INTRODUCTION

Keya Cosmetics Ltd. incorporated as a Private Ltd Company in the year 1996. The next year it started commercial production. After two years it converted into Public Ltd Company. Keya Cosmetics Ltd (KCL) listed in Dhaka Stock Exchange on 16th Sep 2001. It also listed in Chittagong Stock Exchange in the same year. KCL manufactures and sells cosmetics and toiletries products and its segmented in the ‘Pharmaceuticals and Chemicals’ business segment.

CORPORATE GOAL

The mission of Keya Cosmetics Ltd. is to befit the consumers with continuous improved products so that the consumers feel better.

The key objective of Keya Cosmetics is “No compromise with quality”. As stated in the annual reports- KEYA is passionate to serve high quality Cosmetics & Toiletries, Detergent powders, Glycerin Products and soap noodles, the major raw materials of beauty and laundry soap within an affordable price. KEYA is committed to serve their best towards the stakeholders. But what measures high quality products and what is the extent to their best service is not clearly stated in the annual reports.

Keya Cosmetics Ltd nurtures a philosophy of continuous improvement of its products by product development, quality control and standardization. KEYA claims all its products are derived through rigorous research and each of them is incorporated with globally recognized quality norms. The export outlets of KCL are India, Bhutan, Saudi-Arabia, Nepal & Kuwait.

Keya Cosmetics Ltd is an ISO 9001: 2000 certified company; it also has UKAS Quality Management certification.

Corporate Social Responsibility of the firm:

KCL is dedicated to sustainability and corporate social responsibility; as stated in its annual reports. It generates sales and profits while behaving in a socially responsible manner. KEYA believes that effective environmental protection together with social responsibility is in the long run essential to entrepreneurial success. Finding the right balance between economic, ecological and social aims has been a major priority of KCL. KEYA has aligned its research and development work to constantly improving its brands and technologies and their ability t make towards the people more befitting.

KCL’s social commitment is focused by taking part in social activities on the areas of education and research, Environment and Nature Health, social needs, sports and culture. As per the annual reports, some CSR activities are as follows:

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Environment and Nature

KCL invested BDT 1,383,500 for the plantation campaign named “Green Motherland”.

Health Compensation and Social Needs:

KCL provided various medical aided programs towards the poor people for medical treatment tk 140,000 as well as to compensate death of two workers tk 144,000. The company also took part in the donation to Elders Welfare Association for tk 100000.

Education Sports and Culture

The company has contributed tk 231,000 to Saidpur Union High School, Rajanagar to take part into introducing Science and Agricultural dept. An additional donation of 47,000 was also made.

Employment Practices

-Optimum benefit and safety

-Professional training programs

-Improved working condition

-Proper remuneration

VALUATION

Book Value

The book value is computed as total asset less total liabilities and intangible assets if any. The book value of Keya Cosmetics Ltd is:

Total assets - total liabilities –intangible assets

= 2,850,460,324 - 1,319,156,169

= BDT 1,531,304,155

Market Value

The market value is determined by market capitalization plus the market value of debt on the

valuation date.

The Market value of Keya Cosmetics Ltd. is:

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Market Capitalization (on July 01, 2011) + Value of Debt

= (No. of shares outstanding × Market price per share) + Value of Debt

= (61,152,474 × 71.9) + 1,022,547,699

= BDT 5,419,410,580

Deriving the price of Keya Cosmetics using price-earning multiples of the industry

Keya Cosmetics Ltd (KCL) belongs to the “Pharmaceuticals & Chemicals” segment of the stock market. This industry has total 20 companies. By using the price-earnings multiples of the industry, the price of KCL is as follows:

 ACI Ltd

ACI Formulation Ltd

Ambee Pharma

Beximco PharmaBeximco

SyntheticsKeya

Cosmetics

Price 269.60 133.20 397.40 80.40 43.20 274.85EPS 4.4 4.94 1.92 5.44 14.2 4.39P/E ratio 61.27 26.96 206.98 14.78 3.04 62.61

Here, the average of P/E ratios of five different companies belonging to the industry is taken as reference P/E for KCL and the EPS of current year is used to determine the price. Here the over-valuation of other companies may have impact on the price of the share KCL besides if 19 companies were considered other than 5 then there could be significant change in the price.

Computation of FCF and discount the FCFs at the cost of equity to find the stock of KCL:

Assumptions:

1. Sales growth rate is almost 30% (average of last 5 yrs)2. COGS 78% (average of last 5 yrs)3. Operating Expense 20.22%4. 3.5% terminal growth rate5. Income tax rate 27.5%

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The discount factor

To discount forecasted FCFs the cost of equity is taken as discount rate.

Cost of Equity: Ke =Rf + (Rm - Rf) β

Where,

Ke = Cost of EquityRf = Risk free rate (Rate of 20 yrs. Treasury Bond) = 11.5%Rm = Calculated market return using last 60 month DSE general index = 44.95%β = Calculated beta for Keya Cosmetics Ltd. = 0.6662 (Annex-1)Ke = 11.5% + (44.95% – 11.5%) *0.6662 = 33.78%

The enterprise value is found as BDT 718,867,832. The firm has outstanding shares of 61,152,474 with a face value of BDT 10. The calculated equity value per share is BDT 10.72.

The calculation detail is given in Annex-3.

FINANCIAL STATEMENTS AND ANALYSIS

Firms’ behavior with the analysis of structure, conduct and performance of the industry:

As stated before, KCL belongs to the ‘Pharmaceuticals & Chemicals’ segment in the whole industry. There are total twenty companies in this segment. And the competition is immense among these companies. Besides there are lots of foreign imported products distributed via various companies which makes the business more competitive.

From Porter’s five forces (Threat of new entrant, power of buyer, power of supplier, threat of substitute and intra industry rivalry) framework the following analysis can be stated in case of Keya Cosmetics Ltd.

The intra industry rivalry is fierce. Keya cosmetics Ltd has to compete with companies like Reckitt Benckiser (Bd.) Ltd, Square Pharmaceuticals, Kohinoor Chemicals, Marico BD Ltd etc. The storage costs are high in case of the cosmetics besides there are seasonal products also. The power of buyer is also significant in case of this industry. As there are multiple products of various companies the customers can switch to another product without less cost. Besides, the companies have to be extra careful about the quality of the products as the consumers are driven vastly by the foreign branded products. As the products are directly consumed by the

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buyers hence the buyers seek for substitute in case of any deficiency of supply or scarcity. The quality deterioration is also a major reason for threat of substitution. KCL imports 40% of its raw materials and thus it faces difficulty if there is short supply. Thus there is potential threat in business if the suppliers increase price of their products. The switching between foreign suppliers is also costly if there is any due reason to do so. Thus the power of supplier is significant for this industry. There are already a number of companies in the industry where Keya Cosmetics is doing business. Hence the threat of new entry in this industry is relatively low as compared to other threats.

Keya cosmetics Ltd follow a cost leadership strategy for competitive positioning. In 25 th Dec 2010 the board of directors decided to amalgamate Keya Detergent Ltd and Keya Soap Chemicals with Keya cosmetics Ltd to strengthen its financial position, increase profitability and attend turnover growth.

Ratios to evaluate firm’s financial condition of recent five years:

Liquidity

Current Ratio (CR): Current ratio is the indicator of the company’s ability to pay current

liabilities. It measures the ratio of current asset the company has over current liabilities.

CurrentRatio= CurrentAssetCurrentLiabilities

The current ratios of Keya Cosmetics Ltd. (KCL) of last five years are given below:

2006-07 2007-08 2008-09 2009-10 2010-110.00

0.20

0.40

0.60

0.80

1.00

1.20

1.40

1.60

1.80

2.00

1.551.83

1.211.60

1.18

Current Ratio

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Explanation: The current ratio of KCL has been showing a fluctuating trend over 5 years. It was

highest in 2007-08 (1.83:1) and lowest in 2010-11 (1.18:1). It indicates, previously KCL used to

maintain conservative approach of keeping more current assets then liabilities and later years

they are moving towards more aggressive one. It is due to mainly increase in short term funded

facilities and cash credit from banks. Over the period CA does not increase in line with the

liabilities.

Quick Ratio (QR): Quick ratio measure the liquid asset company has to pay its current liabilities.

2006-07 2007-08 2008-09 2009-10 2010-110.00

0.20

0.40

0.60

0.80

1.00

1.20

0.87 0.900.71

0.99

0.56

Quick Ratio

Explanation: it is observed that the quick ratio of KCL has similar fluctuating trend over the years. It was lowest in 2010-11 (0.56:1) like CR but it was highest in 2009-10 (0.99:1). It is quite low compared to CR ratio as KCL maintains good quantity of inventory due to raw materials crisis. Overall, company’s quick ratio needs to be improved.

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QuickRatio=CurrentAsset−InventoryCurrentLiabilities

Efficiency and activity

Average collection period: A/R Turnover Ratio measures how many times the receivable

converted into cash in a year. The inverse of this ratio times the number of days in a year yields

the average collection period which calculates the average time that a receivable is

outstanding.

AccountsRe ceivableTurnoverRatio (A /CTR )= NetCreditSalesAverageAccountsRe ceivables

AverageCollectionPeriod=360A /CTR

2006-07 2007-08 2008-09 2009-10 2010-110

10

20

30

40

50

60

70

36

47

10

6357

Average Collection Period

Explanation: Here, from the average collection trend of receivables we found that, on the year

2008-9 there was a massive improvement in the receivables collection ( 10 days) due to the

receivables from export and distributors was significantly low. Other than that, it maintained a

fluctuating trend in other years. But over all their highest collection period was 63 days which is

also reasonable compare to their product lines as they distribute it on credit to the dealers of

various parts of Bangladesh. During 2010-11, it fell slightly that means they are working to

improve their average collection period.

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Inventory Conversion Period: It is usually computed as cost of sales divided by inventory. The

inverse of this ratio times the number of days in a year yields the inventory collection period

which indicates the average time that inventory takes to sold out.

InventoryTurnoverRatio( ITR )= COGSAverageInventory

InventoryConversionPeriod=360ITR

  2006-07 2007-08 2008-09 2009-10 2010-11Inventory Conversion

Period 99.52 118.08 67.45 107.20 154.28

2006-07 2007-08 2008-09 2009-10 2010-110

20

40

60

80

100

120

140

160

180

100118

67

107

154

Inventory Conversion Period

Explanation: The scenario in respect of inventory conversion period of Keya Cosmetics is quite

high. Its seen that, the ITR is very low. And the inventory conversion period is high ranging from

67 days to 154 days. Though during 2008-9 there were vast inventory items on transit coming

from abroad and hence inventory conversion period was only 67 days but in other years it was

above 100 days or 3 months and it was highest in 2010-11 (154 days). It means the company

takes a long period to sell its inventory after it is created. So, company has huge amount of

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unsold inventory. As it has an increasing trend, which is a bad signal that management has

failed to reduce the conversion period. KCL must increase their sales either by enhancing credit

limit or through implementing efficient marketing strategy.

Total Asset Turnover (TAT):

Total Asset Turnover ratio indicates how effectively the firm uses its total asset.

TotalAssetTurnover= NetSalesTotalAssets

The Total Asset Turnover (TAT) of KCL of last five years is given below:

2006-07 2007-08 2008-09 2009-10 2010-11

1.15 1.20 1.21 0.95 0.85

2006-07 2007-08 2008-09 2009-10 2010-110.00

0.20

0.40

0.60

0.80

1.00

1.20

1.40

1.15 1.20 1.210.95 0.85

Total Asset Turnover (TAT)

Explanation: From the above bar chart its seen that the TAT was at an increasing rate upto

2008-2009 but in 2010 & in 2011 its in a decreasing rate. It happened due to the amalgamation

process the asset quantity increased than that of sales.

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Operating Cycle & Cash Conversion Cycle:

Operating cycle is the total time required to convert the inventory into cash.

Operating Cycle = Average Collection Period + Inventory Conversion Period

Cash Conversion Cycle = Operating Cycle - Payment Deferral Period

2006-07 2007-08 2008-09 2009-10 2010-11OC 136 165 78 170 211

CCC 126 159 72 166 189

The Operating Cycle (OC) and Cash Conversion Cycle (CCC) of KCL of last five years are like

2006-07 2007-08 2008-09 2009-10 2010-110

50

100

150

200

250

OC and CCC

OCCCC

Axis Title

Explanation: It is observed that cash conversion cycle of KCL is at a fluctuating trend. On 2008-

09 it was the lowest as the ACP was the lowest then. From the graph it is also found that the

Operating Cycle is slightly higher but close to CCC. Here the firm has to pay substantially earlier

than receiving cash where the management has huge scope of improvement.

SOLVENCY

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360Re

COGS

leslatedPayabOtherSalesyableAccountsPaderralPerioPaymentDef

Debt Equity Ratio:

Debt Equity Ratio indicates the relative proportion of shareholders' equity and debt used to

finance a company's assets.

DebtEquityRatio=ShortTermDebt+LongTermDebtShareholder ' sEquity

The Debt Equity Ratio of KCL of last five years is given below:

2006-07 2007-08 2008-09 2009-10 2010-11 -

0.10

0.20

0.30

0.40

0.50

0.60

0.70

0.80

0.71 0.60 0.64

0.50 0.67

Debt Equity Ratio

Explanation: The debt equity ratio is at a fluctuating trend. A high debt/equity ratio generally

means that the company has been aggressive in financing its growth with debt. This gives rise

to additional interest expense. For KCL the long term debt on 2009-10 was lowest as the

company had the minimum liability to the leasing companies.

Debt to Total Asset Ratio:

This ratio determines how much of the company's assets have been financed by debt.

DebtToTotalAssetRatio=ShortTermDebt+LongTermDebtTotalAssets

The Debt to Total Asset Ratio of KCL of last five years is given below:

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2006-07 2007-08 2008-09 2009-10 2010-11

0.37 0.34 0.35 0.3 0.36

2006-07 2007-08 2008-09 2009-10 2010-11 -

0.05

0.10

0.15

0.20

0.25

0.30

0.35

0.40

0.37 0.34 0.35 0.30

0.36

Debt to Total Asset Ratio

Explanation: The firm practices almost a same debt to total asset ratio. The debt portion has a

constant relation to the amount of asset firm has. The lowest value to be found was 0.3 and the

highest is 0.37.

Debt Service Coverage Ratio: Debt Service Coverage Ratio (DSCR) refers to the amount of cash

flow available to meet annual interest payments on debt.

DebtServiceCoverageRatio=EarningsBeforeInterest∧Tax(EBIT )

InterestExpenses

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The Debt Service Coverage Ratio of KCL of last 5 yrs is as follows

2006-07 2007-08 2008-09 2009-10 2010-11 -

0.50

1.00

1.50

2.00

2.50

3.00

3.50

4.00

4.50

2.44 2.91

2.11

4.29

2.83

Debt Service Coverage Ratio

Explanation: A DSCR over 1 means that the company generates sufficient cash flow to pay its

debt obligations. A DSCR below 1.0 indicates that there is not enough cash flow to cover loan

payments. From the bar chart it is clear that KCL has generated sufficient cast to cover its debt

over last 5 yrs span.

PROFITABILITY

Operating Profit Margin (OPM):

From operating profit margin its derived how much a firm makes before interest and taxes on

each year.

OPM=OperatingPr ofitNetSales

The OPM of KCL for last five years is as follows:

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2006-07 2007-08 2008-09 2009-10 2010-110.00%

2.00%

4.00%

6.00%

8.00%

10.00%

12.00%

14.00%

16.00%

8.99% 9.04%

1.36%

8.04%

14.66%Operating Profit Margin

Explanation: From the above observation it is seen that KCL has OPM almost same for the years

of 2007, 2008 and 2010. But the OPM was the lowest on 2009. Increased cost of production

and operating expenses has created huge negative impact on OPM of 2009. Besides, the firm

was stumbling to make its position steady in the industry by new product development and

brand transformation programs. There was an increased rate in the commodity, food, utility

and other essential items during this year. The global recession deemed to have a rub-off effect

on the industries of Bangladesh as well.

Net Profit Margin (NPM):

It is an overall measure of the company’s profitability. NPM excludes the Income Tax and other

Non-operating expenses from the operating profit.

NPM=NetIncomeNetSales

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2006-07 2007-08 2008-09 2009-10 2010-110.00%

2.00%

4.00%

6.00%

8.00%

10.00%

12.00%

14.00%

16.00%

8.10% 7.82% 7.19%

14.71%11.14%

Net Profit Margin

Explanation: NPM shows almost similar trend over the years. Only on 2010 the NPM is highest

due to healthy amount of capital gain. Due to amalgamation of Keya detergent & keya soap

chemicals with KCL; the NPM increased on 2011 as compared to 2007, 08 & 09.

Return on Assets (ROA):

An indicator of how profitable a company is relative to its total assets. ROA gives an idea as to

how efficient management is at using its assets to generate earnings.

ROA= NetIncomeTotalAssets

The ROA of KCL for last five years is as follows:

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2006-07 2007-08 2008-09 2009-10 2010-110.00%

2.00%

4.00%

6.00%

8.00%

10.00%

12.00%

14.00%

16.00%

9.32% 9.37%8.68%

14.04%

9.42%

Return on Assets (ROA)

Explanation: The ROA of KCL is almost continuous except 2009-10. This is because the net profit

after tax was more as compared to the previous years. The NPM is more in 2011 but as the

asset has also increased, hence the ratio is less than ROA of 2010.

Return on Equity (ROE):

It measures a firm's efficiency at generating profits from every unit of shareholders' equity.

ROE= NetIncomeCommonEquity

Return on Equity of KCL of last five years is given below:

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2006-07 2007-08 2008-09 2009-10 2010-110.00%

5.00%

10.00%

15.00%

20.00%

25.00%

17.91% 16.46% 15.73%

22.98%

17.53%

Return on Equity (ROE)

Explanation: Similar to other profitability ratios ROE of KCL is almost same except 2009-10. The

increased net profit after tax resulted higher ROE. NPM was more in 2011 but the shareholders

equity was simultaneously increased in the same year.

MARKET

Book Value to Market Value (BV/MV):

The Book value to Market value ratio attempts to identify undervalued or overvalued securities

by taking the book value of the company and dividing by its market value.

BV /MV= BookValueOfFirmMarketValueOfFirm

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The BV/MV ratio is given below:

2006-07 2007-08 2008-09 2009-10 2010-110.00

0.05

0.10

0.15

0.20

0.25

0.30

0.35

0.40

0.45

0.50

0.47

0.230.32 0.31 0.28

BV/MV

Explanation: The stock is overvalued over the last five years. The recent overvaluation of the

entire stock market is reflected here.

Price/Earnings (P/E) Ratio:

The P/E ratio (price-to-earnings ratio) of a stock is a measure of the price paid for a share

relative to the annual net income or profit earned by the firm per share.

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The P/E ratio of KCL for last five years is as follows:

2006-07 2007-08 2008-09 2009-10 2010-110.00

5.00

10.00

15.00

20.00

25.00

8.01

22.58

15.77

11.96

16.38

P/E Ratio

Explanation: The P/E ratio is fluctuating over the last five years. Though the EPS varied only

from 3 to 5.26 but there was vigorous fluctuation in the market value of stock. Hence a sine

wave is observed over the last five years of P/E ratio.

TOBIN Q:

The Q ratio is calculated as the market value of a company divided by the replacement value of

the firm's assets.

TobinQ= MarketValueofAssetsRe placementCostofAssets

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=MarketValueofEquity+BookvalueofDebt+ShortTermDebtTotalValueofAssets

2006-07 2007-08 2008-09 2009-10 2010-110.00

0.50

1.00

1.50

2.00

2.50

1.12

2.46

1.72

1.981.90

TOBIN Q

Explanation: Last three years Tobin Q is almost the same. A ‘Q’ value of greater than 1.0

suggests that the market is overvaluing the company in consideration to its performance and

growth potential. On the other hand, a below 1.0 ‘Q’ value suggests that the market may be

undervaluing the company. Though there is fluctuation it is evident from the chart that the

investors always perceived over valuation of the firm.

Five factor Du Pont Analysis

In five factor Du Pont analysis the Return on Equity (ROE) is decomposed as follows:

ROE = [EBITSales

× SalesTotalAssets

− InterestExpenseTotalAssets ]× TotalAssets

CommonEquity×[1− IncomeTax

NetBeforeTax ]

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Components of ROE 2006-07 2007-08 2008-09 2009-10 2010-11

EBIT/Sales0.09 0.09 0.01 0.08 0.15

Sales/Total Assets1.15 1.20 1.21 0.95 0.85

Interest Expense/ Total Assets 0.05 0.04 0.04 0.04 0.04Total Assets/Common Equity 1.92 1.76 1.81 1.64 1.86(1-Income Tax/Net Before Tax) 0.70 0.73 0.73 0.73 0.73ROE

17.91% 16.46% 15.73% 22.98% 17.53%

Course of actions to increase ROE:

Increase EBIT

Lower interest expense

Increase net profit before tax

COST OF CAPITAL & CAPITAL STRUCTURE

Cost of Equity, Cost of Debt & Cost of Capital(Hurdle rate)

Cost of Equity:

Ke = Rf + (Rm - Rf) β

Where,

Ke = Cost of Equity

Rf = Risk free rate (Rate of 20yrs. Treasury Bond) = 11.5%

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Rm = Calculated market return using last 60 month DSE general index = 44.95%

β = Calculated beta for KCL (Annex – 1) = 0.6662

Therefore, cost of equity is:

Ke = 11.5% + (44.95% – 11.5%) X 0.6662

= 33.78%

Cost of debt:

Kd = Rf + Risk Premium

Credit Rating by crislbd.com as on June 30, 2011:

Rating Risk Premium

A 4.0%

Therefore, cost of Debt is:

Kd = 11.5% + 4%

= 15.5%

Cost of Capital:

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

Where,

WACC= Weighted Average Cost of Capital

We = Weight of equity

Wd = Weight of debt

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Tc = Corporate Tax rate = 27.5%

Debt = BDT 1022547699

Market Capitalization = BDT 4,396,862,881

Therefore, We = 0.811 and Wd = 0.189

And, current cost of capital of Keya CosmeticsLimited is:

WACC = 0.811*33.78% + 0.189*16.5 %*( 1-.275)

= 29.53%

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DIVIDEND POLICY

The last five years dividend pattern of Keya Cosmetics Limited is as follows:

Dividend per share

2006-07 2007-08 2008-09 2009-10 2010-11

Cash Dividend

30% 30% 15% 15% -

Stock bonus - - - - 21%

The mentioned parameters are calculated to assess the Dividend policy of the firm (details

provided in Annex – 5):

Parameters 2006-07 2007-08 2008-09 2009-10 2010-11

DPS 30% C 30%C 15%C 15%C 21%B

EPS 3.40 3.14 3.01 5.26 4.39

DPR 0.88 0.95 0.50 0.29 0.48

OCF per share -1.85 2.77 8.10 0.46 2.50

FCF per share 11.18 6.20 16.32 7.13 14.33

P/E Ratio 8.01 22.58 15.77 11.96 16.38

P/E multiple of the industry 14.93 28.06 27.92 30.2 30.18

BV per share 18.96 19.11 19.11 22.87 25.04

Reserve and RE per share

5.13

5.27

6.78

10.54

1.94

Sustainable Growth Rate (G) 2.09% 0.76% 7.89% 16.42% 9.14%

Inflation rate 7.22% 9.93% 6.66% 7.31% 8.27%

GDP growth rate 6.43% 6.19% 5.74% 6.07% 6.66%

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Few points regarding the stylized facts of the dividend behavior of Keya Cosmetics Ltd are as

follows:

The dividend per share (DPS) was reduced to 15% on 2008-09 as the operating profit

was low but the management still kept DPS to 15% on the next year as to pay dividend

at a satisfactory level within the limit of operating income.

For the long term financial benefits of the shareholders, the management of the

company declared 21% stock dividend on 2010-2011. A regular performing company’s

general shareholders have the expectation to have stock dividend and such stock

dividend relates to continuous and sustainable growth of operating positive result of the

company.

To avoid any negative impression, the management generally try not to decrease the

dividend. As its observed on 2007-08, that the dividend remains 30% cash whereas the

EPS has lowered from 3.4 to 3.14.

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