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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 16
th
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.
KCLs 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 Pharma
Beximco
Synthetics
Keya
Cosmetics
Price
269.60 133.20 397.40 80.40 43.20 274.85
EPS
4.4 4.94 1.92 5.44 14.2 4.39
P/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 rate
5. 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: K
e
=R
f
+ (R
m
- R
f
)
Where,
K
e
= Cost of Equity
R
f
= Risk free rate (Rate of 20 yrs. Treasury Bond)

= 11.5%

R
m
=

Calculated market return using last 60 month DSE general index = 44.95%
= Calculated beta for Keya Cosmetics Ltd. = 0.6662 (Annex-1)
K
e
= 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 Porters 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 firms financial condition of recent five years:
Liquidity
Current Ratio (CR): Current ratio is the indicator of the companys ability to pay current
liabilities. It measures the ratio of current asset the company has over current liabilities.
bilities CurrentLia
et CurrentAss
io CurrentRat =
The current ratios of Keya Cosmetics Ltd. (KCL) of last five years are given below:

1.55
1.83
1.21
1.60
1.18
0.00
0.20
0.40
0.60
0.80
1.00
1.20
1.40
1.60
1.80
2.00
2006-07 2007-08 2008-09 2009-10 2010-11
Current Ratio
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bilities CurrentLia
Inventory et CurrentAss
QuickRatio

=
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.



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, companys quick ratio needs to be improved.


0.87
0.90
0.71
0.99
0.56
0.00
0.20
0.40
0.60
0.80
1.00
1.20
2006-07 2007-08 2008-09 2009-10 2010-11
Quick Ratio
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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.
ceivables ounts AverageAcc
ales NetCreditS
CTR A o rnoverRati ceivableTu Accounts
Re
) / ( Re =

CTR A
iod lectionPer AverageCol
/
360
=



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.

36
47
10
63
57
0
10
20
30
40
50
60
70
2006-07 2007-08 2008-09 2009-10 2010-11
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.
entory AverageInv
COGS
ITR io urnoverRat InventoryT = ) (
ITR
eriod onversionP InventoryC
360
=

2006-07 2007-08 2008-09 2009-10 2010-11
Inventory Conversion
Period 99.52 118.08 67.45 107.20 154.28



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
100
118
67
107
154
0
20
40
60
80
100
120
140
160
180
2006-07 2007-08 2008-09 2009-10 2010-11
Inventory Conversion Period
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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.
s TotalAsset
NetSales
Turnover TotalAsset =
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

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.

1.15
1.20 1.21
0.95
0.85
0.00
0.20
0.40
0.60
0.80
1.00
1.20
1.40
2006-07 2007-08 2008-09 2009-10 2010-11
Total Asset Turnover
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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
360
Re

+
=
COGS
les latedPayab OtherSales yable AccountsPa
d erralPerio PaymentDef

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

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.


0
50
100
150
200
250
2006-07 2007-08 2008-09 2009-10 2010-11
A
x
i
s

T
i
t
l
e

OC and CCC
OC
CCC
2006-07 2007-08 2008-09 2009-10 2010-11
OC 136 165 78 170 211
CCC 126 159 72 166 189
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SOLVENCY
Debt Equity Ratio:
Debt Equity Ratio indicates the relative proportion of shareholders' equity and debt used to
finance a company's assets.
sEquity r Shareholde
bt LongTermDe ebt ShortTermD
Ratio DebtEquity
'
+
=
The Debt Equity Ratio of KCL of last five years is given below:

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.
s TotalAsset
bt LongTermDe ebt ShortTermD
o lAssetRati DebtToTota
+
=
The Debt to Total Asset Ratio of KCL of last five years is given below:
0.71
0.60
0.64
0.50
0.67
-
0.10
0.20
0.30
0.40
0.50
0.60
0.70
0.80
2006-07 2007-08 2008-09 2009-10 2010-11
Debt Equity Ratio
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2006-07 2007-08 2008-09 2009-10 2010-11
0.37 0.34 0.35 0.3 0.36




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.
penses InterestEx
EBIT Tax st foreIntere EarningsBe
atio eCoverageR DebtServic
) ( &
=
0.37
0.34
0.35
0.30
0.36
-
0.05
0.10
0.15
0.20
0.25
0.30
0.35
0.40
2006-07 2007-08 2008-09 2009-10 2010-11
Debt to Total Asset Ratio
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The Debt Service Coverage Ratio of KCL of last 5 yrs is as follows


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.
NetSales
ofit Operating
OPM
Pr
=
The OPM of KCL for last five years is as follows:
-
0.50
1.00
1.50
2.00
2.50
3.00
3.50
4.00
4.50
2006-07 2007-08 2008-09 2009-10 2010-11
2.44
2.91
2.11
4.29
2.83
Debt Service Coverage Ratio
14 | P a g e



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 companys profitability. NPM excludes the Income Tax and other
Non-operating expenses from the operating profit.
NetSales
NetIncome
NPM =

8.99%
9.04%
1.36%
8.04%
14.66%
0.00%
2.00%
4.00%
6.00%
8.00%
10.00%
12.00%
14.00%
16.00%
2006-07 2007-08 2008-09 2009-10 2010-11
Operating Profit Margin
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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.
s TotalAsset
NetIncome
ROA=

The ROA of KCL for last five years is as follows:
8.10%
7.82%
7.19%
14.71%
11.14%
0.00%
2.00%
4.00%
6.00%
8.00%
10.00%
12.00%
14.00%
16.00%
2006-07 2007-08 2008-09 2009-10 2010-11
Net Profit Margin
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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.
ty CommonEqui
NetIncome
ROE =
Return on Equity of KCL of last five years is given below:
9.32% 9.37%
8.68%
14.04%
9.42%
0.00%
2.00%
4.00%
6.00%
8.00%
10.00%
12.00%
14.00%
16.00%
2006-07 2007-08 2008-09 2009-10 2010-11
Return on Assets (ROA)
17 | P a g e



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.

eOfFirm MarketValu
fFirm BookValueO
MV BV = /


17.91%
16.46%
15.73%
22.98%
17.53%
0.00%
5.00%
10.00%
15.00%
20.00%
25.00%
2006-07 2007-08 2008-09 2009-10 2010-11
Return on Equity (ROE)
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The BV/MV ratio is given below:

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.






0.47
0.23
0.32
0.31
0.28
0.00
0.05
0.10
0.15
0.20
0.25
0.30
0.35
0.40
0.45
0.50
2006-07 2007-08 2008-09 2009-10 2010-11
BV/MV
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The P/E ratio of KCL for last five years is as follows:

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.
s ostofAsset placementC
eofAssets MarketValu
TobinQ
Re
=

0.00
5.00
10.00
15.00
20.00
25.00
2006-07 2007-08 2008-09 2009-10 2010-11
8.01
22.58
15.77
11.96
16.38
P/E Ratio
ofAssets TotalValue
ebt ShortTermD fDebt Bookvalueo eofEquity MarketValu + +
=
20 | P a g e



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 =
(

ax NetBeforeT
IncomeTax
ty CommonEqui
s TotalAsset
s TotalAsset
pense InterestEx
s TotalAsset
Sales
Sales
EBIT
1


0.00
0.50
1.00
1.50
2.00
2.50
2006-07 2007-08 2008-09 2009-10 2010-11
1.12
2.46
1.72
1.98
1.90
TOBIN Q
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Components of ROE 2006-07 2007-08 2008-09 2009-10 2010-11
EBIT/Sales
0.09 0.09 0.01 0.08 0.15
Sales/Total Assets
1.15 1.20 1.21 0.95 0.85
Interest Expense/ Total
Assets 0.05 0.04 0.04 0.04 0.04
Total 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 0.73
ROE
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:
K
e
= R
f
+ (R
m
- R
f
)
Where,
K
e
= Cost of Equity
R
f
= Risk free rate (Rate of 20yrs. Treasury Bond)

= 11.5%

R
m
=

Calculated market return using last 60 month DSE general index = 44.95%
22 | P a g e

= Calculated beta for KCL (Annex 1) = 0.6662
Therefore, cost of equity is:
K
e
= 11.5% + (44.95% 11.5%) X 0.6662
= 33.78%

Cost of debt:
K
d
= R
f
+ Risk Premium
Credit Rating by crislbd.com as on June 30, 2011:
Rating Risk Premium
A 4.0%
Therefore, cost of Debt is:
K
d
= 11.5% + 4%
= 15.5%
Cost of Capital:
WACC= We* K
e
+W
d
*K
d
*(1-T
c
)
Where,
WACC= Weighted Average Cost of Capital
W
e
= Weight of equity
W
d
= Weight of debt
T
c
= Corporate Tax rate = 27.5%
23 | P a g e

Debt = BDT 1022547699
Market Capitalization = BDT 4,396,862,881
Therefore, W
e
= 0.811 and W
d
= 0.189
And, current cost of capital of Keya CosmeticsLimited is:
WACC = 0.811*33.78% + 0.189*16.5 %*( 1-.275)
= 29.53%
















24 | P a g e

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%


25 | P a g e


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 companys
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.