Investment in Capital Market

1. BASICS OF COMPANY
ANALYSIS
Kazi Monirul Islam, CFA

2. DON’T FORGET THAT YOU ARE BUYING A
BUSINESS
“Behind every stock is a
company. Find out what it's
doing.”
– Peter Lynch
Most investors often forget that the stocks they are buying or
selling are shares of a certain company.

3. BUSINESS SELECTION
We will invest in a businesses -
(a) that we can understand
(b) with favorable long-term prospects
(c) operated by honest and competent
people
(d) available at a very attractive price

4. DO YOUR HOMEWORK BEFORE INVESTMENT
"Risk comes from not
knowing what you're
doing."
– Warren Buffett
An investor should always do his or her homework before
making decisions

5. TRY TO LEARN EVERYDAY
“Spend each day trying to be a little wiser
than you were when you woke up. Day by
day, and at the end of the day-if you live
long enough-like most people, you will get
out of life what you deserve.”
– Charles T. Munger

6. TRY TO LEARN EVERYDAY

7. WHERE DOES RETURN COME?
Dividend
Growth of the company (NPAT or NPAT driver)
Valuation Level – at which price you bought the shares

8. ALL THREE FACTORS ARE IMPORTANT IN
SHORTER TIME HORIZON
In a shorter time horizon, at which price you buy shares is very much important,
along with other two sources of return
Dividend
Yield
NPAT
Growth
Valuation level
(Repricing
Return)
1 yr Return Stock Characteristics
High Dividend Yield
Value stock
A 7.5% 0.0% 0.0% 7.5%High dividend Yield, no growth, bought at fair price
B 7.5% 7.0% 0.0% 14.5%High dividend Yield, moderate growth, bought at fair price
C 7.5% 7.0% 15.0% 29.5%
High dividend Yield, moderate growth, bought at 15%
undervalued
D 7.5% 7.0% -15.0% -0.5%
High dividend Yield, moderate growth, bought at 15%
overvalued
Growth stock
E 2.5% 15.0% 0.0% 17.5%Low dividend Yield, high growth, bought at fair price
F 2.5% 15.0% 15.0% 32.5%
Low dividend Yield, high growth, bought at 15%
undervalued
G 2.5% 15.0% -15.0% 2.5%Low dividend Yield, high growth, bought at 15% overvalued
Example of return – One Year Period

9. GROWTH IS THE PRIME FACTOR IN LONGER
TERM HORIZON
Initial
Investmen
t
Growt
h
Investment
Value after
10 years
Investment
Value after
20 years
Investment
Value after
30 years
A 1.0 0.0%1.0 1.0 1.0
B 1.0 5.0%1.6 2.7 4.3
C 1.0 10.0%2.6 6.7 17.4
D 1.0 15.0% 4.0 16.466.2
E 1.0 20.0% 6.2 38.3237.4
F 1.0 25.0% 9.3 86.7807.8
Power of Compounding is impressive!

10. IMPRESSIVE RETURNS OF STOCKS EVEN
WHEN MARKET COULDN’T GENERATE
SUFFICIENT RETURN
Annual Return (CAGR) till 2021
Stocks
15 Yrs from
Dec 2006
12 Yrs from
Dec 2009
10 Yrs from
Dec 2011
5 Yrs from
Dec 2016
SQUARE 20.2% 14.2% 13.0% 4.0%
Renata 31.3% 19.8% 18.5% 17.4%
Marico * 21.8% 28.6% 25.0%
Reckit 29.0% 14.8% 25.6% 33.2%
GP * 12.1% 15.2% 11.2%
Berger * 18.2% 23.0% 10.9%
BATBC 35.8% 27.6% 28.1% 21.3%
*No data available or yet to calculate
DSE Index 9.6% 3.6% 2.7% 6.1%
Dividend Yield 3.3% 3.4% 3.8% 3.9%
Total 13.0% 6.9% 6.5% 9.9%
*Dividend Yield rough assumption

11. AND THE REASON WAS EARNINGS
GROWTH…
“Time is on your side when you own shares of superior companies.“ - Peter Lynch
NPAT Growth
NPAT mn 2009 2021Times CAGR
SQUARE 2,116 15,947 7.5 18.3%
Renata 604 5,062 8.4 19.4%
Marico 471 3,447 7.3 18.0%
Reckit 198 804 4.1 12.5%
GP 14,968 34,129 2.3 7.1%
Berger 580 2,692 4.6 14.3%
BATBC 2,069 14,958 7.2 17.9%

12. …THEN THERE WAS FLIPSIDE AS WELL
“In the short run, the market is a voting machine but in the long run, it is a weighing machine."
− Benjamin Graham, American investor and economist
Decline in NPAT and share price (2010-2019)
^ ILFSL & PRIMEFIN NPAT till 2018
-84%
-97%
-40%
-60%
-97%
-84% -88%
-76%
-91%
-95%
-120%
-100%
-80%
-60%
-40%
-20%
0%
PREMIERLEA ABBANK NBL ILFSL^ PRIMEFIN^
NPAT Decline Market Cap Decline

13. SO, WE NEED TO FIND OUT HIGH POTENTIAL
STOCKS AND AVOID THE VALUE
DESTROYERS

14. THE MAJOR PARAMETERS ARE…
Growth trajectory (NPAT and Revenue) – look for fast growers
 Track record of Growth and its drivers
 Likelihood of continuation/change in historical growth trajectory
 Future growth drivers –
 Industry growth – income level, growing customer base, development of support factors, change in demography, customers habits
 Market share gain - competitive forces, company positioning – products, distribution channel, HR quality
 Expansion plan – new products, new location, higher usage of existing products
 New growth initiative and its % impact from it
 Margin increase – price raise, cost cut or increase in efficiency through process improvement
Sustainable growth rate = ROE * retention rate

15. THE MAJOR PARAMETERS ARE…
 Profitability – look for higher or improving
 Profit Margin and
 Return - ROA and ROE
 Sustainability
 Financial Condition – look for solid balance sheet
 Leverage - Cash, debt, debt to equity and equity multiplier
 Investment in Working capital
 Cash flow generation capacity
 Efficiency - Asset turnover ratio etc
Corporate Governance – Owners, boards and Management – Prime Factor

16. MEASURE OF PROFITABILITY: RETURN ON
EQUITY (ROE)
What rate of return has the firm earned on the shareholders’
equity it had available during the year?
The general form of the rate of return computation:
Applied to shareholders’ equity:
16
Rate of return =
Amount of return
Amount invested
ROE =
Net income
Average equity

17. DECOMPOSE ROE
17
=
Net income
×
Average assets
Average assets Average equity
ROE =
Net income
Average equity
= ROA × Leverage

18. DECOMPOSE ROE
A company can increase its ROE
With a business strategy, by increasing its ROA and/or
With a financial strategy, by increasing its use of leverage as long as
returns on the incremental investment exceed the cost of borrowing.
18
ROE = ROA × Leverage

19. PROFITABILITY, COMPETITION,
AND BUSINESS STRATEGY
In other words,
ROA can
be thought
of as:
19
ROA =
Net income
Average assets
ROA =
Net income
×
Revenue
Revenue Average assets
Profit margin × Turnover (efficiency)

20. DECOMPOSING RETURN ON EQUITY
20
ROE =
Net income
×
Revenue
×
Average assets
Revenue Average assets Average equity
ROE = Profit margin × Turnover × Leverage

21. BASICS OF INDUSTRY
ANALYSIS
Kazi Monirul Islam, CFA

22. DEFINE THE NATURE OF INDUSTRY
 Cyclical vs Non-Cyclical
 Basic Consumption Vs Luxury
 Struggling …..Temporary vs Permanent
 High Margin vs Low Margin
 High Turnover vs Low Turnover
 High Leverage vs Low Leverage
 High Capital Intensive Vs Low Capital Intensive
 High Growth stage Vs Moderate Growth Vs Low Growth

23. GROWTH DRIVER
 Under penetration / reach / coverage
 Demographics – Age of the population
 Changes in regulatory regime/ ease of doing business / business ecosystem
 Changes in raw material and finished product price in local and global market – supply shock
 Impact of currency depreciation/appreciation

24. BASICS OF MACRO ANALYSIS Kazi Monirul Islam, CFA

25. TWO BROAD USES
 Determining overall broad call on the market – to be discussed later
 Determine exit or entry point of many stocks based on movement of economic parameters
 Interest rate – leveraged company vs cash rich company
 Currency – FX loan
 Commodity price – raw material price impact on margin
 Condition of your customer economy

26. DETERMINING OVERALL BROAD CALL ON
THE MARKET
 Invest when economy starts doing well
 Usually Decent return
 Risk becomes the highest when you are in the last part of the cycle
 Invest when economy is in distress
 Big return when you buy near the bottom
 Risk is …you may need to wait more to get return/you may see further correction
Track consistency of market valuation level with corporate earnings growth
and comfort level of economic indicators

27. Try to understand ….
Where do we stand in the Economic Cycle (higher side vs lower side)
Instead of…
Predicting the Economy
Because most of the time, correct macro prediction is not possible!

28. USUAL ECONOMIC CYCLE
https://www.youtube.com/watch?v=PHe0bXAIuk0

29. UPWARD LONG TERM TRAJECTORY OF
BANGLADESH
 Large domestic market c. 170mn population with growing middle class
MAC population expected to triple to 34 million by 2025 - BCG
 Demographic Dividend
 Density Dividend
 Situated in a strategic location - Spillover benefit from China and India/Potential trade & commerce
transit hub
 China Relocation Opportunity - Cheap labor and China-US trade war
 Initiatives to set up 100 Economic Zones
 Ongoing investment in Energy and Infrastructure

30. DEMOGRAPHIC DIVIDEND
 Favorable demographic character - 65% population ages between 15 to 64
 The rise in working age population ratio likely to continue till 2035
 Rising middle income to facilitate high growth

31. SHORT TO MID TERM CYCLE
 Liquidity and Interest Rate Cycle
 Fiscal and Monetary policy
 Overall Debt level of the country
 Currency movement / Current account balance/ Fx Reserve
 Inflation
 Health of the banking sector
 Overall governance level in the economy
Depending on the appropriateness of policy, the cycle may become
shorter or lengthy

32. USUAL STOCK MARKET CYCLE

33. BE MENTALLY AND FINANCIALLY READY TO
TAKE BENEFIT FROM THE CYCLE
 The average investor should expect to spend approximately a
third of their life in a bear market.
 These events are to be expected, and once an investor learns
how to harness share price declines into stronger future
investment returns these unexpected events will become
sought after.
“Nothing is stable in human affairs, therefore, avoid undue elation in prosperity or
undue depression in adversity.”

34. BUY LOW, SELL HIGH

35. BUY LOW, SELL HIGH
 “Buying at the point of maximum pessimism” is critical to
investment success.
 Panics and bear markets are a reliable source for excess
return.
 Everyone wins in a bull market, and investor returns will be
determined by their behavior in a bear market.
The average man "tends to buy high and sell low“ − Ray Dalio,
American investor, hedge fund manager, and philanthropist

36. VALUATION Kazi Monirul Islam, CFA

37. VALUATION
“What you pay for an investment is the single biggest determinant for how successful
that investment will be. When equity prices are high, your returns will be lower. When
they are cheap, your returns will be higher.
Barry Ritholtz - American equities analyst

38. VALUATION PRINCIPLES
 Valuation means valuing cash flow you are going to receive from
an investment.
 No cash flow = no value
 Riskiness of cash flow should be reflected in discount rate; high
risk = high discount rate and vice versa
 Reaching a valuation conclusion requires consideration of both
Quantitative and Qualitative factors

39. METHOD OF COMPARABLES
Benchmark Value of the
Multiple Choices
Industry
peers
Industry or
sector index
Broad
market
index
Firm’s
historical
values

40. PRICE AND EARNING MULTIPLES
BEST and SIMPLE method, if you can adjust limitations –
 EPS – True EPS, normalized and reflective of forward EPS
 Differences in Companies – Earnings growth, Risk, and Quality
adjustments

41. PRICE-TO-EARNINGS MULTIPLE
DEFINITIONS
Trailing P/E
Uses earnings
of last 12
m/last 4
quarters /last
year
Preferred when
forecasted
earnings are
not available
Forward P/E
Uses next
year’s earnings
Preferred when
trailing
earnings are
not reflective
of future

42. VALUATION
 FCFF
 DDM
 P/E – Growth
 Growth usually NPAT growth
 More sophisticated formula includes dividend
yield with NPAT growth
 Applicable for manufacturing companies
P/E and Growth Exercise
Expected NPAT CAGR P/E
less than 10% Max 12
10-12% 10 to 15
12%-15% 12 to 18
15%-17% 15 to 22
17% -20% 17 to 25
20% - 25% 20 to 30
More than 25%
Not linear in upward side
since it is difficult to
sustain.
The ranges are for valuation exercise – expecting to help structured thinking. Not a perfect guideline since there are
many factors needed to be considered for the valuation
Lower end or higher end – depends on risk profile of the company

43. VALUATION
 Excess Return/Abnormal earnings/Residual Income
 P/B – ROE
 More applicable for financials
P/B and ROE
Exercise
Expected ROE P/B
less than 10% Max 1
10% to 13% 1 to 1.5
13% to 16% 1.2 to 1.8
16% to 18% 1.4 to 2.3
20% to 25% 1.7 to 3.5
Above 25% 2.5+
The ranges are for valuation exercise – expecting to help structured thinking. Not a perfect guideline since there are
many factors needed to be considered for the valuation
Lower end or higher end – depends on risk profile of the company

44. ENTERPRISE VALUE
EV = Market Cap + Debt – Cash and Cash equivalents – value of other
non-operating investments
Market Cap = Number of shares * Share price
Don’t compare just share price, compare with market cap at
least/Best way to compare with EV

45. ENTERPRISE VALUATION EXERCISE WITH NP
MARGIN
Expected NP Margin EV/Revenue
10% or below 0.5 to 2
10% to 15% 2 to 3
15% to 20% 3 to 4
20%+ 4 to 5
Higher growth companies with similar margin will get higher
multiples
The ranges are for valuation exercise – expecting to help structured thinking. Not a perfect guideline since there are
many factors needed to be considered for the valuation
Lower end or higher end – depends on risk profile of the company

46. ENTERPRISE VALUATION EXERCISE WITH
EBITDA GROWTH
Below 10% Max 6x
10-12% 6.0x to 8.0x
12%-15% 7.0x to 9.0x
15%-20% 9.0x to 11.0x
More than 20% Max 12.0x
EBITDA CAGR EV/EBITDA
The ranges are for valuation exercise – expecting to help structured thinking. Not a perfect guideline since there are
many factors needed to be considered for the valuation
Lower end or higher end – depends on risk profile of the company

47. SUMMARY OF VALUATION
 P/E Multiples should be justified by the growth prospects and
risk profile
 P/B multiples should be justified by the ROE and risk profile
 EV/Sales should be justified by net profit margin, growth, and
risk profile
 EV/EBITDA should be justified by EBITDA margin, growth, and
risk profile
 Dividend yield is effective if it reflects earnings capacity and it
is sustainable or in good cases if it has growth

48. SUMMARY OF VALUATION
 Peer/industry comparison can be done if we can adjust the
differences among the companies
 All of the parameters (EPS, book value, Sales, EBITDA and
Dividend) should be adjusted for abnormal fluctuations, one-
off and cyclical ups and down.
 So find out Base level of EPS, book value, Sales, EBITDA and
Dividend before using it as multiple

49. PORTFOLIO CONSTRUCTION Kazi Monirul Islam, CFA

50. CLASSIFY STOCK BASED ON NATURE
 Slow growers: Large Mature companies, pays a high dividend
yield
 Stalwart: Moderate growth (8%-12%)
 Fast growers: have very high growth (near 20%)
 Cyclical: very much related to the economic cycle
 Turnaround: Very high return when clicks but failure ratio
could be high
 Asset Play: Buy a hidden Gem, not discovered by market

51. CLASSIFY STOCK BASED ON NATURE
 Slow Growers: Low-risk and low-gain
 Stalwart: Low-risk and moderate-gain
 Fast growers: High-risk and high-gain
 Cyclical: May be low-risk and high-gain or high-risk and low-gain,
depending on how adept you are at anticipating cycles
 Turnaround: High-risk and high-gain
 Asset Play: Low-risk and high-gain
Allocation in each class depends on your risk tolerance level and
return target.

52. DIFFERENT STRATEGIES FOR DIFFERENT
CLASSES
 Slow Growers: Hold for stability and regular income from dividend
 Stalwart: Buy at a bargain and sell when there is a 20-50% return, repeat the
process
 Fast growers: Hold and enjoy the compounding effect as long as the story is
intact, sell when the story falters or you find a better story,
 Cyclical: Buy in the down cycle and sell in upcycle
 Turnaround: Buy at the worst time/ showing signs of a turnaround, Sell when
it turns around
 Asset Play: Buy for a hidden Gem, not discovered by the market, and sell when
it is priced
Different exit strategies for different classes of stock

53. THANK YOU