98.55 -2.95% 2,138.72 -0.22%
17-Jul 101.55 -1.15% 2,143.50 2.86%
17-Jun 102.73 4.44% 2,083.80 3.92%
17-May 98.36 -2.53% 2,005.18 -0.54%
17-Apr 100.91 0.55% 2,016.13 -3.57%
17-Mar 100.36 19.60% 2,090.75 3.21%
17-Feb 83.91 5.85% 2,025.82 1.64%
17-Jan 79.27 7.92% 1,993.15 10.06%
16-Dec 73.45 -1.95% 1,810.91 2.00%
16-Nov 74.91 6.74% 1,775.33 2.42%
16-Oct 70.18 -7.11% 1,733.43 -2.55%
16-Sep 75.55 0.37% 1,778.70 2.50%
16-Aug 75.27 -4.50% 1,735.36 -1.97%
16-Jul 78.82 1,770.28
Table 1: Stock Return of Beximco Pharma and Market Return Source:
Investing.com
By putting the formula of covariance, variance and BETA in Excel, we got the value
as below;
Covariance 0.003779864
Variance of market return 0.00275131
BETA 1.373841552
Table 2: Calculation of BETA Source: Author’s Made.
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Graphical presentation of the relationship between BXPH stock return and market
return
Figure 2: Graphical representation of BXPH return VS Market return
Source: Author’s Made
Interpretation:
The beta coefficient for the entire market equals to 1. All other betas are viewed in
relation to this value. Positive betas of assets are normal which means stock price
moves in the se direction as market. Most of the beta coefficients fall between .5 to
2. BETA 0.5 means the return of a stock is half as responsive as the market that is
stock price changes .5 percent for each 1 percent change of market return.
BETA as per our calculation for BXPH stock is 1.37. So, the return of stock moves to
same direction 1.37 percent for each 1 percent change is the return of market
portfolio. BETA of BXPH stock possesses higher level of risk and volatility compared
to stock market as in higher returns in the rising market, signifying higher downside
and risk.
9
-15.00% -10.00% -5.00% 0.00% 5.00% 10.00% 15.00% 20.00% 25.00%
-20.00%
-10.00%
0.00%
10.00%
20.00%
30.00%
40.00%
50.00%
f(x) = 1.39769037876263 x + 0.0112412204419544
R² = 0.495404909649417
BXPH return VS Market return
MARKET RETURN
BXPH RETURN

Although pharmaceuticals industry is a low beta sector, that is not correlated with
economic growth swing, BXPH stock BETA is relatively higher and effected
significantly by economic changes in Bangladeshi Stock market context.
Advantages of CAPM BETA
> Single measures to provide an understanding of security volatility as compared to
the market.
> Therefore, helps an investor to make decisions of adding or deleting a security
from portfolio.
> Considers systematic risk, thereby providing the real picture of the risks involved
since unsystematic risk is mitigated by portfolio.
Disadvantages of CAPM BETA
> “Past Performance is no guarantee of future” – This rule also applies on BETA.
Using this historical beta may not hold true in the future.
> Cannot accurately measure BETA for new Stocks, unlisted or private stocks.
> BETA does not tell us whether the stock was more volatile during the bear phase
or the bull phase. It does not distinguish between upswings or downswing
movements of economy.
Levered vs. Unlevered BETA
Levered BETA or Equity BETA is the BETA that contains the effect of capital
structure, i.e., Debt and Equity both (Margaritis and Psillaki, 2010). The beta that we
calculated above is the Levered BETA.
Unlevered BETA is the BETA after removing the effects of the capital structure. As
seen above, once we remove the financial leverage effect, we will be able to
calculate Unlevered BETA.
Unlevered BETA can be calculated using the following formula –
BETA (Unlevered) = BETA (levered)/ [1+ (1-tax) * (Debt/Equity)]
Debt/equity ratio of Beximco Pharma is= Total Liabilities/ Total Equity
= (35569.55 / 15649.75) Million BDT
= 23.46%
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Here, tax rate of Beximco Pharma is 25%
BETA (levered)/ Asset BETA is 1.37
So, BETA (unlevered)/ Equity BETA
>1.37/ [1+ (1- .25) * .2346]
>1.37/ [ 1+.17595]
>1.37/ 1.17595
=1.17
Thus, unlevered BETA of Beximco Pharma stock is 1.17
Why Unlevering BETA
Unlevering' the beta removes any beneficial or detrimental effects gained by adding
debt to the firm's capital structure. Comparing companies' unlevered betas gives an
investor clarity on the composition of risk being assumed when purchasing the stock.
Since companies have different capital structures and levels of debt, an analyst can
calculate the unlevered beta to effectively compare them against each other or
against the market. This way, only the sensitivity of a firm’s assets (equity) to the
market will be factored.
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3.2 CAPM Method
The Capital Asset Pricing Model (CAPM) links non-diversifiable risk to expected
returns (Dayala, 2012). Using the beta coefficient to measure non-diversifiable risk,
the CAPM is given by
Ke = Rf + (Rm – Rf) Bi
Where Ke = required rate on asset.
Rf = risk free rate of return, commonly measured by the return on a government
treasury bill
Bi = beta coefficient of non-diversifiable risk of asset i
Rm = market return on the market portfolio of assets
The CAPM can be divided into two parts:
> The risk-free rate of return, Rf, is the required return on a risk-free asset, typically
a government issued treasury bill.
> The risk premium, (Rm – Rf), is the market risk premium as it represents the
premium that that the investor must receive for taking the average amount of risk
associated with holding the market portfolio of assets.
Hence, the market premium is adjusted for the asset's BETA to get the risk premium.
The risk premium is added to risk free rate resulting in the required return of that
asset. If other things are equal, the higher the beta, the higher the required rate of
return and vice versa. This required rate is used as discount rate in further valuation
and calculation for making investment decision.
Discount rate for Beximco Pharma using CAPM Method
To calculate an appropriate discount rate for Beximco Pharma, a risk-free rate is
needed along with beta for Beximco Pharma stock and market return rate which are
already retrieved through proper calculation method.
Risk free rate variable
To construct the security market line, we have taken 2.05% annual rate as the risk-
free rate. This is the T-bill rate that the banks can borrow from the Government of
Bangladesh.
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Hence, our chosen risk-free rate is 2.05%.
Market return rate is 5.74%.
BETA coefficient of BXPH stock is 1.37
Risk premium of BXPH stock = (Rm – Rf) Bi = (5.74% - 2.05%)*1.37 = 5.0553% that
is 5.06%
Which means investors expect a 5.06% risk premium to take average amount of risk
holding the BXPH stock.
So, required rate of return for BXPH stock, Ke (BXPH) = risk free rate + risk premium
= 2.05% + 5.06% = 7.11%
The goal of the CAPM formula is to evaluate whether a stock is fairly valued when its
risk and the time value of money are compared to its expected return. The expected
return of the CAPM formula is used to discount the expected dividends and capital
appreciation of the stock over the expected holding period. Now that we found the
required return rate of BXPH stock, we can use this 7.11% as the discount rate for
further valuation process to decide whether to buy the BXPH stock or not.
Limitations of CAPM
There are several assumptions behind the CAPM formula that have been shown not
to hold in reality. Modern financial theory rests on two assumptions: (1) securities
markets are very competitive and efficient (that is, relevant information about the
companies is quickly and universally distributed and absorbed); (2) these markets
are dominated by rational, risk-averse investors, who seek to maximize satisfaction
from returns on their investments.
But in the context of DSE, ours is a semi-efficient market and all small investors do
not have the same information, do not use same level of rationale while examining
risk associated with the asset, definitely are not same risk averse.
However, studies have provided support for the existence of the expectational
relationship described by CAPM in active market. This model is now widespread
used by corporations to assess the required return of their shareholders.
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3.3 Estimation of the constant dividend growth rate of
Beximco Pharmaceutical
Constant Dividend Growth Model
In case of buying or selling decision of stock, investors need to evaluate their stock.
There are some stock valuation methods such as Absolute Stock Valuation,
Discounted Cash Flow model (Al Mamun, 2019). The constant growth model is the
most popular of them.
The constant growth model is also known as the Gordon Growth model is a widely
used approach for stock valuation. We assume that in this model company’s future
dividend is going to rise forever at a constant rate.
Beximco Pharmaceutical’s constant dividend growth rate
calculation and interpretation
From Beximco Pharma's annual report, we got
The total dividend = 598,533,844 TAKA
Shareholders equity = 49,214,092,360 TAKA
The net income = 3514,690,000 TAKA
Payout Ratio: The payout ratio is used to determine the continuity of a firm’s
dividend program (Haque, 2015). This financial metric represents this number of
dividends are paid to shareholder relative to the total net income of a company
We know, Payout ratio = The total dividend/ Net income
0.170294918 = 598,533,844/ 351,469,000
Beximco Pharma’s payout ratio is 17%.
Interpretation: Here, the payout ratio is 17%, which means for every BDT in net
income Beximco pharmaceuticals pay 17% taka as dividend to shareholders.
Usually, a range of 0% to 35% payout ratio is considered as the standard payout
ratio of any company. But ours is 17.03% which is below the standard. Beximco
should pay the dividend more regarding its net income.
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Return on Equity: Return on equity is a financial profitability ratio that shows how
much profit a company can generate from its shareholder investment. High ROE is
always required.
Return on Equity = The net income/ Shareholders equity
= (3,514,690,000/ 49,214,092,360 )
=0.071416333
Beximco Pharma’s return on equity 7.14%.
Interpretation: 15% to 20% is considered as flag ROE for any business entity. Here,
the return on equity is 7.14% which is below the standard one. It means Beximco
should use its investor’s funds more effectively and efficiently.
Constant Growth Rate: Constant growth rate is used to find the present value of
stock and here important parameters are current stock dividend, required rate of
return and expected dividend growth rate (Calin et al., 2013). This stable growth rate
valuation helps the investor to make the right investment decisions.
Constant growth rate = (1-payout ratio) * ROE
= (1- 0.170294918) * 0.071416333
= 5.93%
Beximco Pharma’s constant growth rate is 5.93%.
Interpretation: Here, the constant dividend growth rate is 5.93% which is quite an
excellent growth rate for Beximco. From this, investors can get a positive prediction
in the case of investing in Beximco.
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3.4 Estimation of Current Stock Price of Beximco
Pharmaceuticals
The current price of a stock means the recent selling price of the stock and this is the
most dependable index of that particular security’s present value. The market price is
also known as the current price. This price usually determined by the intensity of
supply and demand.
Current stock price: Next year’s expected dividend, required rate of return on
equity and expected constant dividend growth rate are required to calculate the
current stock price.
From Beximco Pharma’s annual report,
Dividend paid this year (D0) = 1.36 TAKA
Growth rate (g) = 5.93%
Next year's expected dividend per share (D1) = D0* (1+g)
= 1.36* (1+0.0593)
= 1.440586112.
Therefore, Beximco’s next year expected dividend per share is TAKA. 1.440586112.
We know, Current Stock Price = D1/Ke - g
Where,
D1= Next year's expected dividend per share
Ke = Required rate of return on equity/ Discount rate
g = Expected constant dividend growth rate
Beximco Pharmaceutical’s Current Stock Price = D1 / Ke - g
= 1.440586112/ (7.12-5.93)
=120.5964946.
Therefore, Beximco’s current stock price is TAKA 120.5964946.
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3.5 “Method of Comparables” stock valuation approach
Method of Comparables is a relative valuation approach used to estimate value per
share of a corporation (Damodaran, 2012). The comparables approach's core idea is
that an equity's value should be comparable to other stocks in a similar class. The
most typical primary comparative technique examines market comparables for a
business and its rivals. The second comparable method examines market
transactions in which rivals, private equity firms, or other types of major, deep-
pocketed investors have bought out or purchased similar businesses or divisions.
Method of comparables includes Enterprise value to sales, price to earnings ratio,
price to book value ratio and price to free cash flow. Price to earnings ratio and price
to book value ratio is widely used for valuating a firm’s shares. We have been
assigned to analyze the financial data of a publicly listed company and evaluate the
value per share by using the comparables approach. So, after going through the
financial data of Beximco Pharmaceuticals Ltd., we have calculated the company’s
value per share by using price to earnings and price to book value method.
Price to Earnings Ratio Valuation Method
Price to earnings ratio is the commonly used method for valuation. It measures a
company’s its current market price relative to its earnings per share (Damodaran,
2012). Individual investors and analysts use this method to relatively compare what
should be the value of a company’s shares in an apples-to-apples comparison. The
underlying assumption of this valuation technique is that a firm’s future earnings are
considered to be an important determinant of what should be the value of the firm.
The two main components of this valuation method are measuring expected
earnings per share and mean price earnings ratio of the industry. These two
components assist an investor or analyst to determine the value of the shares of a
particular corporation.
17

Stock Value of Beximco Pharmaceuticals LTD. in PE multiple method:
Table 3: Calculation of Mean of Industry PE Ratio Source: Author’s made
A firm’s expected earnings per share can be calculated dividing expected net income
of the firm by total shares outstanding in the company. Mean Industry PE ratio is the
average price earnings multiple of competitor firms in the similar industry. So, after
analyzing the financial statements of Beximco Pharmaceuticals LTD., we have taken
the past 4 years data that includes the net income of the company and calculated the
average to find out the expected earnings of the firm per share. For mean industry
PE ratio, we differentiated the data regarding pharmaceutical company’s average
price earning multiple. The combination of the components assists us to determine
the company’s value per share according to the price earning multiple method.
According to the financial data of Beximco Pharmaceuticals LTD., we have figured
18
Value Per Share in Price Earning Method = 6.336798673 × 23.1
= 146.3800494 Tk.
Value Per Share in Price Earning Method = Expected Earnings of the Firm Per Share ×
Mean Industry PE ratio
Particulars Taka
Historical Year-1 Net Income 2,227,000,000
Historical Year-2 Net Income 2,533,000,000
Historical Year-3 Net Income 3,033,000,000
Historical Year-4 Net Income 3,514,690,000
Total 11,307,690,000
Expected Net Income 2826922500
Total Outstanding share 446,112,090
Expected EPS 6.336798673
Mean of Industry PE Ratio 23.1

out that expected eps of the company is 6.33 and mean industry price earning
multiple is 23.1. So, value per share of the company in PE multiple method is 146.38
Tk.
Advantage
Price earning multiple method of valuation is the easiest way of figuring out what
should be a company’s per share value. Most of the investors and analysts use this
method for valuation because they want to justify whether they are paying a fair
value for the particular company’s shares or not. The components of the methods
are easy to access compared to Dividend Discounting Method (DDM) and Free-
Cash-Flow method (FCF). Moreover, Similar competing companies are grouped
together within the same industry for comparison makes this valuation method little
bit advantageous for the investors to take decisions.
Limitations
But there are some issues attached to this valuation method as well. The underlying
assumption related to the method is that the company’s growth in future earnings will
be the same as to the industry. But normally this kind of assumptions are proved
wrong as growth in future earnings are related to many parameters like company’s
performance within the industry and so on. Company’s misleading presentation of
net income makes it disadvantageous for the investors to take rational decisions.
Moreover, there is a vague definition of industry which makes it complex to
determine industry pe ratio. As, we have taken the financial information from the
annual report of Beximco Pharmaceutical LTD., the data related net income was not
fully justified. Because there might be the chance that the company’s management
can manipulate financial information to show better company performance to the
external parties. So, we weren’t sure about the presented financial statements was
exactly shown in the right way or not. In the same way, the data that was collected
regarding mean industry pe ratio has some noticeable issues as well. Industry
categorization can be possible in both broader and narrower way. Broder
categorization provide less accurate information than narrower way. So, there was
some confusion arising of how industry was categorized and PE ratio was
calculated.
19

Price to Book Value Ratio Valuation Method
Price to book value ratio is also a relative valuation method that compares a firm’s
market capitalization to its book value (Dayala, 2012). It is also widely use because
of its easy way of valuation. This method reflects the equity value relative to its book
value of the equity. There are two components that are important for measuring price
to book value ratio. One is market value per share of the firm and other is book value
per share.
Valuation of Beximco Pharmaceuticals LTD. in Price to Book Value Ratio:
Table 4: Valuation of Beximco Pharmaceuticals LTD Source: Investing.com
20
Price to Book Value Ratio = 94.4335
109.0154988
= 0.866239214
Price to Book Value Ratio = Market Value Per Share
Book Value Per Share
Particulars Taka
Total Assets 65,537,506,398
Intangible Asset 580,960,330
Total Liabilities 16,323,414,038
Total Outstanding share 446,112,090
Market Value Per share 94.4335
Book Value per share 109.0154988

The market value of the shares is the trading price of the particular company’s share
in the market. Book value per share indicates that what will be the price of shares in
the company if it immediately liquidates its assets after paying off liabilities. So, it can
be calculated through deducting intangible assets and liabilities from the company’s
assets and dividing the equity amount by total outstanding shares in the firm. In most
of the cases, ratio 1 is considered to be the ideal benchmark. So, any value under
the benchmark represents that the company is undervalued and its shares hold more
value than its trading price. We had taken the market value of the shares of Beximco
Pharmaceuticals LTD. which is 94.4335 and calculated the book value per share
from taking the necessary data from the financial statements of the company and it
is 109.0154988. So, Price to Book Value ratio of the company is .86. This ratio is
indicating that, in this method, the stock price of Beximco Pharmaceuticals is
undervalued and investors have suitable buying option.
Advantage
Like Price earning multiple method, P/B ratio is widely use because of its simplicity.
Since the financial data are easily available, investors and analysts use this valuation
method to determine the particular firm’s share are undervalued or overvalued.
Limitations
Price to book value ratio has some limitations. It can’t be rationally utilized in
companies having fewer tangible assets. The most noticeable issues of this
valuation model are getting negative book value due to series of negative earnings.
As a result, this method becomes less useful for the investors and analysts who
wants to invest in stocks by relative valuation.
Price to Sales Ratio
Price to sales ratio is another relative valuation approach used by investors and
analysts to determine stock value. This ratio indicates how much investors are ready
to pay for company’s per dollar of sales. The two components that are used for
calculating this ratio are market value per share and sales per share.
21
Price to Book Value Ratio = Market Value Per Share
Sales Per Share

Table 5: Valuation of Beximco Pharmaceuticals LTD Source: Investing.com
Market value of Beximco Pharmaceuticals LTD. has been taken for measurement
and sales per share has been determined dividing annual sales by total outstanding
share of the particular company. The ideal benchmark of this ratio is also considered
to be 1. Any value higher than this indicates that investors are paying higher price
compared to the company’s sales. So, that means, a company’s shares are
overvalued. We went through the financial statements of Beximco Pharmaceuticals
LTD. for getting the related data for the ratio calculations and we found that the
market value and sales per share is 94.4335 and 63.36524079 respectively. So,
Price to Sales ratio is 1.49. This ratio is indicating that the share price of the
particular company is overvalued. Here, existing investors have suitable selling
option.
Advantage
22
Price to Book Value Ratio = 94.4335
63.36524079
= 1.490304445
Particulars Taka
Quarter-1 Revenue ended 31 March,21 7,362,000,000
Quarter-2 Revenue ended 31 December, 20 7,474,000,000
Quarter-3 Revenue ended 30 September, 20 6,926,000,000
Quarter-4 Revenue ended 30 June, 20 6,506,000,000
Recent 4 Quarterly Total Sales 28,268,000,000
Total Outstanding share 446,112,090
Market Value Per share 94.4335
Sales per Share 63.36524079

In the same sense of price to book value ratio, price to sales ratio is easy to compute
because information regarding the ratio is easily available. Investors and analysts
find this valuation method simple and use it for relative comparison.
Limitations
Limitations of the method price to sales ratio are also noticeable. Comparison
between different industries are very complicated with this valuation method. The
idea of revenue recognition is also vague. Credit sales can inflate the price to sales
ratio as well. This ratio only focuses on sales items and completely avoid the cost
structure of a particular company.
23

3.6 Critical analysis of the difference between calculated
price and market price of Beximco Pharma stock
We have calculated the current stock price of Beximco pharmaceuticals by using a
Constant dividend growth model. The current and calculated stock price of the firm is
shown below;
Particulars Price
Current Stock Price 176.60 (June 22, 2021)
Calculated Stock Price 120.60
Table 6: The current and calculated stock price of Beximco Pharma
Source: Investing.com
From the above table, it can be seen that the current stock price of the firm differs
from what we have calculated here. There can be various reasons behind the
difference between these two prices. Broadly speaking, they can be divided into two
types;
Assumption of the model
We have calculated the current stock price of Beximco pharmaceuticals by using a
constant dividend growth model which is also known as the Gordon growth model.
However, this model is not self-contained and it requires a lot of assumption to be
substantive to provide an accurate result.
1. The main limitation of this model lies in its assumption of constant growth in
dividends per share. It is very rare for companies like Beximco to show
constant growth in their dividends due to the business cycles and unexpected
financial difficulties or successes. But this model has forced us to stake at a
constant dividend rate which is not quite rationale for a giant pharmaceutical
company like Beximco.
2. Another issue occurs with the relationship between the discount factor and
the growth rate used in the model. This model cannot show the price of a
share if the required rate of return is less than the growth rate of dividends per
24

share because in that case, the result will be a negative value, rendering the
model worthless. Also, if the required rate of return is the same as the growth
rate, the value per share approaches infinity. The reality is that for companies
like Beximco, dividends grow over time and at some point, they may even
exceed the cost of capital. So, we have to stick to a constant growth rate that
is below the required rate of return while calculating the current price of the
stock. This might be another big reason for the difference between calculated
price and current market price. From the above discussion, it has become
obvious that the model can be best applied only to those companies that have
a constant dividend payment policy. But for company like Beximco, there is a
high probability that the model will fail to provide accurate result.
3. The model doesn’t consider non-dividend factors. There are many non-
dividend factors like customer retention, intangible asset ownership, brand
loyalty which can change the market price of the share. Many research
studies found that non-financial information have a strong impact on the
market price of a share. As per the study "Share valuation and corporate
equity policy” conducted by Auerbach, a famous American financial analyst,
non-financial information disclosure has a great impact on the share price. But
While calculating the current price of the share, we only considered the
financial information. This might be one of the reasons for the difference
between our calculated price and market price of Beximco’s stock
4. The model is very sensitive to the quality of information involved. The model’s
success or failure depends on the inputs provided to it. When information is
accurate, the valuation may be accurate. When assumptions used by
investors are mostly accurate, they will find the model to be working properly.
But as all the data of this study have been collected from the secondary
sources, we are not fully sure about the validity and reliability of these data.
For this reason, the model might fail to give us accurate share price of our
selected company.
Our Limitation
In addition to the assumption of dividend growth model, the difference might also
appear for our own limitations. Some of them are going to be addressed below;
25

1. Lack of available and reliable data – It is said that a lack of data or of
reliable data will likely require to limit the scope of analysis or it can be a
significant obstacle in finding a trend and a meaningful relationship. While
going through the different secondary sources, we have found some
inconsistency. For example, for a single date, we have found different market
price in different sources in some cases. That surely raises the question of
validity of the secondary data. Again, for the current pandemic situation, it was
not possible for us to collect all the data directly from the company. This lack
of validity and reliability of data might be one of the biggest reasons behind
the difference between the calculated and current market price of share.
2. Lack of prior research experience on the topic: Mark Mahaney, a famous
investment analyst said “having prior research experience forms the basis of
your literature review and helps lay a foundation for understanding the
research problem you are investigating” Since we are new to the practical
valuation of stock, we cannot totally ignore our lack of experience. Hence, the
difference could also come from our lacking in the relevant work experience.
.
26

Chapter Four: Conclusion
This study has been insightful as to exactly what processes, information a person
may need to evaluate stock and company as well as understand the market
conditions. Choosing the appropriate dataset for components of the methods based
on which calculations are done is not as simple as being knowledgeable about what
information is required.
This study has also given us perspective about the reasons why calculation and
actual market data differ. We must note that the historical dataset-based assumption
of prospect does not fully reflect the difference. There are far more long historical
data available that make the market data or professionals calculation closer to
accuracy. We have tried to use as justified data as we could from our position and
limitations.
As discussed in the report the importance of valuation and hence understanding a
company's asset worth from different views and methods is definite. And so, despite
the limitations of the report, it is of value to us as student of finance major and
potential investors.
27

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29

Appendix
ASSETS June 30, 2020
Non-Current Assets 53,098,713,225
Property, Plant and Equipment- Carrying Value 33,244,656,330
Right-of-use Assets 237,100,169
Intangible Assets 580,960,330
Investment in Subsidiaries 2,145,185,900
Investment in Associates 29,325,720
Other Investments 3,751,551
Current Assets 12,438,793,173
Inventories 5,528,438,165
Spares & Supplies 735,703,950
Accounts Receivable 3,213,666,345
Cash and Cash Equivalents 615,944,841
Loans, Advances and Deposits 2,345,039,872
TOTAL ASSETS 65,537,506,398
EQUITY AND LIABILITIES
Shareholders’ Equity 49,214,092,360
Issued Share Capital 20,913,297,675
Share Premium 5,269,474,690
Excess of Issue Price over Face Value of GDRs 1,689,636,958
Capital Reserve on Merger 294,950,950
Revaluation Surplus 1,125,767,451
30

Unrealized Gain/(Loss) 926,375
Retained Earnings 19,920,038,261
Non-Current Liabilities 5,692,973,418
Long Term Borrowings-Net of Current Maturity 1,641,924,046
Liability for Gratuity and WPPF & Welfare Funds 2,015,304,583
Deferred Tax Liability 2,035,744,789
Current Liabilities and Provisions 10,630,440,620
Short Term Borrowings 6,987,530,622
Long Term Borrowings-Current Maturity 1,421,497,401
Creditors and Other Payables 1,332,058,976
Accrued Expenses 609,401,272
Dividend Payable 16,803,657
Income Tax Payable 263,148,692
TOTAL EQUITY AND LIABILITIES 65,537,506,398
31