Chapter 1: Introduction & Methodology

1. Introduction:

HEIDELBERGCEMENT BANGLADESH LTD. (HCBL) has been our selected company, which is the leading cement company in Bangladesh under the umbrella of Heidelbergcement group of Germany. HCBL has its uniqueness in operations, marketing & sales, logistics, IT, HR, Finance and various social responsibilities.

2. Objective:

Our basic objective would be to analyze whether the market price is going to reveal good or bad news in terms of Market Value (MV) and Book Value (BV). As long as MV>BV, it would reveal good news and vice versa.

3. Methodology:

a) Statistical Techniques: For simplicity of understanding, we relied on column and line chart, as well as scatter chart to some extent.

b) Nature of data: We have used empirical data for our report. Those are secondary in

nature.

c) Sources of data: We have mainly taken data from annual reports.

d) Time period consideration & justification: For our calculation purpose, we have taken data from 2002 till 2007. In order to analyze a company’s financial performance, atleast 5-year trend has to be taken care, beside that for calculating cash flow and some of the ratios, we had to take data a year before, i.e. 2002.

e) Nature of analysis: Our analysis, especially with the ratio part considered both time series and cross section. In addition, benchmark was of consideration for the current, quick and debt ratio analysis.

f) Standard of comparison: We have chosen Lafarge Surma Cement Ltd as our standard of comparison, another promising company in the cement industry of Bangladesh. Because, it also has almost similar goodwill, state-of-art production and marketing plants, unique performance and high growth firm, which is very close opponent of Heidelberg.

4. Limitation: Unpublished annual report of 2008 (latest data) of Heidelberg Difficulty in revealing HCBL and Lafarge annual reports Lack of Time Lack of technical know-how in higher-level statistical techniques, i.e., regression

Chapter 2: Analysis & Interpretation

1. Analysis of Balance Sheet:Reconstruction of Balance Sheet Based on Book Value & Market Value of Share

Year on Focus: 2007 & 2006

In 2007, Market Price of Heidelberg was BDT 1205 whereas the book value of the company was BDT 506. In 2006, Market Price of Heidelberg was BDT 647 whereas the book value of the company was BDT 431.Hence, the balance sheet of Heidelberg in 2007 & 2006 is reconstructed below to justify the market price.

Original & Reconstructed Balance Sheet: 2007

Assets Amount in BDT'000Liabilities Amount in BDT'000Current Assets 2,201,946 Debt 2,295,851 Fixed Assets Equity 2,856,808 Tangible 2,946,142 IntangibleSoftware 4,571 GoodwillTotal Assets 5,152,659 Total Liability & Equity 5,152,659 Table: Balance Sheet of 2007 Based on Book Value

Balance Sheet Based on Book Value of Share:2007

Assets Amount in BDT'000Liabilities Amount in BDT'000Current Assets 2,201,946 Debt 2,157,951 Fixed Assets Equity 6,808,684 Tangible 3,825,477 IntangibleSoftware 4,571 Goodwill 2,934,641 Total Assets 8,966,635 Total Liability & Equity 8,966,635 Table: Balance Sheet of 2007 Based on Market Value

Balance Sheet Based on Market Value of Share:2007

Calculations: 2007

Original & Reconstructed Balance Sheet: 2006

Assets Amount in BDT'000Liabilities Amount in BDT'000Current Assets 1,417,403 Debt 1,817,095 Fixed Assets Equity 2,321,367 Tangible 2,718,169 IntangibleSoftware 2,890 GoodwillTotal Assets 4,138,462 Total Liability & Equity 4,138,462 Table: Balance Sheet of 2006 Based on Book Value

Balance Sheet Based on Book Value of Share:2006

Assets Amount in BDT'000Liabilities Amount in BDT'000Current Assets 1,417,403 Debt 1,679,195 Fixed Assets Equity 3,481,695 Tangible 3,576,057 IntangibleSoftware 2,890 Goodwill 164,540 Total Assets 5,160,890 Total Liability & Equity 5,160,890 Table: Balance Sheet of 2006 Based on Market Value

Balance Sheet Based on Market Value of Share:2006

Calculations: 2006

The changes made in the reconstruction are, a reduction of debt from reported figure, increase in tangible asset as well as introduction of Goodwill as an intangible asset.

Reduction of Debt in Reconstructed Balance Sheet:

The debt of reconstructed balance sheet is reduced by BDT137, 900 thousand in both 2006 & 2007. This is the amount due to BCIC by the company in the form of supplier’s credit, Quasi Equity loan & ADP interest excess provision. At the time of transfer of 51% shares held by BCIC to TK Oil Refinery Ltd during June, 1993, the company issued 13.5% debenture to pay this amount. The minority shareholders (49%) filed a case with sub judge court, against issue of debentures. The judgment was in favor of the minority shareholders which means the entire liability will not e payable to BCIC. The government appealed to high court and the judgment was again in favor of the minority shareholders. The government again filed an appeal in the Appellate Division of Supreme Court and the case has already been heard & awaiting judgment. The assumption to reduce debt by this amount is the Appellate division of Supreme Court will also be in favor of the minority share holders & this amount will not be payable to BCIC by the company.

Increase of Tangible Assets in Reconstructed Balance Sheet:

The tangible asset of the reconstructed balance sheet is increased by BDT 879,335 thousand in 2007 & increased by BDT 857,888 in 2006. The tangible fixed assets are reported in the original balance sheet at historical cost or revaluation (made in 1988). Looking back from 2006-2007 there is no doubt that these tangible assets especially the Land portion has appreciated. Land & Building consists of 35% of fixed asset in 2007. Land information is not given separately in Balance Sheet. Hence, the appreciation amount is calculated assuming 40% of Land & Building cost is for Land & land appreciates at 2.5% rate per year.

Introduction of Goodwill in Reconstructed Balance Sheet:

The intangible asset of the reconstructed balance sheet is increased by BDT 2,934,641 thousand in 2007 & BDT 164,540 as introduction of goodwill. This is the main reason why book value of Heidelberg share differs from Market Value. It seems the shareholders are happy with the company’s performance which increased goodwill & market price.

Reasons for the increased goodwill can be found in the company’s Brand Image, Product, R&D and Good performance in ratio analysis.

Brand Image: Heidelberg Cement stands for quality in construction in more than 50 countries in the world. It started its business in 1873 in Germany & built up its reputation in quality & commitment over the years. It has a long & successful history in cement industry all over the world. More than 100 years of experience & success in the cement industry creates a Brand Image for the company that is unrivaled in Bangladeshi cement market. This as well as its success in this country creates goodwill for the company unrivalled in the market. The brand image makes shares of Heidelberg perceived as more valuable by the shareholders & the company’s goodwill perception increases.

Product: Heidelberg Cement is the market leader in Bangladesh. Not only that, they are also the price leaders by providing quality product in ceiling price by maintaining uninterrupted supply. Their products, Ruby Cement & Scan Cement are the most preferred brand of cement in Bangladesh. Heidelberg’s position of market leader as well as cost leader makes the goodwill of the company higher than its competitors.

R&D: The Company gets benefited by R&D done by the mother brand. Hence, state-of-the-art technology is readily available for the local company. Heidelberg is really advanced in innovation which will provide its Bangladeshi counterpart concrete competitive edge in the future. Some of the latest innovations done by Heidelberg are-

Waste Heat Power: With the aid of this technology, waste heat - being generated during the cement production process - can be used for electricity generation. This implies not only cost savings but especially benefits the environment by reducing the use of natural resources. This can be really beneficent if implemented in Bangladesh. The firms in our country faces disrupted power supply. This technology can provide uninterrupted power supply for Heidelberg in Bangladesh & create competitive edge for it.

Tio Cem: The new cement made by HeidelbergCement makes an active contribution to environmental protection. TioCem is able to decompose pollutants – in a safe, reliable and substantial way. Bangladesh is a country plagued by pollution. Hence this cement can be popularized here. Urbanization will be able to positively contribute to environment for a change against its reputation of negative effect on environment.

Expansion of Production Capacity: The Company has taken up to set up another unit that will have a capacity of 450,000 MT per year. The contract of the unit was started in Mar’07 & was due to end in 1 year. However, the construction finished in record time & the unit went to production from Apr’08. The increase in production capacity for 2008 indicates that the revenue will grow even further as production will increase. Cement price does not show a trend of coming down in 2008 as well. This promises significant increase in revenue for 2008. This speculation also helps to increase goodwill of the company & its share price.

Performance Ratios: The reflection of reasons for increased goodwill is visible in the company’s ratios. Now let us see if the ratios of the company justify this staggering goodwill.

Profitability Ratio: The profitability Ratios show that Profit Margin, ROA, and ROE all are on the increase from last year. Not only that, growth of Profit margin is highest compared to last 4 years.

The company’s profitability ratios are markedly better in 2006-07 compared to 2003-2005. This is also reflected in the price level of the company’s share.

Market Value Ratio: Market value ratios also are very promising for the company. The earning per share is 110 for 2007 & 97 for 2006 which is indeed impressive. EPS has not only increased from year to year, it is also the highest in the last 5 years in 2007. The Book-Value per share has also increased from last year & is highest in the last five years.

About the EPS, it is the highest in the cement industry of Bangladesh in 2007. There are 8 cement companies listed with Dhaka Stock exchange. Out of them, only 4 companies experienced positive EPS including Heidelberg. Considering the EPS of these companies & P/E Ratio, the market price of Heidelberg at BDT 1205 seems justified. The table below shows that among these companies although Heidelberg’s EPS is highest its P/E ratio is 10.95 where the market is exhibiting P/E ratio of as high as 15.06.

Further indication for the reason of shareholder’s satisfaction can be seen in dividend payment. In 2007, the company declared dividend per share of BDT25 & in 2006 BDT 21. This is higher than last year as well as the highest dividend per share declared by Heidelberg in last 5 years. Dividend per share shows increasing trend from year to year. The company has gone to expansion in 2007, has strong cash base for the year as well as managed to pay high dividend per share. These had positive effect on the shareholders perception of the company.

The upward trend of Market to Book ratio reveal the fact that, the investors are willing to pay more for Heidelberg than for the other cement firms; hence Heidelberg should sell prices well in excess of their book values as it earns high rates of return.

Asset Management Ratio: The Company is showing good results in these ratios as well. Inventory turnover has increased compared to last year indicating good sales. DSO has decreased compared to last year as well indicating better credit sales recovery. These ratios are better for 2007 compared to last year. Total asset turnover ratio has decreased from last year but due to higher current asset than before. If Fixed Asset Turnover is scrutinized, then this has increased from last year as well as last 5 years. Hence, utilization of fixed assets has become better in recent years. This gives investors confidence that the assets of the firm is being used properly.

Debt Management Ratio: These ratios indicate if the company can meet its debt obligation as failure to do so leads to Bankruptcy. Times interest Earned & Cash Coverage ratio both shows better performance in 2007 & 2006 than previous years. These ratios are also best for 2007 compared to last 5 years.

However, debt ratio shows that from 2006 onwards, the debt % has decreased significantly & the company experienced increased EPS. The capital structure was changed by taking short term loans & not long term loans. Furthermore, TIE & Cash coverage has improved. Hence investors should be happy with the situation. The sudden decrease in debt from 2006 onwards can be explained by increase in cash inflow in the recent years. This increased the paying capacity of the company. Thus they prefer short-term loan to long-term loans.

Short Term Solvency Ratio: The short term solvency ratios of Heidelberg also show good performance. Considering the current ratio, quick ratio & cash ratio Heidelberg is more than well equipped to meet its short term obligations. Thus the company is in strong position & has no chance of immediate Bankruptcy. This also boosts investors’ confidence & justifies the increase market price of Heidelberg.

The company’s performances in all ratios show significant improvement from 2006 onwards. This had a positive impact on its shareholders as after 2006 the market price of this share really escalated maintained a steady level till now. This justifies the inclusion of Goodwill in the Reconstructed Balance Sheet.

2. Analysis of Cash flow Statement:

Year Focus 2003-2007

Operating Activities:

Cash flow from operating activities shows cash inflow in the last 4 years with significant increase in 2006 & 2007.

The increase in cash inflow can be contributed to increase in Net Income over the years. The company experienced net loss in year 2003 & 2004. From then onwards, its Net Income gradually increased over the years. The real cash inflow of the company (Net Income plus Depreciation) has increased over the years. Although the company experienced loss in 2003 & 2004, its net income before depreciation was positive for the mentioned years.

The increase in the operating cash flow can be contributed to revenue generated from increased sales. Looking at the gross profit for the last 5 years indicates significant increase from 2006 onwards. The net sales increased by 37% in 2006 & 12% in 2007. This is the result of increased production capacity from 2006 onwards. Also increase in price of cement in the market contributed to the revenue increase.

The graph above shows that the company reached a record production level of 1,000,000 MT for the first time in 2006 & maintained it in 2007 as well.

The graph above shows increase in price level of cement over the years. Considering the price increase, revenue should have been higher than what actualized in 2007. The reason can be contributed to increase in the cost of raw materials & international freight cost.

Cash inflow/outflow of inventory will give us a better picture here. The outflows for inventory show decrease in inventory in 2006.

This can be explained with the help of raw materials consumed, cost per unit of raw materials consumed & inventory turnover ratio.

Units consumed of raw materials show significant increase from 2006 onwards. This can be explained by the fact that production exceeded 1000,000 MT for the first time in 2006 & continued in 2007. With gradual increase in Unit cost, from 2006 onwards the company tried & succeeded in increasing inventory turnover ratio from 4.2 in 2005 to 6.35 in 2006n& 6.51 in 2007.Efficiency in inventory management caused the closing inventory in 2006 to decrease from 2005. Another reason for better inventory ratio can be the speculation of the management that raw material costs will reduce in the future.

Trade & other receivables outflow of the company shows gradual decrease over the years. This indicates credit sale outstanding of the company is decreasing over the years.

If we look at accounts receivables as percentage of total sales, then we see that the percentage of sales outstanding is gradually decreasing. DSO has also decreased for the company from 2006 onwards to 37.28 in 2006 & 36.63 in 2007 from 45.29 in 2004. DSO was as high as 54.07 in 2003 explaining the huge outflow associated with the year.

Investment Activities:

Cash flow from investment activities shows the company makes regular investments. The graph below shows a significant cash outflow in 2007. 80% of this outflow is contributed to expansion program taken up to set up another unit that will have a yearly capacity of 450,000 MT capacity. The contract of the unit was started in Mar’07 & was due to end in 1 year. However, the construction finished in record time & the unit went to production from Apr’08.

Financing Activities:

Cash flow from financing activities show the company has a huge inflow of cash in 2003. This was used to pay current liabilities, to pay out dividend of BDT 12,770 thousand as well as to increase fixed asset through investment in property plant & machineries. The company took a short term loan of BDT 790,000 thousand from standard chartered bank. Besides this, they also received BDT 142,024 thousand from NORAD & BDT 465,134 thousand from International Finance Corporation for establishing a clinker grinding & packaging plant in Dhaka.

From the investment activities discussed earlier an expansion plan execution was identified in 2007. This was financed by short term loan of BDT 186,557 thousand, cash in hand & net working capital without resorting to take loan from Bank. The evidence can be seen in increase

in fixed assets in 2003. This indicates the huge loan was taken to invest in fixed asset. The investment in 2007 is shown as increase in capital work in progress in balance sheet.

The graph above shows, the company takes regular short term loan for financing except in 2005. However, long term loan was taken on 2003 & after that there was no necessity for taking long term loans.

The long term loan was used to increase property plant & equipment that is visible in the graph below of property plant & equipment in balance sheet from 2002-2007.

The expansion initiative on 2007 that was identified can be seen in capital work in progress as reported in balance sheet.

In summary, cash flow analysis shows higher cash inflow due to higher income due to increased price & production. The company had taken long term debt in 2003 & successfully paid the loan in the subsequent years. Present need for liquidity is being managed by short term loan despite expansion plan & payment of dividend due to good liquidity condition resulting from high income.

0.001.002.003.004.005.006.007.008.009.00

Quick Ratio

2002 2003 2004 2005 2006 2007

Year

Quick Ratio Comparison

Heidelberg

LafargeSurma

3. Ratio Analysis

1. Short-Term Solvency:The analysis commences with discussion of Heidelberg’s ‘liquid position’ with respect to its trends and its competitor Lafarge Surma Cement Ltd.

Current Ratio:

0.001.002.003.004.005.006.007.008.009.00

Current Ratio

2002 2003 2004 2005 2006 2007

Year

Current Ratio Comparison

Heidelberg

LafargeSurma

Bench mark analysis: From 2003-2007, Heidelberg has been having a current ratio less than the Bench mark 2.0. A portion of current asset (cash) has been reduced in the expansion planning of the company.

Time series analysis: Heidelberg’s current ratio exhibits a growing trend; therefore, it is highly probable that current asset would be liquidated in near future at close to their stated value. Even in 2007, Heidelberg with current ratio of 1.03, could liquidate it current asset at (1/1.03) 97.09% of its book value and pay off its current debtors in full.

Cross section analysis: Lafarge Surma had higher current ratio than Heidelberg during 2002-2004, as meaning Lafarge’s higher current asset before investing it in long-term projects or expansion planning. However, it fell from that of Heidelberg’s from 2005, indicating Heidelberg’s stronger liquidity position.

Quick (acid-test) Ratio:

0.00

1.00

2.00

3.00

4.00

5.00

6.007.00

8.00

Cash Ratio

2002 2003 2004 2005 2006 2007

Year

Cash Ratio Comparison

Heidelberg

LafargeSurma

Bench mark analysis: Except 2002, the trend for quick ratio depicts lower picture than bench mark ratio 1.0.

Time series analysis: Heidelberg’s quick ratio shows an increasing trend from 2004 till 2007, meaning Heidelberg is in position to pay off its current liabilities without having to liquidate its inventories.

Cross section analysis: Lafarge Surma did not sell its products till 2005, so it used to pile up inventories for raw materials only. The inventory had increased on 2006 as unsold products have been added, and resulted a poorer quick ratio than Heidelberg. Therefore, Heidelberg’s current asset has been more liquid in terms of acid-test too.

Cash Ratio:

Time

series analysis: Since 2005, Heidelberg’s cash ratio had an upward trend, which denotes Heidelberg has been utilized effectively its cash inflow mechanism probably with cash sales from its debtors. Therefore, Heidelberg is in a good position to meet its current liabilities, and adequately liquid. Cross section analysis: Lafarge Surma’s cash ratio leaning during 2006-2007 has been threatening. Though not the core element to make financially solvent, still a company must have sufficient cash or cash equivalents at all times. In addition, the figure during 2002-2005 revealed Lafarge’s unused cash, which was not good either. Comparing this with Heidelberg, the later is in a better position in terms of overall liquidity management.

Overall comments on Liquidity Position:

Heidelberg has been investing in long term projects, paying off its debts and still have been sufficiently liquid in terms of its short-term asset and working capital management and is in a mush better position than its industry-opponent Lafarge.

Total Debt Comparison

0.0%20.0%40.0%60.0%80.0%

100.0%120.0%140.0%160.0%180.0%

2002 2003 2004 2005 2006 2007

Year

To

tal

Deb

t

Total Debt LafargeSurma

Total Debt Heidelberg

TIE Comparison

-100%

-50%

0%

50%

100%

2002 2003 2004 2005 2006 2007

Year

TIE LafargeSurma

Heidelberg

2. Debt Management:This unit involves the deliberation on the extend to which Heidelberg and Lafarge used debt, and if they are benefitted from the leverage:

Total Debt:

Bench mark

analysis: The Bench mark debt ratio is 50% and Heidelberg had a higher ratio from 2004-2007, which might be alarming if not managed properly.

Time series analysis: Though the debt figures are worsening each year, it might make Heidelberg ‘leveraged’, as its interests on the debts enjoy tax advantages and an increased trend of EPS may rationalize the fact. However, with an impressive liquidity position, Heidelberg is having greater cushion against creditors’ losses in the event of liquidation.

Cross section analysis: Prior 2006, Lafarge’s no long term loan gave negative debt ratio figures. However, the ratio has been quite high and growing further, provided by tight liquidity, it might pose a problem for Lafarge. On the contrary, though Heidelberg is having a slight higher ratio than Lafarge during 2006-07, Lafarge is anyhow worse off with negative EPS.

TIE:

Cash Coverage Ratio

-100%

-50%

0%

50%

100%

2002 2003 2004 2005 2006 2007

Year

Cash

Co

vera

ge

LafargeSurma

Heidelberg

Time series analysis: Though during 2003-2005, Heidelberg had negative TIE (due to lower EBIT than interest charges), from 2006, the figures denote Heidelberg has been paying off its compulsory obligation properly.

Cross section analysis: As compared to Lafarge’s negative TIE ratios, Heidelberg has undoubtedly appeared with a higher margin of safely and played safe by making timely interest payments and boosting creditors’ confidence.

Cash Coverage:

Time series analysis: Adding up the non-cash item ‘depreciation’ with the EBIT also revealed the fact of Heidelberg’s having prominent cash coverage ratio during 2006-07. Again then, this implies Heidelberg has been a timely payer of its debt obligations.

Cross section analysis: Even adding up depreciation with EBIT, Lafarge’s cash ratios don’t provide much improvement in it, which pose the threat of bankruptcy to some extent. However, Heidelberg’s higher margin of safely has reflected as compared to Lafarge.

0.00

1.00

2.00

3.00

4.00

5.00

6.00

7.00

Inventory Turnover

2002 2003 2004 2005 2006 2007

Year

Inventory Turnover Comparison

Heidelberg

LafargeSurma

Overall comments on Debt Position:

With an impressive liquidity position, Heidelberg is having greater cushion compared to Lafarge against creditors’ losses in the event of liquidation and higher margin of safety from its rival firm Lafarge.

3. Asset Management:Following section analyzes the effectiveness of the managing assets by Heidelberg and Lafarge.

Inventory Turnover:

Time series analysis:

0.0020.0040.0060.0080.00

100.00120.00140.00160.00180.00

DSO

2002 2003 2004 2005 2006 2007

Year

DSO Comparison

Heidelberg

LafargeSurma

From 2005-2007, the inventory turnover ratios divulge that Heidelberg’s raw materials and cement has been sold out and restocked with a decent growth. Despite the fact that, Heidelberg’s inventory in 2006 has been comparatively lower than 2005; but a higher turnover reveals that they are efficiently selling and restocking their products.

Cross section analysis:

Lafarge had started selling cement only since 2006-2007; therefore, the inventory is fresh and not filled with up with old junk of products and raw materials. Hence, the inventory turnover ratio is lower than that of Heidelberg despite a growing trend. Nevertheless, Heidelberg is making investment with higher rate of returns compared to Lafarge throughout this period.

DSO:

Time series analysis:

Since 2005 onwards, Heidelberg’s DSO has been imposing a decreased trend indicating better credit sales recovery as well as praise-worthy collection performance. The company though collects sales but it needs to do it in within the month, i.e., 30 working days for an impressive closing of accounts for each month.

Cross section analysis:

Total Asset Turnover

0.00

0.20

0.40

0.60

0.80

1.00

1.20

1.40

2002 2003 2004 2005 2006 2007

Year

TA

T Heidelberg

LafargeSurma

Lafarge has substantially reduced its collection time from 2006 to 2007; those are also reflected in their respective DSOs. However, Heidelberg’s DSO has been oversized compared to Lafarge because of its huge volume of sales as compared to Lafarge in 2007.

Total Asset Turnover:

Time series analysis:

Total asset turnover ratio has decreased in 2007 than 2006 due to higher current asset. However, since 2003, TAT ahs been enjoying a prolific growth inclination until 2006, meaning the company has been generating sufficient volume of business given its investment in total assets.

Cross section analysis:

The TAT has been observed to have a gigantic growth (1456%) for Lafarge in 2007 since it’s commence of sales, i.e., 2006. Even so, it will not hurt Heidelberg which is already standing with a TAT of 1.09 as compared to 0.14 of Lafarge.

Fixed Asset Turover

0.00

0.50

1.00

1.50

2.00

2.50

2002 2003 2004 2005 2006 2007

Year

FA

T

Fixed Asset TurnoverHeidelberg

Fixed Asset TurnoverLafargeSurma

Fixed Asset Turnover:

Time series analysis:

The Fixed asset turnover ratio has an increasing trend during 2003-2007, as after 2003 the fixed asset started being utilized properly. Furthermore, the utilization has been even enhanced in time, which denotes about the company’s progress on utilizing its plant and equipments to support generating huge sales

Cross section analysis:

Lafarge’s FAT has also been observed to have a massive growth (1400%) from 2006 to 2007. Nevertheless, the ratio is still lower for Heidelberg with high volume of fixed assets for the period of 2006 to 2007.

Overall comments on the asset management:

Profit Margin Comparison

-400.00%

-350.00%

-300.00%

-250.00%

-200.00%-150.00%

-100.00%

-50.00%

0.00%

50.00%

2002 2003 2004 2005 2006 2007

Year

Pro

fit

Marg

in

Heidelberg

LafargeSurma

With a right amount of stocks in inventory and ideal utilization of total asset (especially fixed asset), Heidelberg has been managing its asset properly. However, DSO can be improved further by adopting aggressive market campaign and learn Lafarge’s ‘market intelligence strategy’ for lowering DSO to the utmost extent.

4. Profitability Performance: Profit Margin:

Time series analysis:

Heidelberg’s growing tendency over the years 2002-2007 denotes its high sales and low costs. Furthermore, as the TIE ratio suggests, the interest payments on debt are covered effectively,

ROA Comparison

-30.00%

-25.00%

-20.00%

-15.00%

-10.00%-5.00%

0.00%

5.00%

10.00%

15.00%

2002 2003 2004 2005 2006 2007

Year

RO

A Heidelberg

LafargeSurma

ROE Comparison

-30.00%

-20.00%

-10.00%

0.00%

10.00%

20.00%

30.00%

2002 2003 2004 2005 2006 2007

Year

RO

E Heidelberg

LafargeSurma

which makes the profit margin high. The apparent benefit of leverage in terms of tax exemption is also evidential in profit promotion.

Cross section analysis:

Heidelberg’s Operating Profit Margin (EBIT/Sales) for the year 2007 is 13%, which is significantly higher than Lafarge Surma’s OPM -95% (due to higher cost incurred in 2006-7). Rationally stating, the below-average debt led Heidelberg enjoying the higher Profit margin.

ROA:

Time series analysis:

The excellent liquidity position, superior asset management, and below average debt led overall ROA of Heidelberg grow from 2003-2006. In 2007, the ROA fell a little due to Total asset reduction (for company work-in-progress). Rational behind this would be Heidelberg require to have higher privilege in near future. Cross section analysis:

Lafarge Surma’s fluctuating trend of ROA is not good news for them, which may indicate their poor asset management and high debt. However, Heidelberg is better off in this regard.

ROE:

EPS Comparison

-40.00

-20.00

0.00

20.00

40.00

60.00

80.00

100.00

120.00

2002 2003 2004 2005 2006 2007 2008

Year

EP

S Heidelberg

LafargeSurma

Time series analysis:

During 2003-06, the ROE position of Heidelberg showed a smooth upward trend, which is due to the efficient leveraging from debt. The below average debt led overall ROE to have this trend. Though, ROE fell a little in 2007 (from 22% to 21.8% of 2006), having the rational of substantially huge retained earnings in 2007 compared to 2006 probably for some future plan.

Cross section analysis:

During 2004 to 2007, Lafarge Surma’s downward trend of ROE is alarming for the company, which is due to very high use of debt. Heidelberg is certainly better off in this regard.

Overall comments on profitability performance:

Along with a prominent benefit out of the “gearing”, the superior liquidity position, excellent asset management and below-average debt had played key roles in ranking outstanding profitability performance of Heidelberg.

5. Market Value Measures: EPS:

P-E Ratio

-300

-250

-200

-150

-100

-50

0

50

2003 2004 2005 2006 2007

Year

P-E

Heidelberg

LafargeSurma

Time series analysis: The earning per share, i.e., NI for each share outstanding of Heidelberg has been Tk. 110 in 2007 from Tk. 97 in previous year, which is quite lucrative for the present and potential shareholders. Despite having negative EPS in 2003-04, Heidelberg’s EPS has not only increased from year to year, it is also the highest in the last 5 years in 2007.

Cross section analysis:

As the EPS of Lafarge is negative, comparing with all eight players in the cement industry (DSE-listed) Heidelberg’s EPS has been the maximum in 2007. Moreover, out of the eight companies, only four have experienced positive EPS so far, Heidelberg has been one of those.

P-E Ratio:

BV/Share Comparison

0.00

100.00

200.00

300.00

400.00

500.00

600.00

2002 2003 2004 2005 2006 2007 2008

Year

Bo

ok V

alu

e/s

hare

Heidelberg

LafargeSurma

Time series analysis: With the highest EPS in the industry, Heidelberg P-E ratio is 10.95 in 2007, which has been improved from that of previous year of 6.67, but 2006 P-E has deteriorated than the year before of 16.32. Before 2005, the net loss led the P/E to be negative as well. This may reveal a fact that, either Heidelberg is riskier or have low growth prospects. Since, the debt figures rule out the possibility of its being bankrupt, the firm may be approaching the “Cash Cow” SBU stage, which will be enjoying its outgrowth in near future. Cross section analysis:

As per 2007 data, Lafarge had a P-E of -27.83, even the market exhibits P-E ratio of as high as 15.06. Heidelberg’s high EPS led the P-E to be lower than market, however higher than Lafarge.

BV/share:

Time series analysis:

MB Ratio Comparison

0.00

0.50

1.00

1.50

2.00

2.50

2002 2003 2004 2005 2006 2007 2008

Year

M-B

Rati

o

Heidelberg

LafargeSurma

The Book Value per share of Heidelberg has also increased in 2007 (tk. 505.63) from previous years, besides that, it has been the highest in the last five years.

Cross section analysis:

Lafarge’s B-V/share dropped to 70.26 in 2007 from 80.68 in 2006. However, the ratio is much lower than that of Heidelberg.

M-B Ratio:

Time series analysis: The Market to Book ratio of Heidelberg had an upward trend through out the period of 2003 to 2007, except a decline in 2005. The M-B is highest in 2007 (2.38) among last five years.

Cross section analysis:

With an M-B of 0.40 in 2007, Lafarge’s M-B ratio has been substantially lower than that of Heidelberg of the same year. This lead to the fact that, present and potential investors are willing to pay more for Heidelberg than for the other cement firms; hence it should sell prices well in excess of their book values as it earns high rates of return.

Dividend Payout Ratio:

Dividend Payout Ratio Comparison

-600%

-500%

-400%

-300%

-200%

-100%

0%

100%

2003 2004 2005 2006 2007

Year

Div

payo

ut

Rati

o

Heidelberg

LafargeSurma

Time series analysis: In 2007, Heidelberg had declared dividend per share of BDT25 & in 2006 BDT 21. This is higher than last year as well as the highest dividend per share declared by Heidelberg in last 5 years. Dividend per share shows increasing trend from 2006 to 2007 growing from 22% to 23%.

Cross section analysis: Through out the period, Lafarge couldn’t declare any dividend to its shareholders, because it had to incur a net loss with huge variable cost of production by importing costly clinker from abroad. Therefore, no dividend payout ratio would have been calculated for Lafarge and thus no comparison was possible with Heidelberg.

Overall comments on the market value measures:

Despite lower P-E, with highest and most impressive EPS, B-V and M-V among rivals, yield the fact that Heidelberg has gained investor’s trust. It has good news that is reflected in almost all ratios of liquidity, debt, asset, profitability and investors know that too.

Chapter 3: Finding & Conclusion