Chapter – 1: INTRODUCTION

Origin of the report

This report has been made as a part of our course Investment and Portfolio Management; Mr
Shahin Sarwar has assigned us this report in order to gain some practical knowledge about how to
conclude on investment decision and analysis on the basis of Top Down approach. The perspective
of such a report is to make us familiar with the key factors of security market that affect the users
in decision making. For this purpose we have chosen and try to analyze and understand the
components according to our best effort.

Objective of the study

The objective of the study is to apply the theoretical knowledge in the practice field. Therefore the
objective behind conducting this study is as follows:

 Calculate ratios of Orion Pharma Ltd. and analyze their financial situation.
 Take in Square Pharmaceutical Ltd consideration and analyze that companies’ three year’s
ratio analysis and analyze them.
 To have a look at investment portfolio, analysis of financial statements, risk analysis,
SWOT analysis, valuation of ORION PHARMA LIMITED.
 Determine whether investment in this company is profitable or not. If yes then Why.

Methodology of the Report

We have collected the necessary and relevant data from different secondary sources. These sources
are mentioned below –

 Annual report of Orion Pharma

 Different websites
 Records from DSE library
 Interview with investor.

Limitations of the study

The limitations of the study are defined by the extensive of the facts covered by the study and those
that left out. However, these limitations can be presented in the following lines:

 The first limitation is the lack of intellectual thought and analytical ability to make it the
most perfect one.
 We have to offset with the quality due to time constraint.
 The analysis is based on complicated data, so it has become difficult to draw a complete
figure.
 As we have to conclude the report by giving an recommendation whether to invest in the
company or not, that required an intellectual and experienced opinion, may not be defensive
up to some extent
 While attempting to analyze the performance many data were missing, we found it rare to
make it consistent with theoretical formula.
 Chapter – 2: Organizational Overview

Background

Orion Group has been one of the leading group of companies in Bangladesh specializing in
industrial products. Currently, Orion exports its products to more than 10 countries including
Armenia, Bhutan, Nepal, Afghanistan, Sri Lanka, Lesotho, Cambodia, Jamaica, Philippines. Orion
Group consists of more than 27 companies encompassing at least 12 industry sectors including
pharmaceuticals & healthcare, power, agriculture, textile, food & beverage etc. Some of these
companies are - Orion Pharma Ltd., Orion Infusion Ltd., Orion Renal and General Hospital, Orion
Power Dhaka Ltd., Orion Power Khulna Ltd., Jafflong Tea Company Ltd., Orion Knit Textiles
Ltd., etc. Approximately 18,000 people are employed by various sister concerns of Orion Group.
Orion Group is dedicated to serving its valued customers with products of excellent quality through
continuous improvement in technology, process and human resources complying with the
guidelines of Good Manufacturing Practice (GMP) and the requirements of ISO-9001: 2008
Quality Management System (QMS). Orion Group does this by upholding these values:

1. Strict quality control

2. Living up to the commitments
3. Transparency and fairness in dealings
4. Taking initiative to exceed standards
5. To trust and respect for others
6. Working as a team
7. Sharing social responsibility

Over the last six decades, Orion Group has emerged as the leading industrial manufacturer, and
has been acting as a pioneer to drive the economic & industrial growth of the country by serving
customers within Bangladesh, and also contributing in our exports by competing in the global
market.
Company detail

Since its inception in 1965, Orion Group has been one of the leading group of companies in
Bangladesh specializing in industrial products. Currently, Orion exports its products to more than
10 countries including Armenia, Bhutan, Nepal, Afghanistan, Sri Lanka, Lesotho, Cambodia,
Jamaica, Philippines. Orion Group consists of more than 27 companies encompassing at least 12
industry sectors. Approximately 18,000 people are employed by various sister concerns of Orion
Group.
Orion Group specializes on the following industry sectors:
 Pharmaceuticals

 Cosmetics & Toiletries

 Infrastructure Development
Sister Concerns of Orion Group

Orion Group has more than 27 sister concerns among which the major ones are:
1. Orion Pharma Limited
2. Orion Infusion Limited
3. Orion Renal and General Hospital
4. Orion Power Meghnaghat Limited
5. Dutch Bangla Power & Associates Limited
6. Digital Power & Associates Limited
7. Orion Power Dhaka Limited
8. Orion Power Khulna Limited
9. Orion Gas Limited
10. City Centre
11. Interior Accom Consortium Limited
12. Jafflong Tea Company Limited
13. Panbo Bangla Mushroom Limited
14. Orion Agro Products Limited
15. Noakhali Gold Foods Limited
16. Kohinoor Chemical Company (BD) Limited
17. Orion Knit Textiles Limited
18. Fish & Co.
19. Krispy Kreme
20. Orion Footwear Limited
21. Global Shoes Limited
22. Orion Home Appliance Limited
 Chapter 3: Review the literature

A good amount of literature exists in the field of valuation of a firm. A comprehensive and
exhaustive review of these literatures is beyond the scope and coverage of this study. This review
of literature limits its focus only on the valuation of pharmaceuticals industry.

For many years, investors used the discounted cash flow model as valuation methodology to
valuate new investment, firms, or asset considering the issue of time value of money. Discount
Cash Flow model (DCF- model) is one of the most applicable models when it comes to valuation
of assets of firms. According to Boer 2002, Discount Cash Flow model (DCF-model) consists of
four main parts which are: net present value, internal rate of return, and risk weighted cost of
capital. According to Bragg (2013) the two most-used tools for evaluating an investment are the net
present value (NPV) and the internal rate of return (IRR).

Net present value

The net present value (NPV) is a beloved methodology to evaluate a project investment for firm
investment purpose. The NPV can be recognized by looking for the differences between the present
value of cash inflows and outflows (Ross et al., 2012). The net present value (NPV) includes the
initial cash flows such as the cost of an asset with all other cash flow. This valuation method can
answer a question such as:

How much value is created from undertaking an investment? Or how much this investment worth
considering the time value of money. In order to calculate the NPV we have to predict the future
cash flows and the required return for projects, and the final stage is to find the PV of the cash
flows and deduct the first investment to get the NPV of the assets or investment (Bragg, 2013)
However, NPV has been criticized from different scholar, for example, Myers (1984), Pindyck
(1991), and Trigeorgis (1993) all have discussed and agreed that NPV is ignoring the flexibility of
real asset investment. The DCF-model use future cash flow and discount it at a present value and
relate also to dividends and accounting earnings. The basic model of DCF takes the following form
(Roos et al., 2012):

Where r is the discount rate, P is the stock price; CF shows the expected cash flows for a certain
period. Researcher such as Kenneth (1982), and Fama and French (1988) have used the dividend
yield concept to show how much they influence the returns in a small period of time. A literature
review of Torrez et al (2006) has summarized and discussed the role of researchers such as Fama
and French (1988) in analyzing a higher period of time. However, Torrez et al. (2006) argued that
the Fama and French (1988) paper concluded that by aggregating earnings as a cause for returns,
explanatory power increasing over varying time periods. A few years later, Strong and Walk in
1993 have proposed a model that explains the existing model by comprising new procedures.
Strong and Walk model has also have been criticized as the model lacks in expounding the causes
of cross sectional variations or the factors that influence these changes, but it shows a higher
explanatory value than the preceding findings (Wilson 1986, 1987) and (Adsera and Viñolas,
2003). There are different academic studies which focused on analyzing cross-sectional the
earnings response variations coefficient for example from 1989, Collins and Kothari put forward
the view that the coefficient should be treated as cross-sectional and temporal constant. Based on
these grounds, there are ascertained that between the ERC and the persistence of earnings is a
positive relationship and that there is a negative relationship between ERC and interest rate and risk
premium measured by CAPM. Additionally Easton and Zmijewski (1989) provide confirmatory
evidence for the positive relationship between the ERC and the persistence of earnings likewise for
the negative correlation between ERC and risk premium. In 1990 Board and Walker have
conducted research on 193 companies over a period of 13 years; they have found out that inflation
levels influence the earnings/returns relationship and that the cross sectional and inter-temporal
variation is significant. After these findings, the DCF model is applied to different stages of a
company: start-up, maturity, declining. When the cost of capital is seen as a constant, the theory
argues for different growth rates in different stages and suggests a new-built model for DCF
(Torrez et al.; 2006):

For many years Discount Cash Flow model (DCF- model) has been used as traditional valuation
tool for relatively safe stocks, but this method will not be useful for valuing companies with
significant growth opportunities and higher risk level (Myers 1984). This gap can be seen as gap
between finance and strategic planning.

Dividend model

Dividend Growth Model is considered as an extension to DCF models and is built based on several
assumptions. Researchers developed a new valuation model within the area of DCF models –
Dividend Growth Model- which is based on the assumption that: 1) the cost of capital cannot be
higher than the growth rate of the company, 2) companies use their cost of capital as a discount rate
and 3) this model has a constant rate.
With the condition that k>g and where g is the growth rate of the company and k is the cost of
capital. General formula:

In the above formula P0 is the value of the stock in period zero, DI is the value of the dividend in
period I, g is the growth rate and k is the cost of capital of the company.

In (1999) Baker and Powell argued that this model is not useful for the firms that has low growth or
does not pay any dividends. However, other scholars such as Al-hares et al. (2012) studies the
relevance of dividends in measuring or estimating the cost of capital and how the cost of capital
will be influenced by the growth rate of the dividends.

Capital asset pricing model

This model is started with Markowitz (1952) article about portfolio theories, and it illustrates the
relationship model that occurs between cost of capital and the expected return:

In the above formula the E is an expectation, RI is the return on equity, RM is the return on the
market, Rf is the risk-free rate for assets and Bi measures the risk of equity. The Capital Asset
Pricing Model has been studied by different finance scholars, for example, Sharpe (1964), Linter
(1965) and Black (1972) and in contrast to DGM models uses a more realistic estimation of cost of
capital. Even so, like many scientific models, the CAPM has its drawbacks. First, the Risk-free
Rate (Rf) is accepted as being the attorney in short-term government securities which are changing
daily, creating volatility. Secondly, the Return on the Market (RM) is drawn from the past and may
not be representative for the future return on the market. Leachman and Francis (1996) argue that
preceding researchers have neglected the impact of foreign asset returns on the domestic risk
premium and therefore examine the importance of volatility in national equity markets. Another
issue is that CAPM is built on assumptions and one of those is that investors can borrow and lend
at a risk-free rate.

Weighted Average Cost of Capital

Weighted Average Cost of Capital (WACC) is grounded on the idea that says that in certain
conditions organization’s value is not influenced by capital structure or dividend policy. 1950s,
after a new debate is fostered on the idea that the valuation of a firm is not dependent on the capital
structure and dividend policy of a company (Miller and Modigliani 1958 and 1963). The formula
for this model is illustrated below:
Where Ktot is the total cost of capital, Kd is the cost of debt capital, Ki is the cost of equity capital,
D is the debt value, E is the equity value. From this expression, the weighted cost of capital for a
company that is not incurring debt could be calculated as follows:

A company’s operation could be financed by debt or equity or a combination of these two. Miller
and Modigliani (1958, 1963) are trying to establish a relationship between the capital structure of a
company and its market value.

Arbitrage Pricing Theory

The Arbitrage Pricing Theory (APT) as arguing that the systematic risk is not the only factor which
influencing value return, however there are other researchers provide evidence in this sense. The
APT is a substitute for the Capital Asset Pricing Model (CAPM) in the sense that both APT and
CAPM is drawing a linear relation between expected returns on assets and other variables, only
that CAPM includes a single factor of systematic risk (Beta) (Ardalan, 1999). By arguing that the
returned value depends on several variables, in 1976, Ross develops a model where Beta is
excluded from the CAPM. In 1996, Fama and French settled a new multifactor model in relation to
the one developed by Ross. This model predicts returns well than CAPM and has the following
structure:

Where RM is the market return, Rf is the risk-free rate.

The above model suggests that the return on a portfolio in excess of a risk-free rate is dependent on
three factors: 1) the excess on the market (RM-Rf), 2) the difference between the return on a small
stock portfolio (SMB) and 3) the difference between a high-book-to-market stocks portfolio and
the return on a low-book-to-market stocks portfolio (HML).
 Chapter 4: Research Methodology

Methodology

Business Valuation has become an intrinsic part of the corporate landscape. The corporate
landscape has witnessed dynamic changes in the recent years as mergers and acquisitions,
corporate restructurings, and share repurchases are happening in record numbers, both in the
United States and abroad. At the core of the dynamics of all these activities stands some notion of
valuation. The valuation methods are not only necessary for accounting purposes but they also
serve as roadmaps for the angel investors, venture capitalists and corporate acquirers in order to
know the true value of a company’s assets. Although there are numerous individual valuation
techniques, these are categorized into four standard business valuation approaches applying
standard formulas:

1. Discounted dividends: this approach expresses the value of the firm’s equity as the present
value of forecasted future dividends.

2. Discounted abnormal earnings: under this approach the value of the firm’s equity is expressed
as the sum of its book value and discounted forecasts of “abnormal” earnings.

3. Valuation based on price multiples: under this approach a current measure of performance or
single forecast of performance is converted into a value through application of some price multiple
for other presumably comparable firms.

4. Discounted cash flow analysis: this approach involves the production of detailed, multiple-year forecasts
of cash flows. The forecasts are then discounted at the firm’s estimated cost of capital to arrive at an
estimated present value.

Collection of Data

The study mainly focuses on Firm Valuation based on ORION PHARMA LIMITED Types of
Data: The report is mainly based on two types of data-

 Primary data
 Secondary data

Primary Sources of Data: Interview and discussion with the officials and clients Secondary
Sources of Data: Published documents and reports, different books and journals, annual reports of
the company, Printed record of the company

Here, we have used top to bottom approach for valuation. The report started with the economy
analysis of Bangladesh for previous three years, then the pharmaceutical industry analysis and after
that detailed on the Firm Valuation based on “ORION PHARMA LIMITED”.

Secondary Sources of Data:

Published documents and reports

Different books and journals

Annual Reports of the company

Printed record of the company

Here, we have used top to bottom approach for valuation. The report started with the economy
analysis of Bangladesh for previous three years, then the pharmaceutical industry analysis and after
that detailed on the Firm Valuation based on “ORION PHARMA LIMITED”.
 Chapter – 5: Finding and Analysis

Diamond model from the Porter five forces model

The diamond model is an economical model developed by Michael Porter in his book The
Competitive Advantage of Nations, where he published his theory of why particular industries
become competitive in particular locations. The diamond model of Michael Porter for the
competitive advantages of nations offers a model that can help understand the competitive position
of a nation in a global competition.

The approach looks at clusters of industries, where the competitiveness of one company is related
to the performance of other companies and other factors tied together in the value-added chain, in
customer-client relation, or in local or regional contexts. The Porter analysis was made in two
steps. First, clusters of successful industries have been mapped in 10 important trading nations. In
the second, the history of competition in particular industries is examined to clarify the dynamic
process by which competitive advantage was created. The second step in Porter’s analysis deals
with the dynamic process by which competitive advantage is created. The basic method in these
studies is historical analysis. The phenomena that are analyzed are classified into six broad factors
incorporated into the Porter diamond, which has become a key tool for the analysis of
competitiveness:

 Factor conditions are human resources, physical resources, knowledge resources, capital
resources and infrastructure. Specialized resources are often specific for an industry and
 important for its competitiveness. Specific resources can be created to compensate for
factor disadvantages.
 Demand conditions in the home market can help companies create a competitive
advantage, when sophisticated home market buyers pressure firms to innovate faster and to
create more advanced products that those of competitors.
 Related and supporting industries can produce inputs which are important for innovation
and internationalization. These industries provide cost-effective inputs, but they also
participate in the upgrading process, thus stimulating other companies in the chain to
innovate.
 Firm strategy, structure and rivalry constitute the fourth determinant of competitiveness.
The way in which companies are created, set goals and are managed is important for
success. But the presence of intense rivalry in the home base is also important; it creates
pressure to innovate in order to upgrade competitiveness.
 Government can influence each of the above four determinants of competitiveness. Clearly
government can influence the supply conditions of key production factors, demand
conditions in the home market, and competition between firms. Government interventions
can occur at local, regional, national or supranational level.
 Chance events are occurrences that are outside of control of a firm. They are important
because they create discontinuities in which some gain competitive positions and some lose.

The Porter thesis is that these factors interact with each other to create conditions where innovation
and improved competitiveness occurs.

Measures of Value Added

In addition to DDM, there has been growing interest in a set of performance measures referred to
as “value added” measures. These value added measures of performance are directly considering
economic profit. There are two main considerations of value added measures as:

 Economic Value Added

EVA is closely related to the net present value (NPV) technique where we can evaluate the
expected performance of an investment by discounting its future cash flows at the firm’s WACC
and when there is positive NPV, it implies that it will add to the value of the firm. In EVA, the
evaluation of the annual performance of management is done by comparing the firm’s net
operating profit less adjusted taxes to the firm’s total cost of capital in dollar terms, including the
cost of equity.
  Market Value Added

In contrast to EVA, which generally is an evaluation of internal performance, MVA is a measure of

external performance-how the market has evaluated the firm’s performance in terms of the market
value of debt and market value of equity compared to the capital invested in the firm.

Market Value Added (MVA) = (Market Value of Firm)-Capital-Market Value of Debt –Market
Value of Equity

SWOT analysis

Strengths:

1. Strong brand image.

2. Adequate financial resources.
3. Well thought of by buyers
4. An acknowledged market leader.
5. Well –conceived functional area strategies.
6. Insulated from strong competitive pressures.
7. Proven management.
8. Better manufacturing capability.
9. Superior technological skills.
10. Strong distribution network.

Weakness:

1. Lack of advertisement.
2. Higher overall unit costs relative to key competitors.

Opportunities:

1. Serve additional customer group.

2. Enter new markets and segments.
3. Expand product line to meet broader range of customer needs.

Threats:

1. Restriction imposed by the government.

2. Entry of lower-cost foreign competitors
3. Rising sales of substitute product
4. Lack of raw materials
 Chapter – 6: Economy Analysis in Perspective of Pharmacy

At present, there are 5 types of medicine manufacturing companies in the country. In a recent
Jatiya Sangshad session, Mr. Mohammed Nasim, the Honorable Health Minister of the People’s
Republic of Bangladesh said, “Local producers are meeting 98% of the country’s demand for
medicines, and there are 851 factories functioning in Bangladesh for the production of medicines.
Of them, 266 are producing allopathic drugs, 26 are producing Uunani medicine, 207 Ayurvedic,
79 homeopathic and 32 herbal medicines.4, 7-9” Many smaller companies are on the verge of
entering highly regulated overseas markets. Bearing in mind its’ successful past endeavors, the
industry has the ability to establish itself in rigorous/mass exportation. “Bangladesh has seen the
broad-based gains in health, education, infant mortality and life expectancy,” said Daniel Gay,
LDC expert in UN DESA’s Development Policy and Analysis Division. “These have in turn driven
economic growth, and latterly reduced economic vulnerability, so it’s really a success story.1”
Since Bangladeshi products are quality and cost effective and there is a huge demand for medicine
in the global market. We could have exported more but the export process is complex and time
consuming. The government should make the process easier. In this regard, Mr. Tofail Ahmed, the
Honorable Minister of Commerce of the Government of the People’s Republic of Bangladesh
opined that “The Pharma sector is exporting high quality medicine after meeting local demands. He
also added, we are now exporting to more than 127 countries after meeting 98% of the local
demand, and Bangladesh is the largest producer of formulated drugs among the Least Developed
Countries.4” Pharmaceutical export is contributing a lot to the GDP of the country and every year
this contribution is positively growing up. In the meantime, Pharma sector has become the 2nd
largest potential sector in Bangladesh to earn foreign currency and contributor to the national
exchequer. At present, about 30 pharmaceutical companies have started their export
activities. According to industry experts, market size of pharmaceuticals may reach about BDT
330,000 million by 2024. The scenario of pharmaceutical industries of Bangladesh has been pin
pointed along with an analysis of its’ future prospects and challenges. A recent BMI Research
(Business Monitor International is a research firm that provides macroeconomic, industry and
financial market analysis founded-1984) suggests, Bangladesh’s pharmaceutical market will
continue to post relatively the high growth rates in 2017, an estimated +11.1% in local currency
terms and +8.1% in US dollar terms from BDT 190 billion (USD 2.4 billion) in 2016 to BDT 211
billion (USD 2.6 billion) in 2017. By the year 2020, the market is estimated to be USD 3.37 billion
(approximately)5. As per Bangladesh Drugs (Control) Ordinance, 1982 no foreign company could
transfer technology to a local manufacturer unless they have their own set up in this country.
Moreover, after the amendments of the Drugs (Control) Ordinance in 2006, now there is no
restriction to produce any drug under mutual agreement with any pharma companies of the world.
These are very timely and appropriate actions undertaken by the government to check misspells as
well as misuse of powers.
 Chapter – 7: Industry Analysis in Perspective of Pharmacy
Industry Analysis

According to Bangladesh Association of Pharmaceutical Industries (BAPI) And Directorate

General of Drug Administration (DGDA), approximately 257 licensed pharmaceutical
manufacturers are operating in Bangladesh and about 150 are functional. These manufacturing
companies meet around 97% of local demand. Specialized products like vaccines, anti-cancer
products and hormone drugs are imported to meet the remaining 3% of the demand. 80% of the
drugs produced in Bangladesh are generic drugs, rest 20% are patented drugs. According to
Director General of Drug Administration (DGDA), the industry has 3,534 generics of allopathic
medicine, 2,313 registered Homeopathic drugs, 5,771 registered Unani Drugs and 3,899 registered
Ayurvedic drugs. Domestic market of Pharmaceutical products in Bangladesh has shown an
increasing trend over the past few years and the market size is BDT 187,566 million as on 2017 Q2
(Source: IMS Health Report Q2).However, this number does not reflect total market size because
IMS report does not include homeopathic, unani, ayurvedic or herbal medicine information.
According to Bangladesh Bureau of Statistics, the industry has contributed 1.85% to the GDP in
2016-17.Pharmaceutical industry of Bangladesh is largely protected from external competition, as
there is a restriction regarding import of similar drugs that is manufactured locally.
This industry is the second largest contributor to national exchequer. At the same time, the industry
provides the largest white collar intensive employment. Pharmaceuticals industry of Bangladesh
has grown significantly over the last five years. From 2012 to 2017, historical five years CAGR
was 15% and from 2014 to 2017, historical three years CAGR was 21%. According to industry
experts, market size of pharmaceuticals may reach about BDT 330,000 million by 2020. The
Pharmaceuticals industry of Bangladesh is expected to grow at a CAGR of 15% over the next five
years due to steady economic growth, population growth, growth of income level of people and
increased health awareness. Being the leader in the growing pharmaceuticals industry; Square
Pharmaceuticals Limited is expected to grow at the same pace with the industry.

Economy Analysis

GDP from Manufacturing in Bangladesh increased to

22427 BDT Million in 2018 from 19776.50 BDT
Million in 2017. GDP From Manufacturing in
Bangladesh averaged 13106.64 BDT Million from 2006
until 2018, reaching an all-time high of 22427 BDT
Million in 2018 and a record low of 7383.40 BDT
Million in 2006. In the year 2015-16 and 2016-17,
Bangladesh has achieved GDP growth rate of
7.11% and 7.28% respectively (Source: Bangladesh
Bureau of Statistics). Bangladesh has achieved the highest-ever 7.86% GDP growth in the
2017-18 fiscal year entered the socio-economic classification of Lower Middle Income
Group. It is targeted that Bangladesh will become higher middle Income Group and Higher
Income Group by 2021 and 2041 respectively. As GDP growth is higher than population growth,
per capita income is likely to rise. This will lead to higher health care expenditure by both
individual and government.

Bangladesh GDP Last Previous Highest Lowest Unit

GDP Annual Growth Rate 7.30 7.20 7.30 4.08 percent [+]

GDP 249.72 221.42 249.72 4.30 USD Billion [+]

GDP Constant Prices 9478.98 8830.54 9478.98 2372.59 BDT Billion [+]

Gross National Product 9872.56 9350.98 9872.56 2483.46 BDT Billion [+]

Gross Fixed Capital Formation 7043.96 6028.30 7043.96 2511.29 BDT Million [+]

GDP per capita 1093.05 1029.60 1093.05 317.70 USD [+]

GDP per capita PPP 3523.98 3319.40 3523.98 1287.90 USD [+]

GDP From Agriculture 10468.80 10117.30 10468.80 7017.10 BDT Million [+]

GDP From Construction 7359.50 6695.10 7359.50 2982.50 BDT Million [+]

GDP From Manufacturing 22427.00 19776.50 22427.00 7383.40 BDT Million [+]

GDP From Mining 1747.40 1633.00 1747.40 700.90 BDT Million [+]

GDP From Public Administration 3646.30 3361.50 3646.30 1408.90 BDT Million [+]

GDP From Services 136914.00 127417.00 136914.00 62352.00 BDT Million [+]

GDP From Transport 10920.80 10246.30 10920.80 4649.70 BDT Million [+]

GDP From Utilities 150890.00 138196.00 163812.00 69975.00 BDT Million [+]
 Chapter 8:Firm Valuation
Introduction

This section consists of stock valuation of Orion Pharma using two methods dividend discount
model and modified EPS (earnings per share) growth model. Firstly, dividend discount model will
be applied for this purpose and later the EPS growth model.

Dividend Discount Model

One of the most common methods of stock valuation is the dividend discount model. This model
is based on the theory that the stock price of a company is equal to the sum of all of its future
dividend payments, discounted to their present value. To further simplify the method, it is assumed
that the expected dividend per share grows at a constant rate of 𝑔 in perpetuity. 𝐷0 is the value
of the last paid dividend per share and 𝐷1 is the value of next year’s dividend per share; and 𝑟 is
the required rate of return by investors. Hence, the current stock price is the sum of the infinite
series:

𝐷1 𝐷1 𝐷1
𝑃= + + +⋯
1 + 𝑟 (1 + 𝑟)2 (1 + 𝑟)3

𝐷0(1 + g) 𝐷0(1 + g)2 𝐷0(1 + g)3

𝑃= + + +⋯
1+𝑟 (1 + 𝑟)2 (1 + 𝑟)3
∞
1+𝑔
𝑝 = ∑ 𝐷𝑜
1+𝑟
𝑡=1
 The above infinite sum can be simplified to:
1+𝑔 𝐷1
𝑃 = 𝐷𝑜 =
1+𝑟 𝑟−𝑔
By plugging in the estimated values of DPS growth rate (𝑔) and required rate of return by investors
(𝑟) on the formula below, we have:

𝐷1 𝐵𝐷𝑇 1.5
𝑃= = = BDT 14.30 per share
𝑟 − 𝑔 0.1049094134 − 0
Orion Pharma has 234,000,000 of shares outstanding. So the total value of common stock of Orion
Pharma is BDT 3,345,743,616 according to this estimation. For comparison, the closing price of
Orion Pharma stock was BDT 45.00 per share on December 30, 2018 and the total value of
common stock of Orion Pharma was BDT 10,530,000,000. This is more than 3 times of the
estimated value. So it can be concluded that the dividend discount model is not suitable for
valuation of Orion Pharma stock given the extent of discrepancy with the market values.

Limitations of EPS growth model

Like dividend growth model, EPS growth model also assumes constant EPS growth rate and
constant required rate of return over the future years, which is not the most probable case in the
real world. These assumptions simplify the method of valuation. Multiple approaches of equity
valuation must be considered in order to make more precise estimations.

Market return of Dhaka Stock Exchange

Market return can be estimated from the mean monthly returns of a market. For this calculation,
DSEX index data from June 30, 2014 to December 30, 2018 is considered.

DSEX Index
Monthly mean return Annual return
0.76031562% 9.12378861%

Annual market return is calculated by multiplying the monthly mean return by 12, since
compounding effect is not applicable in this case. A market return of 9.12% (approximately) means
that investing on a market portfolio would result in an expected annual return of 9.12%.

Systematic risk of Orion Pharma

Systematic risk of a stock is calculated as the slope of the linear regression of the stock returns
against the market returns in the corresponding time period. For this calculation, data of DSEX
index and closing price of Orion Pharma share from June 30, 2014 to December 30, 2018 is
considered. The DSEX index and Orion Pharma share closing price data are provided on the
appendix.
Beta (𝛽) of Orion Pharma 1.40283968128837

Orion Pharma has a systematic risk of 1.4028 (approximately), it means that Orion Pharma stock
price is more volatile than the market and moves in the same direction as market. An increase (or
decrease) of 1% in market return would result in an expected increase (or decrease) of 1.4028% in
Orion Pharma stock return.

DPS (Dividend per share) growth rate of Orion Pharma

Orion Pharma has been paying a dividend of BDT 1.50 per share for the last 4 years (2014-2018).
So the dividend is constant, which makes the dividend growth rate, 𝑔 = 0. The associated data used
for the calculation are provided on the appendix.

P/E Ratio
Price per Earnings per
Year P/E Ratio
share (BDT) share (BDT)
2013 56.40 4.13 13.65
2014 46.00 4.38 10.51
2015 58.70 4.17 14.06
2016 45.50 4.34 10.48
2017 36.80 4.51 8.16
2018 42.10 4.62 9.12
Findings

This section compares the findings of valuation methods with the market values of Orion Pharma
stock price per share.

BDT 80.00

BDT 70.00

BDT 60.00

BDT 50.00

BDT 40.00

BDT 30.00

BDT 20.00

BDT 10.00

BDT 0.00
Market Price (30 Dividend Discount EPS Growth Model NAV per share
June 2017) Model

Figure: Comparison of different valuation techniques

Dividend discount model gives the lowest estimate and is more likely to be inaccurate due to the
limitations of this valuation technique. EPS growth model gives a higher estimate of BDT 62.65
per share. NAV per share is based on the book value of equity and it provides a result of BDT
69.99 per share; while the market price of Orion Pharma stock was BDT 45.00 per share. EPS
growth model gives the closest estimate to the market value. Nevertheless, none of these consider
the changes in future market & industry conditions, political environment and other risk factors,
and are merely based on single linear regressions. For more precise estimations, more variables
must be considered.
 Conclusion

This report conducted study on common stock valuation of Orion Pharma using two methods,
namely dividend discount model and EPS growth model. There are many more approaches for
equity valuation, including free cash flow analysis, sales growth, terminal value, enterprise value
etc. Only two methods are presented on this study due to time limitations and data availability.
These methods are simplified models and do not consider multiple factors that can affect the
estimation results. For more accurate results, multiple approaches can be applied.
 Reference

1. Analysis of investment & Management of Portfolio- Reilly Brown (10th edition)

2. Orion Pharma. (n.d.). Retrieved December 09, 2018, from http://www.orionpharmabd.com/
3. https://www.thedailystar.net/business/local-pharma-market-set-hit-511b-2023-1614133
 Appendix
Close price of Closing value Return of Return
Date
Orion Pharma of DSEX Orion Pharma of DSEX
30 June 2013 45.00 4480.52 – –
24 July 2013 42.90 4427.16 -4.67% -1.19%
31 August 2013 49.10 4549.52 14.45% 2.76%
30 September 2013 54.00 5074.31 9.98% 11.54%
30 October 2013 53.50 5173.23 -0.93% 1.95%
30 November 2013 46.10 4769.43 -13.83% -7.81%
30 December 2013 45.50 4864.96 -1.30% 2.00%
29 January 2014 43.40 4724.05 -4.62% -2.90%
26 February 2014 43.70 4624.95 0.69% -2.10%
31 March 2014 42.00 4530.48 -3.89% -2.04%
30 April 2014 33.00 4047.29 -21.43% -10.67%
31 May 2014 38.50 4586.95 16.67% 13.33%
30 June 2014 40.80 4583.11 5.97% -0.08%
30 July 2014 39.40 4792.31 -3.43% 4.56%
31 August 2014 37.30 4768.67 -5.33% -0.49%
30 September 2014 38.10 4852.08 2.14% 1.75%
29 October 2014 34.80 4564.49 -8.66% -5.93%
30 November 2014 33.90 4581.00 -2.59% 0.36%
31 December 2014 36.80 4629.64 8.55% 1.06%
31 January 2015 35.60 4540.89 -3.26% -1.92%
29 February 2015 39.30 4511.97 10.39% -0.64%
31 March 2015 37.60 4357.54 -4.33% -3.42%
28 April 2015 34.40 4195.70 -8.51% -3.71%
31 May 2015 37.00 4419.39 7.56% 5.33%
30 June 2015 36.80 4507.58 -0.54% 2.00%
31 July 2015 37.00 4525.35 0.54% 0.39%
31 August 2015 37.30 4526.58 0.81% 0.03%
29 September 2015 38.00 4695.19 1.88% 3.72%
31 October 2015 35.30 4592.18 -7.11% -2.19%
30 November 2015 41.50 4801.24 17.56% 4.55%
29 December 2015 42.10 5036.05 1.45% 4.89%
31 January 2018 47.80 5468.34 13.54% 8.58%
28 February 2018 53.20 5612.70 11.30% 2.64%
30 March 2018 49.10 5719.61 -7.71% 1.90%
30 April 2018 46.30 5475.55 -5.70% -4.27%
31 May 2018 48.10 5403.12 3.89% -1.32%
29 June 2018 50.80 5656.05 5.61% 4.68%