Analysis of the company BSRM steels Ltd.

Analysis of the company BSRM steels Ltd.

Submitted To:
Khairul Alam Siddique
Lecturer, Department of Finance,
University of Dhaka.
Submitted By:
Pikashu Podder
Roll: 23-044
Section: A, Batch: 23rd

Date of submission: February 12, 2020

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Letter of Transmittal

February 12, 2020

Khairul Alam Siddique

Lecturer,
Department of Finance,
University of Dhaka

Sir,
As you instructed me on the topic “Analysis of the company BSRM steels Ltd.”. I worked
on the provided instruction on the basis of the course Analysis of financial investment.
Here, I try to give all the information on the company’s valuation and assumption and
techniques. I include all of the relative calculation of the intrinsic value. With incorporating
the global economy, I give futuristic look for the investors. In this report I also show industry
analysis and economic value that by the firm. This report gives a realistic view for the
investors and proper decision that they make. It is pleasure for me to work with this topic.
Thank you for giving me the opportunity to think analytically and to work on this exciting
topic.

Sincerely yours,
Pikashu Podder
ID-23-044
Section: A,
Department of Finance,
University of Dhaka

ii
 Executive summery
Analysis of financial investment incorporates the valuation of company securities, index,
expected risk and return and technical analysis. The knowledge of valuation of a company
with broaden perspective are used in investing. Here is the report I have tried to show all of
the instruction which is provided by our course teacher.
In this report, I tried overall representation of relative analysis and valuation of BSRM steels
Ltd. the intrinsic value of share and other calculations are shown in the appendix part. I have
provided with all required calculation and assumption to convey all valuation. After
analysing macroeconomic try to give futuristic look of the company. Finally, I have showed
that the economy related with company. I embedded all of key assumptions to make the
report fulfil.

As I tried to cover all information in this report, I tried to take information from company
annual report, different web sites and newspapers. I tried to represent all information in a
proper way. As a result, I also showed to determine whether the firm is offloading to sell.

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Table of Contents
Executive summery...........................................................................................................................iii
Introduction.......................................................................................................................................1
Chapter 01.........................................................................................................................................1
1.1 Origin of the report:..................................................................................................................2
1.2 Methodology:.............................................................................................................................2
1.3 Objective of the study:...............................................................................................................2
1.4 Limitations:................................................................................................................................2
Chapter: 02........................................................................................................................................3
Analysis and valuation.......................................................................................................................3
1.1 Intrinsic value of the share BSRM steels Limited:............................................................................4
1.2 Calculation of WACC:.......................................................................................................................5
1.3 The top down approach:.................................................................................................................5
1.4 Dividend discount model:..............................................................................................................12
1.5 Economic value addition:...............................................................................................................12
Conclusion.......................................................................................................................................13
Appendix.............................................................................................................................................14

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Introduction
Chapter 01

1
1.1 Origin of the report:
This report is a requisite of our course “F-307: Analysis of Financial Investment”. Our
distinguished course instructor Assistant professor Khairul Alam Siddique assigned us to
prepare the report. This report is the outcome of the fact.

1.2 Methodology:
All the information in this report surrounds the topic. We have collected the required
information from the annual reports of the companies and websites.

1.3 Objective of the study:

The prime objective of the report is to provide theoretical and practical knowledge on
analysis, valuation and free cash flows etc.

1.4 Limitations:
We have faced some limitation or problem in the meantime of making the report.
Lack of proper knowledge.
 Lack of time.

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 Chapter: 02
Analysis and valuation

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1.1 Intrinsic value of the share BSRM steels Limited:
The assumptions based on BSRM steels Ltd are following:
1. Perpetual growth rate is 5%.
2. Capital expenditures will be financed by long-term loan.
3. Long-term loan will be repaid by three equal-yearly instalments.
4. Risk-free rate is 6%.
5. For maintaining a no-arbitrage scenario, the return from investment was considered to be
equal to the interest rate.
6. To normalize the affairs it was assumed that BSRM's investment will increase by 10% rate
each year.

For forecasting of income statement, I calculate the sales growth rate for 2016 to 2019 and
the average sales growth rate is 0.04515.
The cost of goods sold in proportion to sales and the average proportion is 0.88257.
So, the intrinsic value of share based on free-cash flow model is 19.413337.

For calculation of WACC, I detain risk free rate, market return identified by average market
return changes of DSE. For calculation of beta, I divided covariance of BSRM steels Ltd. by
variance of market return.
The share price is undervalued compared to market share price 36.70.

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1.2 Calculation of WACC:

1.3 The top down approach:

Steel industry is an established and growing industry in Bangladesh. Predominantly based in
the port city of Chittagong, the industry has emerged as a major contributor to the national
economy. According to the experts, the growth of steel industry in Bangladesh is mainly
induced by the rapid expansion of the country's shipbuilding and real estate sector, as well as
the major investments in various infrastructure projects throughout the country.

Global economy:
As a world’s leading steel company with its goal firmly set on becoming a 100-year
enterprise, POSCO is no stranger to rapid changes sweeping across the globe – in trades,
environments as well as in the steel industry itself.
Although growth in steel demand remains positive, the YoY growth rate is indeed slowing
down. In the recent publication of the April 2019 Short Range Outlook (SRO), the World
Steel Association (worldsteel) projects the 2019 global steel demand will reach 1,735 Million
tons – a 1.3% YoY increase. In 2020, demand is projected to grow by 1% to reach 1,752
Million tons.
Undeniably, when compared to the 2018 growth rate of 2.1%, the demand growth across the
globe is steadily diminishing.
It can be expected that this change, could cause a negative evolution in various fields, such as
trade conflicts, and deterioration of confidence for companies and consumers. For the steel
sector specifically, there were extra downturns with decreasing market prices in 2018 which
was accompanied by a substantial increase in crude steel production by almost 5%. The
growth of steel consumption, on the contrary, slowed down in numerous large economies.
Despite the efforts by some economies like closing down a limited number of capacity, this

5
causes a continuation of overcapacity at a high level. This remains the key challenge of the
steel sector worldwide. As long as this structural imbalance between steel capacity and
production persists, we are looking at the picture of a struggling sector facing high risks
going forward.

Industry analysis:
In Bangladesh, there are many impact on the steel industry:
 Government support in order to remove the non-tariff barriers
 Areal state boom in Urban areas and an inflow of remittance f in rural areas
 Governments very big projects like ''Padma multipurpose Bridge'' and ''Metro Rail''
 Calculated average growth rate of 12.2% over the last 10 years
 Statistics says growth rate will continue at 10% up to vision of 2021
From PESTL analysis,
 Currently the demand of steel is around 4mn tons per annum
 Combined capacity of the industry is around 8 mn tons
 may pressurize profit margins
 As our economy keeps growing and size of the industry grows, more and more
companies will be able to invest in this industry and afford newer technologies.

Industry prospectus
ADP & Infrastructure Development: Accelerating of government’s big infrastructure
projects, initiation of Padma Bridge, Metro Rail projects and revival of the local real estate
industry will undoubtedly boost-up the steel consumption locally.
Mitigate Import Dependency: Local industry can have a strategic capacity expansion over the
steel importers by which they can maximize their presence in the local markets.
Possibility of Export: Local steel industry has good export potential after meeting local
demand. Since steel demand is derived from other sectors like construction building roads,
consumer durables and infrastructure, its fortune depends on the growth of these user
industries.

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Port Facilities: The deep draft vessels cannot enter into the Chittagong port as well as the
Monglaport & are lighted at the outer anchorage in the Bay that causes higher freight rates
&& low productivity of our sea borne trade. If the proposed deep sea project will come true
then the freight cost, discipline carrying procedure will develop which ultimately will bring
benefits to this industry.
FDI Attracts: Some foreign investor jointly invested in some big steel plant project in
Bangladesh. It enhances the productivity at good quality which is to contribute to GDP.
However uneven completion from big players, price fall in international steel market,
dependency on imported raw materials & decline in domestic demand for construction
materials due to bearish vibe in the real estate sector are forcing the small mills owners out of
the market.

Industry challenges
Sourcing of Raw materials: Steel making companies mostly depend on raw materials to
produce steel. We have no iron ore in our country so it’s our major drawback to import raw
materials from other country. As steel market price is variable, sourcing of raw material is
important. Shortage or price hike of raw materials will affect the company’s operation.
Interest Rate Risk: Interest rate is the risk that company faces due to unfavourable movement
in the interest rates. Changes in the Government’s monetary policy, along with increased
demand for loans/investments trend to increase the interest rate. Such rises in interest rates
mostly affect companies having floating rate loans or companies investing in debt securities.
Availability of power & Gas: Steel industries require huge and uninterrupted power supply.
Any unfavourable changes in power related regulations may affect the company’s business.
Companies also require for heating billets and accordingly shortage of gas supply will affect
the operation of the company.
Project Inefficiency: It’s an important factor of our steel industry. If a project smoothly run,
then the suppliers of product (steel makers) are benefitted because of fair working capital
projection &consumption. But if the project not runs well according their time proposal then
delay of a project may affect the company’s financial instrument.
Default Risk: Transaction on credit is a normal phenomenon in the business world. The
company may incur loss due to the default as well as the failure to pay timely by the
customers.
Under industry life cycle theory, the steel industry in middle position of mature growth and
shakeout that it rapidly increasing demand improving profitability with oligopoly
competitors.
Porter’s five forces of competitive edge:
Competitive rivalry within the industry: According to the 2014's data, there are 3 major
players in the steel industry in this country – BSRM, KSRM and AKS. Together they meet
more than 50%of the market demand. And the rest of the products are supplied by the other

7
medium and small size companies (Big Steel Companies displace small ones, 2014). Besides
facing competition from the big players in pricing and costing, the decreasing level of
demand is creating extra sets of problems for the small companies to survive in the market. In
a way, the market is becoming monopolistic as most of the construction companies go only to
the market leader to buy steels. So BSRM is now facing a bit of competition from the KSRM
and AKS, so they need to evolve with the market to maintain its dominant position in the
market.
Threat of new entry: To enter in this industry one has to bear a huge initial investment to
build steel mills. Also, the market is already dominated by the 3 big players. So, it would not
be profitable for a new company to enter in this industry. Even the existing smaller
companies are trying to leave this industry. So, it is very unlike that BSRM steel is going to
face competition from the new players in the market.
Threat of Substitution: There are lots of company in this industry who produces the almost
exact same product. Also, there is low switching cost. Hence the customer can change from
one company to other easily. So, the threat of substitution is significant for BSRM in the
industry.
Bargaining power of Buyers: Construction companies in this country often goes with the
steelmaking company who has a good brand image as they think it provides better quality.
And only a few companies have the good image. And the price and quality in the market do
vary from another.

Company analysis:
BSRM is the market leader in the national steel industry.Net sales for 2018-19 were 756,820
MT with value in Taka 61,060.15 (in million). The Chart shows sales growth of BSRM Steels
Limited for the last seven years.

Products and services: BSRM provides best quality products like Deformed Bar “Xtreme
500W” Yield Strength 72,500 psi (min), Grade-75 Wires, Angles, Channels, Spring Steel
Flats, Low Carbon Wire Rods, etc. Company also provides good services for his customers
such as free product delivery service.
Current Business Strategy of BSRM
BSRM has developed its strategy for the future growth of the company. By applying the
market oriented strategy BSRM try to attract more customers. At present, BSRM has
launched new products in the market named ‘BSRM Xtreme 500W’. The company already
booked many construction material supply orders from the corporate customers. Price

8
reduction strategy is another strategy they have already started to apply. The company has
already appointed more than 100 dealers and agents all over the country to supply their
products and services to their customers. By providing high quality products and customer
services BSRM try to increase their sales and profits. This is the current business strategy of
BSRM.
Current Business Plan of BSRM
For increase the production capacity by 33% from the present capacity of 375,000 tons/year
to 500,000 tons/year BSRM has taken some actions. The next plan of BSRM is, they will
spend about Tk. 650,000,000 for the expansion of the company. By retained earnings and
partially by term loans from the banks, BSRM will finance their business target. For the un-
interrupted raw material supply BSRM group has established a new company named ‘BSRM
Iron & Steel Co Limited (BISCO). BSRM Steels Ltd. will acquire 95% stake in BISCO for
strategic reasons and increase competitive position of our Company.
Competitive Position of BSRM
Various models and strategies can be used to review the competitive position of a company
such as Boston Consulting Group Matrix, Industry Life Cycle and Strategy clock etc. I am
going to analyse the competitive position of BSRM by using Boston Consulting Group
Matrix (BCG) and Industry Life Cycle.
BCG matrix:
The above chart showing four different level of competitive position.
Stars – High market share high market growth.
Question mark – Low market share high market growth.
Cash cows – High market share low market growth.
Dogs – Low market share low market growth.
According to this Boston Consulting Group Matrix analysis BSRM is in the position of star
because it has about 50% market share in the steel industry. BSRM is number one steel
industry in Bangladesh. BSRM earned net profit of Tk. 574.08 million in 2009. Gross Profit
also increases Tk. 271,922,738 from the previous year. So it shows the high market share and
high growth rate.
Industry life cycle theory:
An industry start its journey or beginning from the introduction phase of the life cycle.
Perhaps a fresh and unique product offering has been developed and patented, thus beginning
a new industry. Significant amount of capital required in the growth stage of an industry like
the introduction stage. The industry is experiencing more product standardization at this
stage. When the industry begins its expansion into maturity stage the curve looks flat. This
indicates slow growth of the industry. Some experts place another stage between growth and
maturity, called expansion. Declines are almost expected in an industry. If product
improvement has not kept speed with other competing products and if new innovations or

9
technological changes have caused the industry to become obsolete, sales suffer and the life
cycle experiences a decline. In this stage, sales are falling at very fast rate.

According to industry life cycle, the competitive position of BSRM is in maturity stage.
BSRM has already passed its introduction and growth level. Now it has a brand name and
value in Bangladeshi steel market. BSRM has very strong customer backup. Now in this
mature stage, it has to introduce new strategy to increase its growth.
According to the previous analysis of the existing position of BSRM I can suggest a possible
alternative strategy under ANSOFF matrix. ANSOFF matrix is a popular method among the
organization’s business practices. ANSOFF matrix (Product market expansion grid)
represents four potential options which are shown in the figure below.
ANSOFF Matrix (Product-Market Expansion Grid)
Market penetration
Market penetration is the name given to a growth strategy where the business focuses on
selling existing products into existing markets.
Market development
Market development is the name given to a growth strategy where the business seeks to sell
its existing products into new markets.
Product development
Product development is the name given to a growth strategy where a business aims to
introduce new products into existing markets.
Diversification
Diversification is the name given to the growth strategy where a business markets new
products in new markets. This is an inherently more risk strategy because the business is
moving into markets in which it has little or no experience.
Here two alternative strategies I can mention. They are Market development and product
development. Let us evaluate both strategies related to the BSRM.
Market Development
Suitability
BSRM can increase their market coverage through the market development strategy. By
applying market development BSRM can increase its sales growth rate. If they increase their
sales obviously they can profit. There are some areas in Bangladesh which are in under
development process. Many constructions activities are running all over the country. So, it
can be a good chance for BSRM to increase their market growth.
According to BSRM’s vision and mission statement it has mentioned to provide high quality
steel products to the customer and become market leader in steel industry sector. Market

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development can support BSRM to achieve their mission and vision. So this is a suitable
strategy to BSRM.
Acceptability
BSRM is the leading steel industry in Bangladesh and they have brand name. People
undoubtedly believe their products. BSRM always honestly work for their customers,
shareholders. So, in capital market it has a positive reaction. Currently government spending
large amount of money in the industry sector for the development of current economical
condition. So, this is an acceptable strategy.
Feasibility
According to the cash flow statement BSRM has good financial ability in market. In the date
of 31st March, 2008 BSRM’s share money deposit was BDT 6,015,000 and Liability against
import was BDT 169,597,618. It has the largest work force and experience management
team. BSRM has good annual balance and cash flow statement. Their stock market shares are
also strong valued. BSRM has financial capability to research on the market. So this strategy
is also feasible.
Product development
Suitability
Bangladesh Steel Re-Rolling Mills Ltd. currently produces steel related products and
services. It has good market share as mentioned. BSRM can use product development
strategy for their market growth. People’s experience and perceptions are always changing.
So customers prefer to experience new product. Generally they like new products with high
value and low price. BSRM can produce new products and can improve their customer
relation facilities. Also they can improve their current product by using new technological
instruments and machines. It has already create and maintain a well-known brand name so,
that will help to marketing the new product. Also BSRM created brand and customer loyalty
so this strategy is appropriate to BSRM.
Acceptability
Using the industry life cycle analysis it is clear that BSRM coming under the maturity stage.
Therefore, product development is acceptable in this stage. It will help to achieve the profit
growth. Through the product development it can ensure the profit and success. In the steel
business field changes are important to progress in the market. For an example TESCO has
introduced TESCO lemon drinks, TESCO sugar, etc. Introduce lemon drinks and sugar is
product development strategy for the company. It is not a completely new product it is a
modified product. By Using these types of strategy TESCO try to increase their market
growth. So this strategy is also acceptable for BSRM.
Feasibility
Through the financial statement BSRM has established their financial resource. They have
strong financial background and stability in the market. Optimum level of financial resources
helps BSRM to support the product development strategy. As a steel industry BSRM has the
financial, human, technology and physical resource. Favourable and good cash flow

11
statement shown in the financial statement. Therefore this strategy is also feasible to Sri
Lanka Telecom.
According to the evaluation of the alternative strategy analysis I can recommend that product
development strategy is the most suitable strategy than the market development. There are
many opportunities for BSRM to enter into the new market. BSRM already has the brand
name. So it is the chance for BSRM to implement the product development strategy.

New Organizational Structure

Under the every divisional CEO the structure will be same for GM to the bottom line. It is a
common practice that when an organization changes their strategy it requires to change of the
organizational structure. There are four major types of organizational structure used which
are divisional structure, functional structure, matrix structure, strategic business unit
structure. According to the new strategy of BSRM I have proposed a new organizational
structure. The new structure is the divisional form of organizational structure. Product
development is the new strategy I have recommended for BSRM. So, I have restructured the
existing structure. I have added six divisional CEO for the company according to my new
strategy product development. One CEO cannot control all of the part of Bangladesh so I
have introduced the others. I have included another manager who is product research and
development manager under the Sr. Manager Marketing & Sales. In this structure product
research and development manager is an important post. His job will be the product research
and find out the market opportunity which BSRM can implement into their product
development strategy.

1.4 Dividend discount model:

The value of share in infinite time period is 90.51/-
Under present value operating free cash flow, the value is 2.52988
Under present value of free cash flow to equity is 3.28335

In relative valuation, I calculate the dividend pay-out ratio dividend divided by earning which
is 0.543478. As a result the price equity ratio is 19.9

1.5 Economic value addition:

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2017-18 gives a positive value but in 2018-2019 the EVA is negative. So in recent year there
is no value addition compared to other years.

Based on above mentioned analysis, I should think of offloading the stock from my portfolio.
As forecasting cash flow is 19.17333 of BSRM Steels Ltd, the value lower than the last
trading market price 36.50 per share.

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 Conclusion
As an investor’s perspective it can easily understand from the valuation of free cash flow
model of BSRM steels Ltd, the company’ s share price is undervalued from the market
trading price based on my forecasting. The other industry and technical analysis gives
positive understanding about the company. Moreover, from the dividend discount model and
operating valuation the share price also lower than market trading share price. So, as an
investor company performance better but share price undervalued.

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 Appendix
Proforma Income statement

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 Proforma balance sheet
2019 2020 2021 2022 2023
Total Current Assets 39014.32 48781.03 47898.66 47417.71 47297.06
Cash and Short Term Investments 1409.86 1550.846 1705.931 1876.524 2064.176
Cash 513.19 561.6865 614.7658 672.8612 736.4466
Cash & Equivalents -
Short Term Investments 896.67 957.4642 1022.38 1091.698 1165.715
Total Receivables, Net 18637.65 19066.32 19504.84 19953.45 20412.38
Accounts Receivables - Trade, Net 9690.14 10323.29 10997.82 11716.42 12481.97
Total Inventory 14990.1 12741.59 10830.35 9205.795 7824.926
Prepaid Expenses 3976.72 3579.843 3222.575 2900.962 2611.446
Other Current Assets, Total -
Total Assets 65808.18 101879.6 114105.1 114251.5 114749.4
Property/Plant/Equipment, Total - Net 23288.35 23288.35 23288.35 23288.35 23288.35
Property/Plant/Equipment, Total - Gross 27382.47 29738.23 42204.79 42204.79 42204.79
Accumulated Depreciation, Total -4094.12 -3691.26 -3328.04 -3000.56 -2705.3
Goodwill, Net -
Intangibles, Net 48.5 43.86001 39.66392 35.86927 32.43766
Long Term Investments 3457.01 3719.362 4001.625 4305.308 4632.038
Note Receivable - Long Term -
Other Long Term Assets, Total -
Other Assets, Total -
Total Current Liabilities 33888.18 34343.17 34880.03 35504.08 36221.11
Accounts Payable 3361.61 3477.754 3597.91 3722.218 3850.82
Payable/Accrued -
Accrued Expenses 107.38 113.7154 120.4246 127.5297 135.0539
Notes Payable/Short Term Debt 20457.42 19978.72 19511.21 19054.65 18608.77
Current Port. of LT Debt/Capital Leases 2294.04 2500.274 2725.049 2970.031 3237.037
Other Current liabilities, Total 7667.73 8272.714 8925.431 9629.648 10389.43
Total Liabilities 44910.97 58031.92 63395.91 70421.59 79586.67
Total Long Term Debt 9067.95 9972.931 10968.23 12062.86 13266.73
Long Term Debt 9067.95 12151.05 16282.41 21818.43 29236.7
Capital Lease Obligations -
Deferred Income Tax 1790.4 1389.35 1078.136 836.6335 649.2276
Minority Interest -
Other Liabilities, Total 164.44 175.4081 187.1079 199.588 212.9005
Total Equity 20897.22 23362.46 26296.96 29806.31 34020.83
Redeemable Preferred Stock, Total -
Preferred Stock - Non Redeemable, Net -
Common Stock, Total 3759.53 3931.341 4111.003 4298.876 4495.334
Additional Paid-In Capital -
Retained Earnings (Accumulated Deficit) 9196.76 9616.132 10054.63 10513.12 10992.52
Treasury Stock - Common -
ESOP Debt Guarantee -
Unrealized Gain (Loss) 7940.93 9814.989 12131.33 14994.32 18532.98
Other Equity, Total -
Total Liabilities & Shareholders' Equity 65808.18 81394.38 89692.87 100227.9 113607.5
Total Common Shares Outstanding 375.95 375.95 341.77 375.95 16
Calculation of WACC:

Dividend discount model:

Infinite period

Dividen
d
Growth
required rate of return
D1= 2.52525

value 90.51

Present value of operationg fee

cash flow
n= 5 years.
Vj= 951.10973
Per share 2.5298836
Present value of free cash flow to
equity

Vj= 1234.3763
Per share 3.2833522

Relative valuation:

Relative
17
valuation
Earning 4.6

Dividend payout ratio= 0.543478261

Price equity 19.9

ratio=

18