A Brief Strategic Analysis of Aziz Pipes Limited

Course Name: Strategic Management

Course No. F-624

Submitted to: Submitted by:

Dr. M. Masud Rahman Asifa Ishrat Noor
Professor Department of Finance
Department of Finance
Evening MBA
University of Dhaka
University of Dhaka
0
Table of Contents

Particulars Page no.

Executive Summary 2
1.Introduction 3

1.1Company Overview
1.2Objective of the study
1.3Methodology of the study
1.4Limitations of the study

2.Industry Analysis 3

Porter’s Five Forces Model

3.Company Analysis 6

3.1 Ratio Analysis

3.2 Potential analysis
Growth rate in sales
3.3 Financial distress Prediction
3.4. Market price of the share

4.Findings 10
5.Conclusion 10
6.References 11
7.Appendix 12

1
Executive Summary
Polyvinyl Chloride (PVC) is one of the major manufactured products of local plastic industry. PVC pipe
is a widely used material in electrical, irrigation and construction industry. Aziz Pipes Limited is a
manufacturing company of PVC pipes & fittings, PVC foam sheet and PVC Profiles. Its previous
achievements includes receiving National Export Trophy Award for the years 1997-98 for earning huge
amount of foreign exchanges under Deemed Export of PVC Rigid Pipes as Non-Traditional Products. But
it has failed to keep up with strong competitors who have gained and sustained competitive advantage
through their continuous focus to develop efficiency, quality, innovation and customer responsiveness.

To find out the financial performance of Aziz Pipes Ltd, first of all, industry analysis has been done using
Porter’s Five Forces Model. Then company analysis has been done using ratio analysis, potential analysis
and financial distress prediction. Data have been gathered from the company’s annual report and audited
financial statement collected from the company’s official website and LankaBangla Financial Portal.

Interesting observation has been made regarding the market price of the company’s share. It has been
explained by traders’ behavior which shows contradiction to investment fundamentals. And finally, some
suggestions have been given which can be practiced by the company to increase working capital, stand
strongly among competitors and regain its lost glory.

2
 1. Introduction

1.1 Company Overview:

Aziz Pipes Limited was incorporated in the year 1981 with the aim at manufacturing PVC Rigid Pipes. It
started its commercial production in the year 1985 with the yearly installed capacity of 1200 metric ton.
With the passage of 12 years of time from 1985 to 1996, the Company increased its total production
capacity of 7500 metric ton per year. In 1995, the Company diversified its production line of
manufacturing PVC Flexible Corrugated Conduit Pipes. The Company has been listed with the DSE in
1985 and CSE in 1995.

At present the company is being operated with a paid up capital of Tk. 48.50 million against an authorized
capital of Tk. 500.00 million. It has its registered office at Motijheel, Dhaka, Bangladesh and the factory
is located at Amirabad, Sibrampur and Faridpur.

The Company propels its corporate creed ahead keeping the following things in mind:

Mission:

The corporate mission is to be a preeminent supplier of PVC pipes & fittings, PVC foam sheet and PVC
Profiles to its customers through product leadership, excellent value and superior quality and service.

Vision:

 To promote quality products with the objective of setting benchmarks for industry practice.
 To promote and assist in the development of standards, specifications and practices that help
ensure the proper use of plastic pipes.
 To enhance the knowledge and awareness of contemporary plastic pipeline technologies amongst
users and installers.

Code of Ethics:

 Manufacture and supply products and services of the highest quality and optimum value
 Sustain a level of competence expected as a professional operator and only supply such products
and services for which Aziz Pipes Limited is suitably qualified.
 Conduct all aspects of business in a professional and responsible manner.
 Engage in fair and open competition based on truthful representation of products and services
Offered.

Core Values:

 Customers: Satisfy Customers with highest quality product, service & support.
 Excellence: Achieve excellence in people, creativity & imagination.
 Integrity: Be honest, upholding values and standards.

3
 1.2 Objective of the study:

 To find out the performance of Aziz Pipes Ltd.

1.3 Methodology of the study:

 All the used data are secondary data. Data have been gathered from company’s annual report and
audited financial statement collected from the company’s official website LankaBangla Financial
Portal. Statement of financial position and statement of comprehensive income of the company
have been added in the appendix.
 Porter’s Five Forces Model has been used for industry analysis.
 Ratio analysis is done to understand the financial performance of the firm.
 Z score model has been used to predict financial distress.

1.4 Limitations of the study:

 Insufficiency of data.
 The deviations of share prices may not be clearly explainable with three fiscal years’ data.
 Studies measuring the effectiveness of the Z-score have shown the model to be accurate with
more than 70% reliability.

2. Industry Analysis

Polyvinyl Chloride (PVC) piping is the most widely used plastic piping material. PVC piping systems
are:

 Environmentally sound.
 Provide long service life.
 Easy to install and handle as they are lighter.
 Can be used under ground or above ground in buildings.
 Corrosion resistant.
 Cost effective.
 Widely accepted by codes.
 Resistance to many ordinary chemicals such as acids, bases, salts and oxidants makes it suitable
for use in salty, sandy and chemically aggressive water without any hazards.

The PVC pipes industry is growing in Bangladesh due to positive macroeconomic fundamentals,
including big infrastructure projects across the country, development of special economic zones, housing
construction both in urban and rural areas with incessantly burgeoning consumption in agriculture sector.

Porter’s Five Forces Model:

Analysis of PVC pipes Industry of Bangladesh in respect to Aziz Pipes has been done using Porters
Model of Industry Competition as followed:

4
 New Entrants

Bengal Group, Hatim, BRB

Polymer Ltd

Suppliers Major Competitors Buyers

RFL Group, Bengal Group,Hatim,

Most of raw materials are Housebuilding sector,
National Polymer Group, BRB
imported from abroad. Some industries, irrigation related
Polymer Group,Anwar Group,
are recycled locally. firms
Gazi Group, Lira Group

Substitute

HDPE pipe, PPR pipe, GI pipe, MS

pipe, SS pipe

 Threats from New Entrants:

Aziz Pipes Ltd has failed to create brand loyalty among its customers. It lacks absolute cost
advantage,too. That is why it lost its market share to new entrants like Bengal Group, Hatim and BRB
Polymer Ltd though it had more than 20 years of experience when these companies entered the business.

 Rivalry among Established Companies:

Aziz Pipes Ltd failed to compete with conglomerates like RFL Group RFL Group,National Polymer
Group, Gazi Group, Lira Groups of Industries etc. All these companies excelled through investment in
innovation, product design, quality control and after-sales support. Their wide distribution networks also
help them to offer quality products to clients in Bangladesh and aboard. For example, RFL Plastic Pipes
Limited has excellent infrastructures that provide it necessary facility to manufacture quality products in
bulk quantity. Its products conform to various national and international quality standards. Also, it is
capable to produce according to British Standard (BS), The International Organization for Standardization

5
(ISO) and American Society for Testing and Materials (ASTM) specification as per customer
requirement. They also promote their products using print advertisement, television commercials etc.
Thus these companies have succeeded in achieving competitive advantage through cost leadership and
product differentiation strategy.

 The Bargaining Power of Buyers:

PVC piping has demand in sewers, water service lines, conduit, irrigation and various industrial
installations. As the switching cost in the industry is very low, buyers have the power to pit the companies
against each other to force down prices.

 The Bargaining Power of Suppliers:

96% raw material of PVC is resin of Vinyl Chloride Monomer (VCM) which is imported from
international market. The suppliers are powerful as VMC is vital to the companies in this industry.
Besides, the profitability of the suppliers is not significantly affected by the purchases of companies in
this particular industry. PVC end-products are spread across various segments comprising electrical,
electronics, agriculture, automobiles, packaging, pharmaceuticals and agriculture.

 Substitute Products:

PVC pipes have strong substitutes like high-density polyethylene (HDPE) pipe, Polypropylene Random
Co-polymer (PPR) pipe, Galvanized Iron (GI) pipe, Mild Steel (MS) pipe and Stainless Steel (SS) pipe
which can satisfy similar customer needs. This limits the industry profitability.

3. Company Analysis

3.1 Ratio Analysis of Aziz Pipes Limited:

A financial ratio is a relative magnitude of two selected numerical values taken from a
company's financial statements. Ratio analysis is done below to understand how well Aziz Pipes Limited
is performing and areas that need improvement.

Ratio Formula 2015 2014 2013 Comment

1. Current ratio Current 0.55 0.59 0.61 Indicates decrease in
Asset/Current ability to pay current
Liability debts.

2. Quick ratio or Cash+Receivables/ 0.24 0.26 0.28 Do

Acid test Current Liability

6
3. Inventory COGS/ Inventory 1.8 2.52 2.5 Inefficiency in
turnover controlling
merchandise
4. Days Sales Receivables/ Daily 175.8 127 123 Delays in collection of
Outstanding Sales cash from sales.
(receivable/daily
sales)
5. Fixed Asset Sales/Net Fixes 1.9 2.56 2.57 Assets are not being
Turnover Asset fully utilized

6. Total Asset Sales/Total Asset 0.6 0.8 0.8 Do

Turnover
7. Debt Ratio Total Debt/Asset 173% 166% 160% Debt has increased.

8. Times EBIT/Interest 111 78 -19 Earning is increasing

Interest Earned than interest expense.
or Interest
Coverage ratio
9. Profit Margin Net Income/Sales -4.17% -2.08% 0.435% The gap between cost
and revenue is
increasing.

10. ROA Net Income/Total -2.50% -17.01% 0.361% Return on asset has
Assets improved.

11. ROE Net Income/Total 3.40% 2.60% -0.602% Return on

Equity shareholders’
investment increased.
The company is
growing.
12. Market: Market value/ -0.68 -0.43 -0.41 Worsened because of
Book ratio Total negative book value
Equity/Number of resulting from a long
Share series of negative
earnings.

13. P:E ratio Market value/ -19.9 -16.5 68.67 Trust of investors has
Earning per share gone down.

7
3.2 Potential analysis:

Growth rate in sales

The growth rate in sales for 2015 is calculated as gs = %, using following equation:

D
p  (1  d )  (1  )
Where, E
gs 
D
T =Ratio of total assets to sales T  ( p  (1  d )  (1  )
E
p =Net profit margin on sales

d =dividend payout ratio

D = Total Debt

E = Equity

−.042∗(1−0)∗(1+606.15/−255.49)
gs=
1.666−(−.042∗(1−0)∗(1+606.15/−255.49)

= 3.58%

Similarly, calculating growth rate of sales in 2014: gs= 2.65%

And in 2013 gs= -0.598%

3.3 Financial distress Prediction:

Financial distress is a condition where a company cannot meet, or has difficulty paying off, its financial
obligations to its creditors as its operating cash flows are not sufficient to meet its liabilities. One of the
popular methods to predict financial distress is the Z-score model. It was developed in 1968 by Edward I.
Altman, a financial economist and professor at the Leonard N. Stern School of Business at New York
University. It is the output of a credit-strength test that gauges a publicly traded manufacturing company's
likelihood of bankruptcy. The Altman Z-score is based on five financial ratios that can be calculated from
data found on a company's annual report. It uses measure of profitability, leverage, liquidity, solvency and
activity to predict whether a company has a high degree of probability of being insolvent.

Z-Score = 1.2A + 1.4B + 3.3C + 0.6D + 1.0E

Where:

A = net working capital / total assets

B = retained earnings / total assets

8
C = earnings before interest and tax / total assets

D = market value of equity / total liabilities

E = total sales / total assets

A score below 1.2 means the company is probably headed for bankruptcy, while companies with scores
above 3 are safe. Z within the range between 1.2 and 2.9 is grey area. Investors can use Altman Z-scores
to determine whether they should buy or sell a particular stock if they are concerned about the underlying
company's financial strength.

Z score of Aziz Pipes Limited:

2015 2014 2013

A= -0.55 A= -0.47 A= -0.42
B= -1.17 B= -1.07 B= -0.98
C= -0.025 C= -.017 C= 0.00646
D= 0.287 D=0.169 D=0.154
E=0.6 E=0.82 E=0.83

Z2015= -1.6083 Z2014= -1.1967 Z2013= -0.9323

It shows the company is suffering from financial distress risk although its reflection to the stock price is
absent from the market.

3.4. Market price of the share:

Year Price
2013 (Dec 31) 20.6
2014(Dec 31) 21.8
2015 (Dec 31) 36
Present (12 Dec,2016) 70

9
 Figure: Historical Chart of Share Price (Source:LankaBangla Securities Limited, 2016)

4. Findings

 All the calculations like z-score, P/E ratio etc. are strongly indicating that there should be no
reason for increasing price of the share of Aziz Pipes.
 The company is in the edge of bankruptcy. Despite this, the market price of a "Z" categorized
company is unbelievably increasing. One reason may be that most of the stockholders in share
market of Bangladesh (DSE & CSE) are traders, not investors. They always try to pick up the
profit from day to day buy/selling process of the share. And for this they are highly interested to
buy z-categorized share because price of this categorized companies are highly changeable over
time. This creates a demand pressure in the market As a result price of the share increases.

5. Conclusion

Aziz Pipes Limited has a glorious past of achievement. In addition to meet-up local market demand, it
used to export PVC Pipes under deemed sector earning a good amount of foreign exchanges. It received
Top 10 National Award for the year 1992-93 among Top 10 leading Plastic sector Companies as selected
by Dhaka Stock Exchange. It was awarded Jashim Uddin Foundation Gold Medal in 1998 for
contribution towards Industrialization & Economic Development. It received National Export Trophy
Award for the years 1997-98 for achieving huge amount of foreign exchanges under Deemed Export of
PVC Rigid Pipes as Non-Traditional Products. But it has failed to keep up with strong competitors who
have gained and sustained competitive advantage through their continuous focus to develop efficiency,
quality, innovation and customer responsiveness. Financial distress of Aziz Pipes Limited has made costs

10
of capital higher- short-term loan by contractors and banks has become expensive and hard if not
impossible to get. The company has continuously been defaulting in payment of installments against short
term loan and cash credit from banks. The management said that due to unavailability of banking
facilities, all raw materials have been purchased from local market at higher price to avail local credit
facilities. Cost of goods sold (COGS) is 94.84% of total turnover in 2015 which was 94.61% in the
previous year. Negative retained earning shows that the company has more retained losses over time than
accumulated net income.

Aziz Pipes Limited is simply delaying bankruptcy. Rather it should adopt constructive strategies
immediately like to identify what to do to at least break even - increase volume by utilizing production
facility at the optimum level, change cost structure to decrease variable costs, re-fix sales price of the
product. The company can increase working capital by choosing from following options:

 Issuing new shares against cash contribution and bonus to increase the paid-up capital.
 Replacing short-term debt with long-term debt
 Selling long-term assets for cash
 Settling short-term debts for less than the stated amounts
 Collecting more of the accounts receivables than was anticipated and thus decrease the amount of
current liabilities.

The company needs to measure against the products and practices of the most efficient competitors at
both the functional and corporate level. Most importantly, it needs to identify and overcome the internal
forces that are barriers to change.

6. References
 Official Website of Aziz Pipes Limited. Available at:
http://www.azizpipes.com/ [Accessed 10 December, 2016]
 Annual report of Aziz Pipes,2014.Available at:
http://www.azizpipes.com/wp-content/uploads/2015/12/annual_report_2014.pdf [Accessed10
December, 2016]
 Audited financial statement of Aziz Pipes,2015.Available at:
http://www.azizpipes.com/wp-content/uploads/2016/06/audited-financial-statement_2015.xls
[Accessed 10 December, 2016]
 LankaBangla Financial Portal. Available at:
http://lankabd.com/dse/stock-market/AZIZPIPES/aziz-pipes-limited/financial-
statements?companyId=45&stockId=45 [Accessed 10 December, 2016]
 Chowdhury A, Barua S, 2009 ‘Rationalities of Z-Category Shares in Dhaka Stock Exchange: Are
They in Financial Distress Risk?’ Available at:
http://dspace.bracu.ac.bd:8080/xmlui/bitstream/handle/10361/449/Anup.Chowdhury(2).pdf?sequ
ence=1 [Accessed 10 December, 2016]

11
 7. Appendix

Aziz Pipes Limited

Statement of Financial Position

For the year ended 31 December, 2015

Property & Assets 2015 2014 2013

In Million Taka In Million Taka In Million Taka
Non-Current Assets 110.817634 119.875442 130.581406
Fixed Assets 93.457603 101.515411 111.221375
Pre-Production Expenses 17.360031 18.360031 19.360031
Current Assets 239.839018 254.307043 273.727484
Inventories 110.735309 115.158046 121.173271
Accounts Receivable-Trade 102.778804 108.287068 114.976099
Advances, Deposits & Prepayments 25.067678 27.835021 28.358521
Cash & Bank Balances 1.257227 3.026908 9.219593
Total Assets 350.656652 374.182485 404.30889
Capital & Liabilities
Shareholders’ Equity (255.492313) (246.717048) (242.456845)
Share Capital 48.5 48.5 48.5
Share Premium 106.7 106.7 106.7
Revenue Reserves & Surplus 62.841411 65.652502 68.775938
Retained Earnings (473.533724) (467.56955) (466.432783)
Loan Fund 173.76509 189.024694 204.344057
Term Loan 145.74263 159.167458 172.596308
Deferred Tax Liabilities 28.02246 29.857236 31.747749
Current Liabilities 432.383875 431.874839 442.421678
Cash Credit 359.535025 359.535025 359.535025
Accounts Payable (Goods Supply) 63.966627 61.357259 70.668216
Creditors & Accruals 2.407064 3.090561 5.509972
Staff Gratuity 1.091869 1.091869 1.091869
Provision for Income Tax 4.732709 6.149544 4.848
Unclaimed Dividend 0.650581 0.650581 0.650911
Total Shareholders’ Equity & Liabilities 350.656652 374.182485 404.30889
Net Asset Value (NAV) per Share (52.68) (50.87) (49.99)

12
 Aziz Pipes Limited

Statement of Comprehensive Income

For the year ended 31 December, 2015

Particulars 2015 2014 2013

in million Taka in million Taka in million Taka
Turnover 210.491529 306.956756 335.535094
Cost of Goods Sold 199.62942 290.40926 303.067301
Gross Profit/(Loss) 10.862105 16.547496 32.467793
Operating Expenses (20.751155) (23.439564) (29.861039)
Administrative & General Expenses (19.928571) (22.276646) (28.41776)
Selling & Distribution Expenses (0.822584) (1.162918) (1.443279)
Operating Profit /(Loss) (9.88905) (6.892068) 2.606754
Financial Expenses (0.089516) (0.088596) (0.136004)
Net Profit /(Loss) before WPPF (9.978566) (6.980664) 2.47075
Contribution to WPPF - - (0.117655)
Net Profit /(Loss) before Income Tax (9.978566) (6.980664) 2.353095
Income Tax Expenses 1.203301 0.588969 (0.890287)
Current Tax (0.631475) (1.301544) (1.677675)
Deferred Tax 1.834776 1.890513 (0.787388)
Net Profit /(Loss) after Income Tax (8.775265) (6.391695) 1.462808
Earnings per Share (EPS) (1.81) (1.32) 0.30

13