VALUATION OF RENATA Marcos, Bangla-

PHARMACEUTICALS
desh envoy tack-
le cooperation
on pharmaceuti-
LIMITED cal sector|
Manilla Bulletin

Bangladesh on
track to becom-
[The pharmaceuticals sector is the defensive one to invest when the ing a $6b pharma
market by 2025
economy is facing in unprecedented downfall. As Bangladesh has
|The Daily star
the potential to reach $6Billion pharma market by 2025, this sector
can become next export potential in diversifying our export basket. Guess who own s
Renata is one the companies which tops the screening in its stellar Renata Limited? A
charity!|Renata
financial performance over a decade. It’s constantly diversifying the
Insight
company portfolio via its subsidiary, firm wide corporate govern-
ance practices, and CSR activities to make it even more standout VAT on sales of
among all other peers.] locally pr oduced
APIs likely to go
from FY23|The
Business
Standard

Pharma, food see

sharpest profit
Date of Completion
growth| The Daily
24th June, 2022 Star
 TABLE OF CONTENTS

Contents Page Number

Executive Summary 3
Macroeconomic Analysis 4-7
Industry Analysis 7-10
Company Overview 11
Financial Statement Analysis 12-15
Ratio Analysis & Interpretation 16-19
Cost of Capital 20
Assumptions 21
Free Cash Flow Model Valuation 22
Dividend Discounting Model Valuation 23
Residual Income Model Valuation 24
Peer Group Multiples 25
Subsidiary Valuation 26
Intrinsic Value of Renata pharmaceuticals Limited 26
Recommendation 26
References 27
Appendix 28-29
Forecasted Statement of Financial Position of Renata 28
Pharmaceutical Limited
Forecasted Statement of Financial Performance of Renata 29
Pharmaceutical Limited

2
 EXECUTIVE SUMMARY

Bangladesh is in its growth phase. During the other key player Beximco pharmaceuticals. The
pandemic period it also availed a 6.5% real domestic pharmaceuticals market is dominated
growth rate of GDP. Compared to its peers, by six major players. Top 6 companies hold ap-
Bangladesh has developed on many parametric. proximately 53% of the total market share.
It has become the world’s second largest gar- Globally medicine export statistics has over the
ment exporter, owing to its development strate- years made it the thrust sector. Besides Bangla-
gy of export-oriented industrialization. Globally desh has become the hub of generic drugs in
war induced supply chain constraints has also Asia. Over the years, this industry has phased
affected Bangladesh in many aspects from oil to into adopting oligopoly and perfectly competi-
other staples. This has induced the inflation to tive market in fragments. This has led to the en-
reach its peak. But the pharmaceuticals sector try of new competition easy which is due to
being a defensive one thrives in inflationary en- lower bargaining power of the intended market
vironment as it deals with life saving elements. and the pharma producers having absolute
With more and more population is educated pricing advantage. This ensures a higher margin
and earning enough, the tendency of them to for the industry. Furthermore local unethical
expend on medical facility has risen exponen- practice of tagging physician to recommend
tially. Moreover, the population growth is stag- their drug has increased the competition
nant and slowing down. This means the ad- among the player. Lastly, the availability of sub-
vantage of demographic dividend will fade stitute products has made the option of buyers
away in coming 10-20 years. Another point is to choose while buying generic drugs.
that within next 4-5 years more and more in- The core businesses of Renata Limited are hu-
creasing population chunk will enter 40-50s man pharmaceuticals and animal health prod-
which will be pent up demand of prescription ucts. In Bangladesh it is the 4th largest pharma-
drugs and medical services. This is boon for the ceutical company and the market leader in ani-
overall pharmaceutical industry. Another nota- mal health products. Renata Limited sources its
ble aspect is the export of pharmaceuticals raw materials at competitive prices from differ-
products which is on the rise. This will open new ent suppliers from across the world to reduce
avenues for export diversification as 83% export dependency. Renata is a Leading Pharmaceuti-
is from RMG. Moreover, key players in pharma- cals company that focuses on long term
ceuticals are also engaged in generic drug ex- growth.
port to other countries which is promissory for Over the past 11 years the balance sheet has
its future growth along with pent up local mar- growth 6 folds and top line margin 5 folds. The
ket demand. This essentially contribute to the liquidity cushion for the company along with
pharmaceuticals industry’s future growth pro- profitability is noteworthy and strong. The de-
jection. The exemption of TRIPS won’t affect pendency on external financing is low but driv-
much on the sector as 1% will come under the ing the cost up as mostly equity financed. This
radar of stopping the production. From the val- can be evident from the higher cost of capital
uation perspective, inflation will erode the equi- which consists of only cost of equity as no long
ty value, and certainly pharma industry will be term borrowing is availed recently. The constant
affected by this as inflation pushes the discount growth rate has been made up of long term in-
rate to be higher. flation and population growth. Recent develop-
Among the industry players, locals have im- ment in WPPF being disallowed for tax ad-
mense potential for outstripping the other for- vantage will strain its bottom line but still on
eign players as they know the tactics of captur- discussion for any impact to be seen on Renata.
ing local market. This has eventually led the exit Overall, in high inflation though losing value, it
of Sanofi Bangladesh by selling its stakes to is a must to be the investment portfolio.

3
MACROECONOMIC ANALYSIS
Bangladesh has maintained macroeconomic
stability through prudent fiscal and debt man-
agement since, along with expansion of its so-
cial security net and investment in infrastruc-
ture projects. Economic growth has been con-
sistent over the past 40 years and gross do-
mestic product growth has been outstripping
South Asia’s – with the region contracting by
6.58% as a whole and Bangladesh growing by
3.5% in 2020. Due to its macroeconomic stabil-
Source-Bangladesh Bank
ity, Bangladesh’s economy has grown around
270-fold in the past 50 years in local currency
terms, and its budget deficit has remained at
5% of GDP or less. It has become the world’s
second largest garment exporter, owing to its
development strategy of export-oriented in-
dustrialization.
Thought due to the Ukraine-Russia War, world
wide there will be supply side constraints, ris-
ing inflation. Our economy is also facing the
burnt of turmoil. The International Monetary
Fund has revised down its economic growth Source-Bangladesh Bank
projection for Bangladesh to 6.4% for the cur-
Despite all this Bangladesh has topped even
rent fiscal year largely because of Russia-
India and peer countries in many parameters.
Ukraine war and supply chain disruptions.
The rise of GDP and GNI has accelerated the
pharmaceutical industry’s growth.

Source-Global Economic Outlook of IMF (April 2022)

4
Amidst all global turmoil, we will be hit hard by borrowing will downplay it again.
our purchasing power. Our G2G loans at the The presence of global inflationary pressure is
concessional rate disbursement will reach the also felt in Bangladesh as its still highly import
end of its tenure. With U.S. inflation reaching dependent.
8% and China's resourcing at a dead end due
to zero Covid policy, more inflation will be im-
port in our country for the time being. Added
to this, is our exchange rate volatility which
may get support on a fixed rate regime plan.
But on the monetary side liquidity crunch can
be seen which may downplay the recent up-
trend of private sector credit growth but can
help restrict the inflation trend. Apart from this,
the worrisome matter is the twin deficit chal-
lenge. The abundance of LC payments against Source-World Economic Indicator
resumed import orders during the 2nd half of
CY 2021 dried up our FOREX reserve. IMF
warned about the FOREX reserve statistics is
inflated as the reserve includes the EDF (Export
development Fund). EDF has been constructed
as a refinancing fund from the foreign ex-
change reserve for bringing export proceeds.
In the case of many of these loans, no export
earnings were generated with buyers failing to
pay back the money, resulting in the piling up
of forced loans against the EDF in banks. Thus,
along with constant depreciation of taka, the Source-Bangladesh Bank
misappropriation of forex reserve via EDF loans
turned forced loan are draining, the greenback As Bangladesh is gradually reaching a middle
liquidity from our system also. income country status, the greater infusion of
education and hygiene and healthcare aware-
ness have increased the medical expenses
along with CPI inflation. Earlier there was trend
of inverse relationship between CPI Food and
Non-Food Inflation which is again slowing co-
inciding each other similar to worldwide expe-
rience. But in the long run Bangladesh will
maintain 6% inflation rate though inflation re-
cently crept up to 7.42%. Inflation and popula-
tion growth rate will dominate how far the
pharmaceuticals industry will grow in the fu-
Source-Bangladesh Bank
ture.
Private sector credit growth has been down- In the next decade, one of the most crucial
ward sloping since FY2019 due to crowding drivers for a healthy growth of the pharmaceu-
out effect and new single digit interest rate tical industry will be a shift in demographics. In
policy . Private sector credit has since then the population frontier, 17.1% of the popula-
missing the monetary policy target. Though tion is aged 50 and above. As the population
recently it has seen a upward shift but the li- growth has slowed in Bangladesh (1.0% in
quidity crunch, inflation and huge government 2020 vs. 1.2% in 2011), by 2030, more than 40

5
million people will be aged 50 years and above. vestment like T-bond or Sanchaypatra can offer
This will create more drugs dependencies and higher rate than Bank.
constant ways to shine.

Source-BBS Source-Bangladesh Bank

The weighted average yields on most of the

short-term government securities continued The huge NPL burden and loan rescheduling
maintaining an upward trend while medium and have made the whole banking sector vulnerable
long-term government securities observed which also question the operability of single
downward trend during Q3FY22. The yields on digit interest rate regime. The banks will be un-
91-day, 182-day, and 364-day treasury bills willing to give loans and will feel the liquidity
nudged up to 2.43%, 3.05%, and 3.75% in crunch as people will prefer the other long term
March 2022 from 2.36%, 3.19%, and 3.44% in safer heaven over banks’ term deposit products.
December 2021, respectively. However, yields But pharmaceuticals industry is not on the radar
on 2-year, 5-year, 10-year, 15-year and 20-year of piling NPL and rescheduled loan records
treasury bonds dropped slightly to 4.61%, which makes it easy for this industry players to
6.11%, 6.92%, 7.48% and 7.63% from 4.68%, get access to loan capital for future expansions.
6.41%, 7.38%, 7.77% and 7.87% percent, respec- Over the years our production has tripled and
tively, at the same time. The recent June 2022 industrial growth has flourished tremendously.
91 days T-bill rate shows 6.05% and 10 years T- As pharmaceuticals industry also falls under
bond rate is 8% whereas inflation has been al- large scale industries with heavy machinery in-
most 8%. vestment, the production capacity according to
The higher rates will increase the discount rate market demand has been abundant.
and make the value of the stocks fall.

Source-Bangladesh Bank

The introduction of single digit interest rate is

another anomaly though good for borrowers. Source-Bangladesh Bank
This interest rate policy breaks the market
based rate and question arises how a safer in-

6
 INDUSTRY ANALYSIS
According to Bangladesh Association of Phar-
maceutical Industries (BAPI) and Directorate
General of Drug Administration (DGDA), ap-
proximately 284 licensed pharmaceutical man-
ufacturers are operating in Bangladesh and
about 213 are functional (1). These manufactur-
ing companies meet around 98% of local de-
Source-BBS
mand. Specialized products like vaccines, anti-
cancer products and hormone drugs are im-
The quantum index of Manufacturing gives a
ported to meet the remaining 2% of the de-
snapshot how far the pharmaceuticals manu-
mand. 80% of the drugs produced in Bangla-
facturing has progressed, Along with that add-
desh are generic drugs, rest 20% are patented
ed capacity, many industry players are export-
drugs. According to Director General of Drug
ing the pharmaceuticals products to other
Administration (DGDA), the industry has 3,534
countries. This has paved the way of export di-
generics of allopathic medicine, 2,313 regis-
versification which is dire need as 83% of ex-
tered Homeopathic drugs, 5,771 registered
port earnings account from RMG. The heavy
Unani Drugs and 3,899 registered Ayurvedic
dependency on RMG has created a dire prob-
drugs(2).
lem from the onset of pandemic on March
Key Features and statistics of Bangladesh
2020.
Pharmaceuticals industry (3)
1. Nearly self-sufficient; 98% demand met by
local production.
2. Total market size approx. $3.2 Bn in 2021
with growth rate of 10.72%.
3. Historically good market growth maintained
(CAGR 8.93% in last 4 years). From 2012 to
2017, historical five years CAGR was 15%
and from 2014 to 2017, historical three
years CAGR was 21%.
4. Strong manufacturing base with skilled
Source-Bangladesh Bank manpower.
5. Largest white-collar labor-intensive employ-
ment sector in Bangladesh.
Overall, the monetary and budgetary stances
6. 2nd highest contributor to national excheq-
have been conducive for pharmaceuticals in-
uer.
dustry. The increasing GNI pushing health care
7. Registered allopathic pharmaceutical com-
expenses and the changing demographics will
panies: 284 & functional around 213.
shift towards even higher domestic market de-
8. All the top 10 companies are local, and they
mand. Export potential opens the door for fur-
have approx. 70% market share
ther progress along with easy access to financ-
9. Leading companies have nearly all major
ing at a low rate under single digit interest rate
GMP accreditation like USFDA, UK MHRA,
policy. Moreover, being a defensive sector the
EU GMP, Health Canada, TGA Australia, AN-
increasing inflation won’t pose impediment to
VISA Brazil, GCC etc.
its market presence or demand.
Local pharmaceutical makers, even so, have im-
Moreover, the ending of TRIPS exemption will
mense potential in the healthcare sector, as
also be ineffective as 85-90% of all generic
Bangladeshis spend around $2.04 billion
drugs that the local pharmaceutical firms pro-
abroad annually for medical treatment, which is
duce are off-patent.

7
1.94%of the country's GDP, according to a mar- domestic sales. Besides, the company exports
ket examination by the Bangladesh Investment more than Tk 312 crore worth of products.
Development Authority (BIDA). Beximco is also listed as the first company in
Bangladesh to be listed on the Alternative In-
vestment Market on the London Stock Ex-
change. Beximco Pharmaceuticals also holds a
85.22-percent stake in Nuvista Pharma Limited
and a 54.6% stake in Sanofi Bangladesh Limited.
Opsonin Pharma, a popular local pharmaceuti-
cal company in Bangladesh, was founded in
1956 by Abdul Khaleque Khan. The company
currently ranks 4th in terms of pharmaceutical
sales with a market .
Large drug manufacturers listed on the capital
Source-BAPI

Key Players of BD Pharmaceuticals Industry

and Performance in H1 of 2022 (4)
The domestic pharmaceuticals market is domi-
nated by six major players. Top 6 companies
hold approximately 53% of the total market
share. In the fiscal year 2020-2021 Square Phar-
ma generated a revenue of about BDT 58.35
billion. with a market share of 17.21% their do-
mestic sales hit BDT 56.84 billion. They exported
drugs worth BDT 1.51 Billion in that year. At
present, Square Pharmaceutical dominates the market have reported good growth in the busi-
market with a market share of 17.73% in the ness while small companies suffered a decline
pharmaceutical industry of Bangladesh. mainly because of the Covid-19 pandemic.
Among the top drugmakers, Square Pharma
Incepta Pharmaceutical Ltd. is the second larg-
posted a 16% growth in sales, Beximco 18%,
est pharmaceutical company in the country with
Renata 17%, ACI 9%, Acme 16%, IBN Sina 25%
a market share of 10.21%. According to a Janu-
and Orion Pharma 13%. In terms of net revenue
ary 2021 report in The Daily Star, Incepta Phar-
generation, Square Pharmaceuticals Ltd is out-
maceutical has an annual turnover of BDT 2,755
performing the industry with its revenue almost
crore.
equal to its next two competitors’ combined.
The most popular painkiller medicine of the
Average Cost of goods sold for the top 4 enlist-
country Napa is one of Beximco’s most sold
ed companies is average 50% of revenue
products. The company is the third leading
whereas in net profit margin Square Pharma is
pharmaceutical manufacturer in Bangladesh
enjoying an average 30% margin whereas the
with a market share of 8.39 percent in the do-
rest of the big players of the industry is having
mestic pharmaceutical sector. Beximco also ex-
an average margin of 15%-17%.
ports products to more than 50 countries, in-
From investors’ perspectives, Renata Ltd has
cluding countries in the USA, European Union,
showed 51.67 BDT EPS mainly attributed by its
Australia, and Canada. Listed on the Dhaka
lower shares outstanding. With an EPS of 17.99,
Stock Exchange, Beximco’s total revenue gener-
Square Pharma is also one of the market lead-
ated in the fiscal year 2020-21 was more than
ers mainly due to its high profitability,
BDT 2,949 crore, of which Tk 2,633 crore was

8
Global Footprint of Bangladesh Pharmaceu- 5. MNCs are increasingly outsourcing their
ticals Industry (5) production for cost containment
1. Export is growing fast, the current export 6. Major generic hubs India and China are los-
earning is more than $169.02 Mn (crossing ing cost advantages
the mark of BDT 14 Bn). 7. Medicine price in Bangladesh is currently
2. Bangladesh Government has declared Phar- among the lowest in the world
maceuticals as the “Thrust Sector”. 8. Extended patent waiver from TRIPS (Trade
3. Approximately 1200 pharmaceutical prod- Related Aspect of Intellectual Property
ucts received registration for export over Rights). It means Bangladesh and other
the last two years and are being exported to LDCs are exempt from patent protection by
more than 150 countries including USA, UK, WTO for an extended period until 2033
Canada, Australia, Germany, EU etc. (from original 2016). Bangladesh is allowed
4. Leading companies have increasing focus to produce any patented medicine without
on highly regulated markets, including USA, taking prior permission from innovator.
UK, Canada, Australia, Germany, EU etc.
5. Leading companies have nearly all major Risk Associated with the Pharmaceutical In-
GMP accreditation like USFDA, UK MHRA, dustry of Bangladesh (In light of Porter’s 5
EU GMP, Health Canada, TGA Australia, AN- Forces)
VISA Brazil, GCC etc. Even though the industry is enjoying an above
6. Few companies are now exporting medicine average return than the industry the competi-
to the highly regulated countries, includes tion and everchanging global scenario is mak-
USA, UK, Canada, Australia, Germany, Eu- ing all players conscious about their future. The
rope etc. report tries to assess the industry challenges
and its competitiveness in light of Porter’s 5
Opportunities in global generic market & Forces model.
Bangladesh is an emerging generic hub in • Threat of New Entrants
Asia The big payoffs available in the pharmaceutical
1. Global generics market is valued at around industry lead to a steady flow of new compa-
US $1.3 Tn and is projected to grow $1.52 nies being created. The industry is gearing up
Tn by 2023 (Ref: IQVIA Market Prognosis, to expand as 19 companies have got the go-
Sep 2018) ahead in the last three year to set up facilities
2. Generic drugs will continue to grow main- at a combined investment of around BDT
taining healthy rate 6548.2 million. The entry of these new compa-
3. Drugs worth more than US $200 Bn coming nies will boost competition as there are already
off patent by 2025 more than 200 manufacturers in operations.
4. Developed countries are increasingly pro-
moting use of generic drugs

9
However, it is getting more costlier to enter this industry massively as over 85% of the generic
industry because of higher investment and drugs produced now by the industry are off-
higher import cost for API. It is also very im- patent ones, which need no royalty payment to
portant for the pharmaceutical companies to patent owning companies.
focus on research and development to sustain Companies expected to grow manyfold in the
their position in the market. The cost associated next few years with many drugs going off pa-
with R&D is very high. tent in the US and the emerging countries com-
• Bargaining Power of Buyers ing into focus. This will affect the export share
Pharma is unique among industries because of the industry as more and more countries will
the medical patient has an absolute lack of be able to produce the generic medicines which
knowledge regarding pricing. The only entities are under patent right now.
with negotiating power are the pharmacies and According to the industry experts, the pharma-
medical institutions that fulfill the patient's pre- ceutical companies allocate enormous amounts
scriptions. First to market generics and biosimi- in their annual budgets to distribute gifts
lars offer significant cost savings for insurance among the medical practitioners. And maintain-
companies in the developed markets. In Brand- ing the relationship with them is getting costlier
ed markets, patients/pharmacists cannot usually due to increasing competition among the phar-
substitute between brands. Thus, bargaining maceutical companies. So the degree of rivalry
power of the buyer is high. is in a medium or moderate level for this indus-
(6)
• Bargaining power of Suppliers try.
Pharmaceutical manufacturing comes in two • Threat of Substitute Products
stages as outlined above. Here, the Active- The threat of substitution is higher in unbrand-
Pharmaceutical-Ingredient, commonly referred ed markets where one generic can be substitut-
to as API, is the core ingredient of every finished ed by another product by the suggestions of
drug product. The APIs account for 30% of total pharmacists. For the branded market, doctors
drug costs in case of small molecules and can and specialists can substitute one brand for an-
go up to 55% for generic products. Currently, other based on the preference of choice. That is
Bangladesh meets 98% of the demand for fin- why the promotional cost for the pharmaceuti-
ished-form pharmaceutical products locally. cals companies are very high and this situation
Though nearly self-sufficient in the area of fin- puts the threat of substitution somewhat on a
ished drugs, more than 90% of the API and raw High.
materials have to be imported. Heavy reliance
on import of raw materials makes the pharma-
ceutical industry vulnerable to supply chain dis-
ruptions and price volatility. Thus, the backward
linkage has become a pain point for our prom-
ising pharmaceutical sector.
Also the bargaining power is high for API com-
panies who dictate the terms of shipment and
chemical prices. Once the new API part in coun-
try will be up and running, the bargaining pow-
er of suppliers will come to a low level.
• Rivalry and Existing Competition
Bangladeshi drugmakers will be allowed to de-
velop generic versions of patented drugs until
2033 and future pathway is still not clear about
what will happen after Bangladesh graduates
from LDC. Though experts believe even after
that the TRIPS adherence is unlikely to affect the

10
COMPANY OVERVIEW time to time that may affect its business. De-
crease in purchasing power of customers, com-
Renata Limited (formerly Pfizer Limited) is one
petition in domestic market, international trade
of the leading pharmaceutical companies and
barriers, dependency on import for APIs, uncer-
market leader of animal health products in
tainties arising from significant changes in the
Bangladesh.
pharmaceutical policy and regulations, tax re-
The company started its operations in 1972 as
gime, variable fiscal and monetary policies, etc.
Pfizer (Bangladesh) Limited. In 1993, Pfizer
can impose regressive impact on the growth
transferred the ownership of its Bangladesh op-
potential of the pharmaceutical sector.
erations to local shareholders and the name of
the company was changed to Renata Limited. Management of the Company is vigilant in
identifying any such risks associated with oper-
Business Profile
ating activities of the business, and assessing
The company is engaged in the business of and determining effective solutions to those
manufacturing, marketing & distributing Hu- risks to ensure smooth performance and pro-
man Pharmaceuticals, Animal Health Medicines, gress of the Company. The Company envisages
Nutritional, and Vaccines. that transition of Bangladesh to a middle-
income country is likely to improve the stand-
The core businesses of Renata Limited are hu- ard of living, purchasing power and health
man pharmaceuticals and animal health prod- awareness of its population, which in turn is ex-
ucts. In Bangladesh it is the 4th largest pharma- pected to trigger the demand for healthcare
ceutical company and the market leader in ani- products in the coming years. With long-term
mal health products. Besides, the company is strategic plans in place and with a strong mar-
also the contract manufacturer for UNICEF and keting and sales team, Renata Limited expects
SMC for General products (birth-control pills, to retain and expand its existing market share
oral saline and micronutrient powders). and keep up with the changing demand of the
Renata products are exported to Afghanistan, market by adding new products to its portfolio.
Belize, Cambodia, Ethiopia, Guyana, Honduras, The Company makes investment decisions only
Hong Kong, Kenya, Malaysia, Myanmar, Nepal, after considering all related risks and return on
Philippines, Sri Lanka, Thailand, United King- investment. Furthermore, to ensure uninter-
dom, and Vietnam. rupted operation with competitive edge.

Product Development Renata Limited sources its raw materials at

competitive prices from different suppliers from
Maxpro, the gastroenterological drug of Renata across the world to reduce dependency. The
is the 3rd brand among the top 10 brands that Company also expects to expand its global
is sold in country with a market share of 1.37% presence in the coming years and is investing
of the total market. The research and develop- heavily in people, factories, and R&D.
ment team of Renata is on continuous pursuit
in capturing the market and in 20-21 they have Renata is a Leading Pharmaceuticals company
developed 47 new products out of which 41 is that focuses on long term growth. The compa-
done by Renata’s own research team and 8 ny’s vision is to establish itself among the best
were developed by outside labs but will be pro- of innovative branded generic companies in
duced in Renata’s manufacturing units. Bangladesh and it has been successful in up-
holding its vision since long.
Risks & Concerns
Operating in a dynamic and competitive market
exposes the Company to various risks from

11
FINANCIAL STATEMENT ANALYSIS
Vertical Common Size Balance Sheet

12
Vertical Common Size Income Statement

13
Horizontal Common Size Balance Sheet

14
Horizontal Common Size Income Statement

15
RATIO ANALYSIS & INTERPRETATION
Renata Pharmaceuticals Limited

16
RATIO INTERPRETATION
• Based on the liquidity ratios, Renata has turnover period has brought up the cash
gradually increased it liquidity levels and conversion cycle. However, the higher peri-
maintained well above ideal benchmark od is gradually on the
such as current ratio faring well above 2x • In the efficiency scale, for every 1 tk. Assets
and on 11 years’ average having 1.50x of li- almost 90 paisa sales are generated and 2
quidity to meet sudden and instant pay- tk. revenue is generated against every 1 tk.
ments. Quick ratio is also faring above ideal Fixed assets expenditure. This figures even
benchmark and in even any kind of liquidity shoots up if considered working capital. For
crisis of no additional cash inflow, defensive 1 tk. Working capital expenditure 3-4tk. Rev-
interval shows on an average for past 11 enue is generated. Interest burden for Re-
years Renata was able to pay 60 days or 2 nata has been 11 paisa for every 1tk EBIT.
months expense before running out of cash This can be attributed to high credit worthy
and on 2021 it has 120 days or 4 months ex- history in loan payoff which offers them to
penses accumulated in fluid assets. These bag lower rates on short term loans based
ratio indicates Renata’s strong footing in li- on corporate relationships. Tax burden
quidity maintenance. shows the 27% effective tax rates reflection
• Based on profitability perspective, Renata on EBT.
has gradually decreasing top line margin but • Leverage ratio shows 63% of equity is debt
higher and higher bottom line margin over and debt ratio has been maintained at 37%
the years. The increasing base of assets and on an average for 11 years. That means fi-
equity portion has drop down slightly the nancing mostly comes from equity which is
ROA & ROE of Renata over the years but still costly one. Among debt financing options
maintaining 14% ROA on average and 23% short term debt has 82% share and rest on
ROE on average. The bottom line improve- long term debt financing but there is no
ment can be observed in higher and im- long term loans. Mostly, for day to day op-
proved EPS over the years shooting up to 52 eration short term financing is availed and
taka against every share. The operating ROA for expansion plans Renata relies on equity
margin or Basic earnings power shows the financing. The one unit of equity supports
efficiency in using assets to generate return almost 2 tk. of assets. Operation margin can
a stable return over 20% but the decreasing pay 18 times more on an average interest
trend its due to total assets growth of 6 payment and the ratio is upward sloping
folds over the 11 years and not every one is with recently 2021 statements showing the
earning a return. So, from return perspective capacity to pay 50 times more interest pay-
Renata is a Cash Cow. ments by EBIT. Cash coverage ratio also fol-
• From activity ratio perspective Renata on an lows the same pattern of strong resiliency.
average pays early which means they avail • For 1 tk. EPS, 14 tk. Price is paid by the in-
the rebate by paying the creditors faster. On vestors of Renata and for 1 tk. Cash flow in-
that note, their receivable payment is also vestors pay around 57 tk. to buy the share.
faster within 30-40 days on an average. But On an average every 1 tk. Sales generated
their inventory turnover is slowing gradually investor pay 2 tk. While buying Renata's
which is concern as pharmaceuticals indus- share. PEG ratio suggest that Renata is over-
try has a fast moving inventory. Here if com- valued over the years. Graham’s Intrinsic val-
pared with sales growth which is quite stellar ue shows that the stock is worth of 700 tk.
around 18%. This overall higher inventory on 2021.

17
RATIO ANALYSIS & INTERPRETATION
Renata Pharmaceuticals Limited

• Dividend related ratio suggest that Renata because Renata has high retention ratio and
maintain lucrative dividend policy which sup- higher ROE. Renata has surpassed their
port the theory of equity being the costly growth phase and has a stronghold position
one to finance. Dividend yield is around 3% in pharmaceuticals market. This high growth
of market price which is due to the fact that rate in a cash cow position is difficult to
market price is really high. They disburse achieve. Still the diversified product portfolio
30% of the net earnings to the shareholders along with its subsidiary and export potential
and retain 70% earnings for expansion pur- and better bottom line return has driven the
pose. Based on the retention of the profits sustainable growth potential.
and equity return they have on an average a
growth rate of 17%. This is an estimated
growth rate. The growth rate has been high

18
RATIO ANALYSIS & INTERPRETATION
Renata Pharmaceuticals Limited

• Operating leverage shows on incremental • Based on five way ROE decomposition, tax
sales Renata earn 25% incremental operat- burden shows tax has eaten a lot of profit
ing profit. Over the years, this ratio has of Renata. But due to having less debt in
been dipping low which indicates that high- the financing side, the interest has paltry
er sales is resulting difficulty in generating negative effect on ROE. Operating margin
higher operating profit. That also means has been sliding over the years which sup-
their fixed cost has risen over the years. This port the magnifying effect of operating lev-
case can be related to the higher inventory erage on sales turning up lesser operating
turnover which can suggests there is prob- margin.
lem in selling the inventory. • Total asset turnover shows efficiency of as-
• Financial leverage shows Renata having sets spending on top line sales. For every 1
higher sensitivity of earnings as a result of tk. spent on assets purchasing almost 1 tk.
capital structure changes. This is due to the sales is generated. Overall, this ratio results
lesser debt in its balance sheet. But as Re- in stagnant position.
nata has optimal debt to equity ratio, they • Equity multiplier or financial leverage indi-
can take up additional debt as debt is less cates each unit of equity supporting twice
costlier than equity financing. Though addi- the asset base which aligns with the struc-
tional debt may increase interest burden ture of capital heavily being influenced by
and decrease interest coverage, debt fi- equity financing.
nancing can be availed in future as they • This all results on an average 23% return for
have strong foothold in pharmaceuticals equity holders.
business.
• Overall leverage is product of the two which
is significantly lower as their bottom line
was increasing year over year despite top
line margin was slowing as it is entering into
mature phase of business life cycle.
19
COST OF CAPITAL
Renata Pharmaceuticals Limited

11 years price data of Renata shows that mean yearly

return is 20.74%, the standard deviation of Renata
price is 7.51%. The correlation with DSEX or market
index is 16.10% and thus beta or Renata is 0.19 which
indicates its weak positive price correlation.
Equity beta when adjusted accordingly it stands at
0.46 which indicates in the long run the stock will be
less than 50% correlated with rise and fall of market
index (DSEX). Market risk premium of 12.56% when
beta adjusted stands at 5.77%. Adding with this the
country risk premium from Asawth Damodaran’s re-
cent calculation 3.56% and Maturity risk premium
taking the difference of 10 years T-Bond and 91 days
T-bill rate of 1.95%, the cost of equity comes up as
11.28%.
As inflation is already 8% assuming that until supply
chain crisis solves, the inflation in the long run 6%
and population growth averaging at 1.1% totals the
growth rate of 7%.

20
ASSUMPTIONS
1. Gross Sales growth and VAT rate have been calculated from 11 years CGAR for each sales
category.

2. COGS have been calculated on Gross Sales and adjusted with yearly average growth of COGS ex-
penses which stands as 46% Forecasted Gross Sales.

3. Operating Expenses calculated as an average of Gross sales % for 11 years which stands 25.32%.

4. Effective tax Rate has been estimated 27.15% as an average over the years.

5. Working Capital has been forecasted from the average of Working Capital Turnover on sales.

6. From average Fixed Asset Turnover, the Capital Expenditure has been estimated.

7. Net Profit After Tax has been gradually calculated constructing Forecasted Income Statement.

8. Dividend has been estimated 32%-35% of Forecasted EPS over the years.

9. Cost of equity is 11.28%

10. Growth rate has been 7.10% considering long term inflation and population growth of Bangla-
desh

11. Valuation of Subsidiary is based on NAV calculation or P/B multiple based on Renata’s average
P/B of 2x along with adjusting Renata’s shareholding portion.

12. On final value calculation, FCF has been given 27% weight, DDM has been given 25% and RI
method got 28%, and all other multiples got 5% weight each.

21
FREE CASH FLOW
MODEL VALUA-
TION
Renata Pharmaceuticals
Limited

22
DIVIDEND DISCOUNTED
MODEL VALUATION
Renata Pharmaceuticals Limited

23
RESIDUAL INCOME
MODEL VALUATION
Renata Pharmaceuticals Limited

24
PEER GROUP MULTIPLES

25
SUBSIDIARY VALUATION

INTRINSIC VALUE OF RENATA PHARMACEUTIACALS LIMITED

RECOMMENDATION
Based on the analysis, it can be said that in high inflationary environment and high risk free interest
rates driving the discount rate up destroys the value. Such can be attributed to the stellar stock like
Renata Pharmaceuticals Limited. Over the years, it has earned superior return and gave lucrative
dividend all while maintaining Top line and Bottom line margin. Thus, seeing form Top-down ap-
proach throughout the report, we can justify to “HOLD” the stock now and till the price drops to
1012, after dropping below that price “BUYING” more will be recommended to achieve dollar cost
averaging and reap the lesser price of Renata in the portfolio later when market turnarounds. Here
one noteworthy point to keep in mind that NBR proposed to include a clause in Finance Act 2022-
23 to disallow the contribution to WPPF having a tax advantage which will strain the bottom line
margin of Renata in coming days as its one of the highest payer of WPPF. The decision is stated to
be magnify the effective tax rate from 1% to 2.25%. However, as it is still pending, the possible sce-
nario is just to be checked how much margin shock need to be cushioned.

26
REFERENCES
1. http://bapi-bd.com/bangladesh-pharma-industry/overview.html
2. http://www.dgda.gov.bd/index.php/registration-dashboard
3. http://bapi-bd.com/bangladesh-pharma-industry/overview.html

4. https://www.tbsnews.net/economy/stocks/top-drugmakers-keep-growth-trajectory-h1-364801

5. https://www.researchandmarkets.com/reports/5125539/bangladesh-pharmaceutical-market-
future
6. https://www.lightcastlebd.com/insights/2021/08/active-pharmaceutical-ingredient-api-
manufacturing-the-next-growth-driver-of-the-bangladesh-pharmaceutical-industry/

7. https://www.tbsnews.net/economy/wppf-tax-will-increase-top-10-listed-firms-costs-over-
tk200cr-445058

8. Major Economic Indicators by Bangladesh Bank.

9. CPI Data by Bangladesh Bureau of Statistics.

10. Quantum Index by Bangladesh Bureau of Statistics.

11. Pocket Export Statistics FY 2020-2021 by Export Promotion Bureau.

12. Global Economic Indicator by International Monetary Fund (April 2022)

27
 APPENDIX

Forecasted Statement of Financial Position of Renata Pharmaceutical

Limited

28
Forecasted Statement of Financial Performance of Renata
Pharmaceutical Limited

29