Financial Statement Analysis And Valuation Of RAK Ceramics Bangladesh Ltd

Introduction

A brief description of RAK Ceramics Bangladesh Ltd.

Name of the company	:RAK Ceramics Bangladesh Ltd.
Date of incorporation	: November 26, 1998
Commencement of Business	: 12 November 2000
Authorized Capital Pre- IPO paid-up Capital                                     IPO size	: Tk.3,000 mn : Tk. 1,855.64 million : Tk. 300 million.
Face Value Indicative price Nature of Business	: Tk. 10 : Tk. 40 : The Company is engaged in manufacture and sell of          tiles and sanitary ware.
Turn Over (sales) Profit after tax EPS (Basic)	:Tk.3,247.99mn for year ended on the 31.12.08. and Tk.1910.35 for last 6 (six ) month as on 30.06.09.  : Tk. 286.4 mn for the year ended on 31.12.08. and Tk.142.46 for last 6 (six ) month as on 30.06.09 :Tk. 10.99
Short term and long term loan from different Banks Investment in Subsidiary Companies  Share Money deposit	: Tk. 1220.45 mn. : Tk. 362.66 mn : Tk.558.84 mn
Major Product Issue Manager Auditors	: Tiles and sanitary ware : IDLC Finance Ltd & Equity Partners Ltd. :  K. M. Hasan& Co. and S.F. Ahmed & Co.

Company Background :

RAK Ceramics (Bangladesh) Limited, a UAE-Bangladesh joint venture company, was incorporated in Bangladesh on 26 November, 1998 as a private company limited by shares under the Companies Act 1994. The name of the Company was thereafter changed to its name from RAK Ceramics (Bangladesh) Private Limited to RAK Ceramics (Bangladesh) Limited on 10 June 2008, certificate issued by the Registrar of Joint Stock Companies dated 11 February, 2009.

It is engaged in manufacturing and marketing of ceramics tiles, bathroom sets and all types of sanitary ware. It has started its commercial production on 12 November 2000. The commercial production of new sanitary ware plant was started on 10 January 2004. Further expansion of the existing facilities of ceramics tiles plant took place in year 2004, and for tiles and sanitary plants were in year 2007.

RAK Ceramics (Bangladesh) Limited, 90% held by RAK Ceramics PSC, a company incorporated under the laws of UAE and remaining 10% owned by local investor Mr. S.A.K. Ekramuzzaman.With an annual turnover of over BDT 3248 million, within the short span of eight years RAK has firmly established itself as one of the leading manufacturer of high quality ceramic wall, floor tiles, gresporcellanato and sanitary wares products in Bangladesh.

Specializing in high-quality ceramic wall and floor tiles, GresPorcellanato, and sanitary ware, RAK Ceramics uses more than 8,000 production models, with new designs added almost every week to its portfolio. Tiles are manufactured in a variety of sizes.

RAK Ceramics is the world’s first company to launch Luminous, the wonder tile that glows in the dark and the Antimicrobial, a super specialty tile for the hospitality industry. The company's creations include the high-valued brand "Elegance Ceramics" and it continues to be a global pioneer in the world of ceramics through innovative eco-friendly products such as RAK SLIM, Stone Art Collection, Orion Collection and Wood Art Collection using the latest Nanopix digital printing technology. It has also launched its trendy tiles in unique sizes of 25x70 and 20x50 appealing to the urban consumers. Further it has tapped children tiles segment with the launch of Junior Tiles Collection.

The global production of tiles exceeds 360,000 sq.m. and 12,000 pieces of sanitary ware per day from its 10 state-of-the-art plants in UAE and 1 plant each in China, Sudan, Bangladesh, India and Iran. RAK Ceramics manages around 8,000 employees in UAE and 12,000 employees worldwide and currently exports to more than 160 countries, which is a testimony to its excellent reputation worldwide. RAK Ceramics has recently achieved the status of supplying 1 billion sq.m. of tiles and 50 million pieces of bathware worldwide and it is the fastest ceramics manufacturer to achieve the milestone since its inception within two decades.

RAK Ceramics is a ISO 9001 : 2008 & ISO 14001 : 2004 certified organisation. In 2007, it was given an AA rating and was ranked among the top four brands in the UAE by UK-based Brand Finance Middle East. RAK Ceramics was also recognised as Company of the Year in 2004 by the Arabian Business Awards and bestowed the MRM Business Award for Manufacturing, the highest manufacturing award of the UAE.

RAK Ceramics was also honoured by the Emirates Securities and Commodities Authority (ESCA) for complying with good governance and transparency according to best international practices.RAK Ceramics won the Innovation Award for its revolutionary RAK Slim tiles. RAK Ceramics was also honoured with the Best Brand Award. It has achieved the Environmental Performance Certificate (EPC) in recognition of its successful efforts to comply with environmental protection standards and regulations. RAK Ceramics is the first ceramics manufacturing company in the region to produce GRI-based sustainability report.

RAK Ceramics offers a complete solution with its diversification into tile adhesives and grouts in a joint-venture with Laticrete International Inc of USA to form Laticrete RAK; a joint venture with German-based Kludi to manufacture a range of taps, faucets and other accessories for sanitary-ware products under the brand name Kludi RAK; eco-friendly paints under the brand RAK Paints and RAK Porcelain, the tableware range of products targeted at high-end hospitality industry. All these subsidiaries contribute to RAK Ceramics brand by offering complete value-added service to clients.

The Products of RAK Ceramics company :

RAK Ceramics Ltd. Produces a wide range of products such as Ceramic Wall and Floor Tiles, Decors and Boarders. It also produces an extremely wide range of products in GresPorcellanato in several finishes suited for any ambience.

The products of RAK Ceramics company are given below :

Wall tiles	Floor tiles	Sanitary ware
Ceramics	Ceramic-GresPorcellanato	Model wise bathrooms set
Décor tiles	Salt and Paper(Glaze)	Over counters
Border tiles	Salt and Paper(Homogeneous)	Under counters
Wall tiles matching with Decors and Borders	Soluble Salt(Mirror Polish)	Wall mounted wash basins
	Double charge(Mirror Polish)	Other accessories
	Wooden model	Asian water closet
	Stair and pavement	Wash basin pedestal
	Slate and Rustic	Urinal Bow

Market Share and Dividend Policy of RAK Ceramics Bangladesh Ltd :

Authorisedcapital : 6,00,000,000 ordinary shares of Taka 10 (upto 2012)

Issued, subscribed, called and paid up :

278,388,935 ordinary shares of Taka 10/- each.

Dividend Policy :

The Board of Directors of the Company is pleased to recommend dividend 15 percent in cash and 10 percent in stock of the paid up capital of the Company for the year 2012. Previous year dividend was paid at 15percent in cash and 10 percent in stock. They have adopted Dividend Discount Model (DDM) for valuing the share of  RAK. The valuation is based on the forecasted earnings and dividend payments  of the company prepared by RAK Ceramics (Bangladesh) Limited.

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Marketing Mechanism and Distribution of the Products :

RAK ceramics is currently leading the company strategically to position rak ceramics as a premium international brand known for its innovative product range through technological advancement and high-quality production. RAK ceramics has invested heavily in research and development as innovation is the key factor for the company’s sustainable success as it continues to add new designs and models on a frequent basis to cater to different markets.  It has sustainable growth plan. With its state-of-art plants and distribution network and diversified range of products, rak ceramics will continue to exploit new opportunities for growth and expansion. RAK ceramics offers a complete interior solution with its diversification into tile adhesives and grouts in a joint-venture with laticrete international inc of usa to form laticreterak; a joint venture with german-based kludi to manufacture a range of taps, faucets and other accessories for sanitary-ware products under the brand name kludirak; eco-friendly paints under the brand rak paints and rak porcelain, the tableware range of products targeted at high-end hospitality industry .RAK company always try to go close to their clients by listening to their needs and adapting to market requirements excellence in producing high-quality products that offers best value-for-money redefining the product innovation and design process accountable to its clients, trade partners, stakeholders and employees motivate to develop them into future entrepreneurs, integrity of the management towards the organisational goals committed to the society by contributing towards a healthy environment.

INDUSTRY ANALYSIS

Porter’s five forces model identifies the following factors which affects an Industry’s external environment.

Figure :     Porter’s five forces model

Understanding these competitive forces and their underlying causes reveals the roots of an industry’s current profitability while providing a framework for anticipating and influencing competition (and profitability) over time (Porter 2008). Porter argues that the stronger each of these forces is,the more limited is the ability of established companies to raise prices and earn greater return. Within Porter’s framework, a strong competitive force can be regarded as a threat since it depresses profits. A weak competitive force can be viewed asan opportunity, for it allows company to earn greater profits. The strength of these five forces may change through time as industry conditions change profits .The analysis of five forces indicates that the collective impact of the competitive forces is moderate to weak; hence, the ceramic industry of Bangladesh is considered to be competitively attractive in the sense that industry members can reasonably expect to earn decent profits and a nice return on investment.

Risk of Entry by Potential Competitors

 Normally companies that are not currently competing in an industry, but have the capability of doing so are known as potential competitors. Bangladesh has certain competitive advantages in the international market in terms of availability of gas, cheap labor and the generalized system of preferences (GSP) that allows Bangladesh to have duty-free exports to Europe and there is no quota restriction either on the export. Considering this sector’s potentiality for investment, ceramic industry has always allured both local and foreign investors. Since domestic and export demand for ceramic products are rising rapidly, widening the gap between demand and supply, the new entrants can easily expect to earn attractive profit by capturing the untapped demand. As the construction industry including residences, shopping malls and others is growing so fast, the ceramic tiles business is becoming one of the booming and prospective sectors. In this sector, there are low entry barriers as the government regulations are supportive for new entrants. However, the number of new entrants and their capacity development is low compared to the growth in domestic and export demand. Hence, the competitive threat of potential entry is not strong enough to place significant competitive pressure on RAK Ceramics Bangladesh Ltd.

Bargaining Power of Buyers

RAK Ceramics Bangladesh Ltd has got different types of customers. They are both domestic customers and foreigncustomers. The individual buyers mostly pay the seller’s posted price. However, itis relatively easy for buyers to switch to comparatively low-priced imported ceramic goods; keeping this in mind, the RAK Ceramics industry is aiming for competitive pricing to attract and retain customers. As a result it has low bargaining power in local industry. The bargaining power of international buyers is reasonably strong enough to negotiate for price concession and favorable terms. But due to increased production cost, other low price supplier countries are also failing to offer competitive prices and losing their share in the international market. Thus, more international buyers are moving towards Bangladesh as it has cost competitiveness in terms of gas supply, cheap labor cost, skilled labor and also has competitive advantage of possessing “bone china” technology. As the number of buyers, both in local and international market, is growing, the bargaining power of buyers is weakening for RAK Ceramics industry.

Threat of Substitute Products

The RAK ceramic industry is already in fierce competition with low-priced sanitary ware, tiles and table wares, mostly imported from China. Besides, it is also facing strong competitive pressure from firms in other industries offering substitute products such as low priced melamine wares, aluminum wares, steel kitchen wares, glass wares and plastic wares etc. In recent years, large scale manufacturers have entered the crockery market, with their brands competing strongly with both local ceramics products and foreign products of their same kind. Companies like Bangladesh Melamine, Sharif Melamine, RFL, BRB, and GAZI are contributing greatly to this thriving crockery market by creating demand for new products. Other substitutes of tiles include wooden flooring or tiles, bamboo flooring, ply board, marble stones and other artificial stones for both interior and exterior usage. Hence, the availability and low cost ofsubstitutes is exerting moderately competitive pressure on RAK Ceramics Bangladesh Ltd.

 The Bargaining Power of Suppliers

Normally suppliers become powerful over an organization when any of the following situations prevails:

• Product that the supplier sells has few substitutes and is important to the company.
• When the company’s industry is not an important customer to the supplier.
• When suppliers respective products are differentiated to such an extent that it is costly for a company to switch from one supplier to another.
• When to rise prices, suppliers uses the threat of integrating vertically forward into the industry and competing directly with the company.
• When buying companies cannot use the treat of vertically integrating backward and supplying their own needs as a means of reducing input prices.

In Bangladesh, there is a shortage of raw materials, equipment and machineries for ceramic industry, it gives the supplier of RAK Ceramics Bangladesh Ltd more leverage in bargaining the price. But the supplier base is moderately large enough to weaken the supplier power.

Rivalry among Existing Firms

The RAK Ceramics Bangladesh Ltd faces stiff competition. Ceramic manufacturers like Monno Ceramic, ShienpukurCeramic, Standard Ceramic, FARR Ceramic and Bengal Fine ceramics are still leading in ceramics industries. All other ceramic manufacturers are also increasing their production capacity following robust growth in demand for ceramic ware. However, increment in the number of new plants, capacity development, product development and market expansion by RAK Ceramic Bangladesh Ltd made it reducing rivalry among existing firms. As there still exit ample growth opportunities in this industry, the rivalry among the existing companies are still weak.

Internal Environment Analysis

The RAK Ceramics Bangladesh Ltd’s profit is not stable over last several years. In this section, attempts will be made to identify the causes and the sources of competitive advantages of RAK Ceramic company.

RESULTS OF INDUSTRY ENVIRONMENT ANALYSIS

Understanding industry structure for RAK Ceramics Bangladesh Ltd is of great concern to strategist since defending against the competitive forces and shaping them in a company’s favor are crucial to strategy. Besides, it is also essential for effective strategic positioning of a company. This analysis will help RAK Ceramics Bangladesh Ltd. to decide how to influence or to exploit particular characteristics of the ceramic industry. The analysis of porter’s five forces model indicates that the industry environment of ceramic sector is weak to moderate competitive and offers ample growth opportunities for both its incumbents and new entrants. As the collective impact of the five competitive forces is moderate to weak, the ceramic industry is considered to be competitively attractive in the sense that industry members can reasonably expect to earn decent profits and a nice return on investment. Therefore, to sustain in this industry, the RAK ceramics companies should match strategy to prevailing competitive conditions of the marketplace. These strategies should include actions such as continuous productdevelopment, quality improvement and offering ranges of prices to satisfy allsegments of the domestic and export market.

Identification of Red Flags & Estimating Earnings Quality

 

Potential Red Flags Identification:

A very common approach to accounting quality analysis is to look for “ red flags” pointing to questionable accounting  quality. These indicators suggests that the analyst should examine items more closely or gather information on them.

Some common types of  red flags are:

1)Unexplained changes in accounting especially when performance is poor.

2) Unexplained transactions that boost up profits.

3) Unusual increase in accounting receivable in relation to increase in sales.

4) Unusual increase in inventories in relation to sales increase.

5) An increasing gap between a firm’s reported income  and its cash flow from operating activities.

6)  An increasing gap between a firm’s reported income  and its tax income.

7) A tendency to use financing  mechanism like research and development partnership and the sale of  receivables with recourse .

8) Unexpected large assets write off.

9) Large fourth quarter adjustments.

10) Qualified audit opinions or changes in accounting auditors that are not well justified.

11) Related party transactions or transactions between related parties.

Identified Red Flags of RAK CeramicsBangladesh  Limited :

I became able to identify the following two red flag of RAK Ceramics Bangladesh Limited and gathered information about their origination-

1)      An unusual increase is accounts receivables in relation to increase in sales is traced in the year of 2010.

From the above table we can see that sales increased by only 14.25% in the year 2011 but accounts receivables increased by 35% in that year. This may be due to the fact that export sales decreased significantly at that year and to cover up such decrease the company tried to increase local sales by increasing credit sales.

I)                   Significant inecrease in cash flows from operations in the year of 2012 while reported income is decreased significantly.

From the above information we can see that although reported income has been decreased by 22.05% in the year 2012 cash flows from operations increased by 74.19% in that year. Cash flows from operations increased because payments for cost and expenses decreased significantly in that year but still reported income is showing a negative growth rate.

Estimating Earning Quality of RAK CERAMICS Bangladesh Limited :Earnings management is predominantly a function of manipulating accruals, so it is intuitive to use the magnitude of accruals as a proxy for earnings quality: the higher the total accruals as a percentage of assets, the greater the likelihood that earnings quality is low.

There are two approaches for measuring earnings quality-

1)      Balance Sheet Approach: Formula = (NOA_t – NOA_t-1)/{(NOA_t + NOA_t-1)/2}

2)      Statement of Cash Flow Approach: Formula = {NI_t– (CFO_t + CFI_t)}/ )/{(NOA_t + NOA_t-1)/2}

Decision Rule: A high ratio indicates that the companies accrual basis earnings has a high aggregate accruals component (more management discretion), which implies low earning quality and vice versa.

Balance Sheet Approach Year 2009 2010 2011 2012 NOA [( TA-Cash) - (TL-TD)] 3028032801 3,630,698,075 4,087,398,156 4,690,230,001 Balance Sheet Aggregate Accruals 602,665,274 456,700,081 602,831,845 Average NOA 3329365438 3859048116 4388814079 Balance Sheet Accrual Ratios 0.181015057 0.118345267 0.137356433 Cash Flow Statement Approach Year 2009 2010 2011 2012 Cash Flow Aggregate Accruals -194,649,927 527,692,568 537,522,569 Cash Flow Aggregate Accrual Ratios -0.058464572 0.13674164 0.122475584 Decision (Individual Evaluation): Using both balance-sheet-based accruals ratio and cash flow statement based accrual ratios we can conclude that RAK Ceramics Bangladesh Limited has improved earnings quality from 2010 to 2012. Analysis of Cash Flow Statement : FCF and OCF through graph :       OPERATING CASH FLOW : In the following graph of OCF we can see that OCF is higher in 2010but in 2011 it falls in a significant amount due to the expansion of the firm in a subsidiary operation and also due to increase their sale and overall profit.                                                            Figure : Operating cash flow.       FREE CASH FLOW : In the following graph of FCF, we see that FCF is is increasing all of the year of 2010, 2011 and 2012. Figure : Free cash flow.

Classification of RAK CERAMICS BANGLADESH Limited in terms of OCF & FCF:

There are four types of decision that we can take:

OCF	FCF	Category
Positive (+)	Negative (-)	Growth Company
Positive (+)	Positive (+)	Cash Cow
Negative (-)	Positive (+)	Disinvest/Quit
Negative (-)  > FCF Negative (-)  <FCF	Negative (-)	1)Disinvest/Quit 2) BMRE

As both Free cash Flow and Operating Cash Flow are positive for RAK Ceramics Bangladesh  Limited for every year from 20010 to 2012 so the firm can be classified as a cash cow.

Analysis of Cash Flow Trend:

After analyzing the cash flow statement of RAK Ceramics Bangladesh Limited it is found that although net cash inflows occurred from operating activities year after year, net cash outflow occurred in investment activities from 2010 to 2012 and in financing activities from 2011 to 2012 for the company.

Cash Flow Trends:

v  For analyzing cash flow trend the following graphs are used-

Figure 01: Net Cash Inflow from Operating Activities.

Explanation: The above figure indicates that net cash inflows from operating activities decreased sharply in the year of 2011. The reason identified is that cash payments for cost and expenses increased significantly in that year. And then it started increasing and continued to increase up to 2012.

The following figure no.02representsNet Cash Inflow from Investment Activities :

Figure 02: Net Cash Inflow from Investment Activities.

Explanation: The above figure indicates that net cash outflows from investment activities increased sharply from the year of 2011. The reason identified is that cash investment in long term asset is increased sharply from the year of 2011.

v  The following figure represents the cash outflow from financing activities :

Figure 03: Net Cash Inflow from Investment Activities.

Explanation: The above figure indicates that net cash outflows from financing activities is increased from 2011 but in the year of 2010 there is cash inflow from financing activities.

Analysis of the performance of the Company

Ratios . . .

Du-pont Analysis

                                  

Year	O. Profit Margin	Total Asset Turnover	Interest Burden	After tax Retention rate	Financial Leverage	ROE
2012-13	0.208745166	0.588493423	0.952951999	0.628500001	1.45632672	0.10715
2013-14	0.231163737	0.566029405	0.96544092	0.6285	1.493380173	0.118566
2014-15	0.255994241	0.542538401	0.966350558	0.6285	1.533108031	0.129322
2015-16	0.283496813	0.516760449	0.963074422	0.66339878	1.572867181	0.147219
2016-17	0.313959723	0.503259403	0.959960378	0.695072586	1.640742022	0.172977

Sensitivity of ROE in respect to operating profit margin-

Year	O. Profit Margin	Total Asset Turnover	Interest Burden	After tax Retention rate	Financial Leverage	ROE	% Change in ROE
2012-13	0.208745166	0.588493423	0.952951999	0.628500001	1.45632672	0.107150245	-
2013-14	0.231163737	0.588493423	0.952951999	0.628500001	1.45632672	0.118657842	0.107396839
2014-15	0.255994241	0.588493423	0.952951999	0.628500001	1.45632672	0.131403501	0.107415221
2015-16	0.283496813	0.588493423	0.952951999	0.628500001	1.45632672	0.145520749	0.107434339
2016-17	0.313959723	0.588493423	0.952951999	0.628500001	1.45632672	0.161157558	0.107454153

MEAN=0.107425138 SD=2.46692E-05 CV=0.000229641

Sensitivity of ROE in respect to Total Asset Turnover-

Year	O. Profit Margin	Total Asset Turnover	Interest Burden	After tax Retention rate	Financial Leverage	ROE	% Change in ROE
2012-13	0.208745166	0.588493423	0.952951999	0.628500001	1.45632672	0.107150245	-
2013-14	0.208745166	0.566029405	0.952951999	0.628500001	1.45632672	0.103060097	-0.03817208
2014-15	0.208745166	0.542538401	0.952951999	0.628500001	1.45632672	0.09878296	-0.041501385
2015-16	0.208745166	0.516760449	0.952951999	0.628500001	1.45632672	0.094089426	-0.047513599
2016-17	0.208745166	0.503259403	0.952951999	0.628500001	1.45632672	0.091631216	-0.026126314

MEAN=-0.038328344 SD=0.009006498 CV=-0.234982712

Sensitivity of ROE in respect to Interest Burden-

Year	O. Profit Margin	Total Asset Turnover	Interest Burden	After tax Retention rate	Financial Leverage	ROE	% Change in ROE
2012-13	0.208745166	0.588493423	0.952951999	0.628500001	1.45632672	0.107150245	-
2013-14	0.208745166	0.588493423	0.96544092	0.628500001	1.45632672	0.108554503	0.013105509
2014-15	0.208745166	0.588493423	0.966350558	0.628500001	1.45632672	0.108656783	0.0009422
2015-16	0.208745166	0.588493423	0.963074422	0.628500001	1.45632672	0.108288413	-0.003390215
2016-17	0.208745166	0.588493423	0.959960378	0.628500001	1.45632672	0.107938269	-0.003233441

MEAN=0.001856013

SD=0.007763411

CV=4.182842526

Sensitivity of ROE in respect to Financial Leverage-

Year	O. Profit Margin	Total Asset Turnover	Interest Burden	After tax Retention rate	Financial Leverage	ROE	% Change in ROE
2012-13	0.208745166	0.588493423	0.952951999	0.628500001	1.45632672	0.107150245	-
2013-14	0.208745166	0.588493423	0.952951999	0.628500001	1.493380173	0.109876478	0.025443091
2014-15	0.208745166	0.588493423	0.952951999	0.628500001	1.533108031	0.112799483	0.026602642
2015-16	0.208745166	0.588493423	0.952951999	0.628500001	1.572867181	0.115724789	0.025933691
2016-17	0.208745166	0.588493423	0.952951999	0.628500001	1.640742022	0.120718728	0.043153574

                                              

MEAN=0.03028325 SD=0.008593368 CV=0.283766382

DECISION: As CV is higher in case of interest burden, so, ROE is more sensitive in case of interest burden.

v Analysis of Sustainable Growth :

                      Computation of SG :

Computation Between Actual and Sustainable Growth :

The following graphs shows the actual and sustainable growth comparison of the firm –

Explanation& Suggestions:

The sustainability growth of RAK Ceramics Bangladesh Limited’s is lower in 2011 and is higher in 2010 and 2012 than its AG which is a good sign. It means that the company has the potential of going up growth. In these cases, management's principal objective is finding productive uses for the cash flows that exist in excess of their needs. Options available to business owners and executives in such cases include returning the money to shareholders through increased dividends or common stock repurchases, reducing the firm's debt load, or increasing possession of lower earning liquid assets. These actions serve to decrease the sustainable growth rate. Alternatively, these firms can attempt to enhance their actual growth rates.

Estimation of Value Addition:

For estimating value addition at first intrinsic value of shares for RAK Ceramics Bangladesh Ltd and no-growth value is calculated for every year and then by subtracting no-growth value from intrinsic value present value of growth opportunity (PVGO) is calculated which is the indicator for value addition or subtraction. 

Here,

Intrinsic value = D₁/ (k-g) &

G = ROE*b

No-growth value = E₁/ k

PVGO = Intrinsic Value – No-growth value

Explanation of the results:

 From the above table we can see that PVGO is positive and higher for the 2010 & 2011 and in 2012 it is lower than previous year but positive. These positive growth opportunities indicate that the growth opportunity actually increases the stock price.

v Measuring DOL & DFL :

Degree of  Financial leverage :

The degree of financial leverage (DFL) is the leverage ratio that sums up the effect of an amount of financial leverage on the earning per share of a company. The degree of financial leverage or DFL makes use of fixed cost to provide finance to the firm and also includes the expenses before interest and taxes. If the Degree of Financial Leverage is high, the Earnings Per Share or EPS would be more unpredictable while all other factors would remain the same.

The degree of financial leverage or DFL helps in calculating the comparative change in net income caused by a change in the capital structure of business.This ratio also helps in determining the suitable financial leverage which is to be used to achieve the business goal. The higher the leverage of the company, the more risk it has, and a business should try and balance it as leverage is similar to having a debt.

ü  From the above discussion we can say that the DFL of the firm is decreasingslightly year after year but remain positive throughout the year. That indicates that financial position of the firm is not good. As the degree of financial leverage is positive so the earning per share would be more unpredictable for the shareholders of the firm.

ü  Moreover higher the leverage ratio of the firm, the more risk is in the firm. As leverage ratio of the firm is positive so the firm need to balance its debt for better financial position.

ü  On the other hand the ratio also helps the investor to decide which firm to invest in lower risk, with high profitability. As the ratio is on the side of the firm and bears a bad indication of higherrisk , so customer may not decide to invest in the firm. So the firm should try to control the DFL.

Degree of  Operating leverage:

The Degree of Operating Leverage (DOL) is the leverage ratio that sums up the effect of an amount of operating leverage on the company’s earnings before interests and taxes (EBIT). Operating Leverage takes into account the proportion of fixed costs to variable costs in the operations of a business. If the degree of operating leverage is high, it means that the earnings before interest and taxes would be unpredictable for the company, even if all the other factors remain the same.

A business would benefit if it can estimate the Degree of Operating Leverage or DOL. The impact of the leverage on the percentage of sales can be quite striking if not taken seriously; therefore it is really important to minimize these risks of the business.

ü  From the above table we see that the degree of operating leverage of the firm was significantly higher in 2010 and 2011. That indicates the earning before interest and taxes would be unpredictable even if the all the others factors remain constant.

ü  On the other hand as operating leverage is high a small percentage change in sales can increase the net operating income. For this reason Since the Degree of Operating Leverage or DOL helps in determining how the change in sales volume would affect the profits of the company, it is important to ascertain the value of degree of operating leverage in order to minimize the losses to the company.

ü  When there is a higher degree of operating leverage or DOL then the firm should try and balance the operating leverage to balance with the financial leverage in order to provide with profits to the company.

        

v Comments on Disclosure Practice :

Mandatory Disclosure practices by RAK Ceramics Bangladesh Limited :

I)                   According to ICAB manual typical annual report must include the followings-

ü  Accounting policies;

ü  Balance sheet

ü  Cash flow statement

ü  Profit and loss account

ü  Notes to the financial statements

ü  Chairpersons statement

ü  Directors' Report

ü  Operating and financial review

ü  Other features Auditors report.

Ø  RAK Ceramics Bangladesh Limited provided a complete set of financial statements in their annual report which include a statement of financial position, a statement of comprehensive income, a statement of changes in equity, a statement of cash flows and notes for the period according to the BAS 1(10).

In addition annual reports should also disclose the following according to BAS-1:

II)                According to BAS an entity should disclose the following information prominently-

a)      The name of the reporting entity or other means of identification, and any change in that information from the end of the preceding reporting period; 

b)      Whether the financial statements are of an individual entity or a group of entities;

c)      The date of the end of the reporting period or the period covered by the state of financial statements or noted;

d)     The presentation currency; as defined in BAS 21.

Ø  The name of the reporting entity and other means of identification are followed by RAK Ceramics Bangladesh Limited.

Ø  It is also clear from the annual report that the company is an individual entity. The dates of the end of the reporting period are covered by the set of the financial statements or notes. Sample is given in the following page-

RAK CERAMICS (BANGLADESH) LTD. Consolidated Statement of Financial Position as at 31 December 2012

RAK CERAMICS (BANGLADESH) LTD. Notes to the Consolidated Financial Statements As at and for the year ended 31 December 2012.

v  It is also disclosed in the annual report of RAK Ceramics Bangladesh Ltd. that foreign currency transactions are recorded at the applicable rates of exchange ruling at the transaction date. 

III)             The company follows the BAS-1 (54) in completing financial position statement. But some of the elements are absent.

IV)             According to BAS-1 (97) When items of income or expenses are material; an entity shall disclose their nature and amount separately.

Ø  Items of income or expense are shown separately both in the statements and notes by RAK Ceramics Bangladesh Limited.

V)                According to BAS-1 (98) circumstances that would give rise to the separate disclosure of items of income and expense include-

a)      Write downs of inventories to net realizable value or of property, plant and equipment to recoverable amount, as well as reversals of such write-downs.

Ø  The write down of inventory by RAK Ceramics Bangladesh Limited-

Inventories 2011 2012  Raw materials 727,722,559 783,651,191 Stores and consumable spares 663,996,775 716,448,414 Finished goods 69,474,372 72,557,895 Work-in-process 29,127,189 28,575,283  Goods-in-transit 10,615,250 11,141,554 Total : 1,500,936,145 1,612,374,337

b)Disposals of items in property, plant and equipment.

Ø  Such disposals of RAK Ceramics Bangladesh Limited are as follows-

Property, plant and equipment are stated at their cost (Fair value for Building & other construction) less accumulated depreciation in accordance with IAS 16 as adopted by ICAB as BAS 16 "Property, Plant and Equipment”. Cost represents cost of acquisition or construction and capitalization of pre-production expenditure including interest during construction periods. No depreciation is charged on land and land development. Full year’s depreciation has been charged on additions irrespective of date when the related assets are put into use. Depreciation on all other fixed assets is computed using the straight line method in amounts sufficient to write off depreciable assets over their estimated useful economic lives.

VI)             According to BAS an entity shall present statement a statement of changes in equity showing in the statement:

a)      Total comprehensive income for the period, showing separately the total amounts attributable to owners of the parent and to non controlling interest;

b)      For each component of equity, a reconciliation between the carrying amount at the beginning and the end of the period, separately disclosing changes resulting from-

i)                    Profit or loss;

ii)                  Each item of other comprehensive income

iii)                Transactions with owners in their capacity as owners, showing separately contributions by and distributions to owners and changes in ownership interests in subsidiaries that do not result in loss of control.

RAK Ceramics Bangladesh Limited has followed the above rules of BAS-1 (106).

VII)          According to BAS-1 (117) an entity shall disclose in the summary of significant accounting policies:

a)      The measurement basis (or bases) used in preparing the financial statement, and

b)      The other accounting policies used that are relevant to an understanding of the financial statements.

Ø  It is mentioned in the annual reports of RAK Ceramics Bangladesh Limited that the company followed IAS, BAS, IFRS and BFRS in preparation of financial statements.

Voluntary disclosure practices of RAK ceramics ltd-

(I)    Description about the products the company manufactures;

(II) The breakdown of shareholding as follows-

Sl. No.	Shareholder's Group	No. of Shares Held	% of Total Shares	o. of Shareholders
1.	Sponsors & Directors : I. Local (Individual + Corp. Body) II. Govt. of Bangladesh III. Foreign (Individual + Corp. Body)	18,556,374 N/A 201,578,626	6.67 N/A  72.41	1  N/A  8
2.	Associated Companies	N/A	N/A	N/A
3.	Govt. of Bangladesh	N/A	N/A	N/A
4.	Corporate Bodies I. Local (other than in sl no. 1) II. Foreign (other than in sl. no. 1)	27,232,564 500	9.78  0.00	490 1
5.	General Investors I. Local Individual II. Non Resident Bangladeshis (NRBs) III.Foreign Individual	30,293,766  727,105 N/A	10.88 0.26 N/A	58,617  2,130  N/A
6.	Total	278,388,935	100.00	61,247

Choice of Accounting Policies by RAK Ceramics Bangladesh Limited-

Some crucial accounting policies by RAK Ceramics Bangladesh Limited are discussed below-

1)     Recognition of Income: According to BAS-18 ‘Revenue’, Vat as included in sales price and collected on behalf of customers is not considered as ‘Revenue’.

2)     Property, Plant and Equipment: these are initially stated at cost of acquisition and subsequently stated at cost less accumulated depreciation in accordance with BAS 16. Any kind of repair and maintenance is charged off as revenue expenditure in the period when it is incurred. But if it is clearly demonstrated that the expenditure has resulted in an increase in future economic benefit expected to be obtained from the use of fixed assets, then the expenditure is capitalized as an additional cost of assets.

3)     Depreciation:Items of property, plant and equipment are depreciated on a straight-

4)     line basis in profit or loss over the estimated useful lives of each component. Capital work-in-progress and land are not depreciated. Depreciation on addition to fixed assets is charged from the day of their acquisition and charging of depreciation on property, plant and equipment ceases from the day on which the deletion thereof takes place. Depreciation continues to be charged on each item of property, plant and equipment until written down value of such fixed asset is reduced to Taka one.

4)R & D Expenses: Development costs are expensed when incurred instead of recognizing as an asset due to the uncertainty of the related future economic benefit.

5)    Advertising and Promotional Expenses: All costs associated with advertising and promoting products are expensed in the year incurred.

6)    Inventories:Inventories on hand are valued at the lower of cost and net realisable value. For raw materials and consumable spare parts cost is determined on a weighted average cost basis. Work-in-process is stated at cost to complete of respective product. Cost comprises cost of raw materials, wages and other overheads up to the stage of completion. Finished products are stated at lower of cost and net realisable value. Net realisable value is the estimated selling price in the ordinary course of business less the estimated costs necessary to make the sale. Raw materials in transit are valued at cost.

7)    Lease: Leases for which the Company assumes substantially all of the risks and rewards of ownership are classified as finance leases. On initial recognition, the leased asset is measured at an amount equal to the lower of its fair value and the present value of minimum lease payments. Subsequent to initial recognition, the asset is accounted for in accordance with the accounting policy applicable to that asset.

8)     Taxes :

      Current tax:

              Current tax is the expected tax payable on the taxable income for the year, using tax rates enacted or substantially enacted at the reporting date, and any adjustment to tax payable in respect of previous year. Provisions for corporate income tax is made following the rate applicable for a publicly-traded company.

      Deferred tax:

Deferred tax has been recognised in accordance with Bangladesh Accounting Standard (BAS) 12. Deferred tax is provided using the liability method fortemporary differences between the carrying amount of assets and liabilities for fi nancial reporting purposes and the amount used for taxation purpose.Deferred tax is determined at the effective income tax rate prevailing at the reporting date.

Off Balance Sheet Items for RAK Ceramics Bangladesh Limited-

The only off balance sheet item for the company is Leased asset.

Economic Characteristics & Strategies

 

Economic characteristics of a business can be easily identified and evaluated using Structure Conduct Performance Analysis or SCP Analysis.

The Structure-Conduct-Performance (S-C-P) paradigm of strategy assumes market structure would determine firm conduct which would determine performance. This is a paradigm that is foundational to industrial organization economics, consistent with the positional view of strategy, as opposed to the resource-based view of strategy.

This model can be used to justify consolidation in the industry. If Structure drives Performance, one way to improve performance is to create a more attractive industry Structure. This analysis is similar to the competitive intensity dimension of Porters 5 forces analysis.

The usefulness of this model is diminished when industry boundaries are blurred and primary threats are coming from outside the industry.

S-C-P analysis framework:

Highlight in Structure :

• Industry concentration  – from monopoly to perfect competition?

(Ceramics industry is not perfectly competitive in our country).

• Market share pattern – is there a dominant leader?

( RAK ceramics has high market sharein this industry share relative to others and it is a domonent leader firm).

• What is the Minimum Efficient Scale?

( As the market pattern is competitive so a small change in price specially based on better quality with newer design is efficient scale in this industry.)

• Ownership of major companies (if they are listed/family/state-owned)

( Most of the companies in this industry are listed in DSE. Owners are sponsors directors, general investors, non-resident Bangladeshi and corporate bodies.)

Highligh inConduct :

• Where do they compete? Prices? Service? Advertising investment? War for Talent? Product innovation?

(In Ceramic industry the firms compete both on prices, service, and product innovation. To grab the market share with reasonable prices and with cost leadership they compete with each other on basis innovating new product with new design and high quality.)

• Is the conduct stable, or is it erratic, linked to the industry cycle?

( Ceramics industry conduct specially the production, marketing above all customer satisfaction level is stable on the product quality.)

• Do player try to differentiate, or follow “me-too”  strategy?

( As there is competition to grab the customers for this the players on the field always try to differentiate themselves with newer quality type ceramics products with higher quality superior to their competitors.

• Do competitors try to grow the pie (“good competitors”), or fight to enlarge their share (“bad competitors”)?

( Actually the competitors always try to enlarge their market share as a result they engage in bad competition. But ceramics companies try to be good competitors and at the same time try to grab market share).

Highlight in Performance:

• Long term Total Shareholder Returns (TSR)?

( On the growing stage the total shareholders return is simply lower than any other industry, because of customer acceptance with the satisfaction after they use.)

• Return on Capital Employed? (ROCE)

( ROCE is medium in this industry).

• Economic Profit?

80/20 rule – if we calculate this for the largest companies, our estimate for the industry will be accurate. If we can’t get the data for some private companies or divisions, then we will identify the best comparable company and assume the same profitability and quantify, average over several years to remove the industry cycle effect.

Policy Implications and Conclusions

 

Classifying  RAK Ceramics Bangladesh Limited using Boston  Consultant Matrix-

The BCG Matrix was developed by Bruce Henderson of the Boston Consulting Group, a strategic management consulting firm, in the early 1970s, to analyze the performance of products. According to this technique, business or products are classified as low or high performers depending upon their market growth rate and relative market share. It is a two-by-two graph, with market growth shown on the vertical axis and market share charted on the horizontal axis.

The matrix places products or business into four categories based on their market share and market growth. The categories are-

Figure :  Boston Consulting Group Matrix.

v  Dogs:Low Market Share and Low Market Growth. They often don't make much profit, but they don't need much investment either. Much of the time, the company may need to offer a price discount to sell Dog products.

v  Cash Cows:High Market Share and Low Market Growth. These businesses or products are well established. They're likely to be popular with customers, which makes it easier for the company to exploit new opportunities. However, the firm should avoid spending too much effort on these, because the market is only growing slowly, and opportunities are likely to be limited.

v  Stars:High Market Share and High Market Growth. Businesses and products in this quadrant are seeing rapid growth. There should be some good opportunities here, and the firm should work hard to realize them.

v  Question Marks (Problem Children):Low Market Share and High Market Growth. These are the opportunities that no one knows how to handle. They aren't generating much revenue right now, because the company doesn't have a large market share. But they're in high-growth markets, so they could become Stars or even Cash Cows if the firm can build market share. However, if the firm cannot increase market share, Question Marks could absorb a lot of effort with little return.

Application of BCG matrix in perspective of RAK Ceramics Limited :

From the above discussion it can be decided that RAK Ceramics Bangladesh Ltd is a cash cow firm. Because  from my analysis of the corresponding market share of this firm is almost 60%, while its other competitors market share is very small amount of each of the firm.On the other hand it is also clear that its growing rate is higher than its competitor. So, the firm has the possibility to be star. On the other hand when the firm lost his growth rate it will turn into as a dog, where it should be shut down.

VRIN MODEL

Applying Barney's (1991) VRIN framework can determine if a resource is a source of sustainable competitive advantage. The resource-based view (RBV) is a way of viewing the firm and in turn of approaching strategy. Fundamentally, this theory formulates the firm to be a bundle of resources. It is these resources and the way that they are combined, which make firms different from one another. It is considered as taking an inside-out approach while analyzing  the firm. This means that the starting point of the analysis is the internal environment of the organization.

The VRIN characteristics :

The important features for a resource to be strategically important are as below

§ Valuable - When resources are able to bring value to the firm they can be a source of competitive advantage.

§ Rare - Resources have to deliver a unique strategy to provide a competitive advantage to the firm as compared to the competing firms. Consider the case where a resource is valuable but it exists in the competitor firms as well. Such a resource is not rare to provide competitive advantage

§ Inimitable - Resources can be sources of sustained competitive advantage if competing firms cannot obtain them. Consider the case where a resource is valuable and rare but the competing organizations can copy them easily. Such resources also cannot be sources of competitive advantage

• Non-substitutable - Resources should not be able to be replaced by any other strategically equivalent valuable resources. If two resources can be utilized separately to implement the same strategy then.

Competency	Valuable	Rare	Inimitable	Non- Sub	Conclusion
Technology and instrument	Yes	No	No	Yes	Comp. Parity
Innovation of new product	Yes	Yes	Yes	No	Temp. comp. adv.
Specializing in producing high quality ceramics products	Yes	Yes	No	No	Sustainable comp. adv.

 Identify key competencies and Constructing a VRIN Table:

Application of VRIN model in RAK ceramics ltd :

As RAK Ceramics Ltd valuable and non substitute instrument and it is able to innovate new product with new dimension and with higher quality and can capture the market share with high value brand which is not so easily inimitable by other ceramic industry and also it has achieved specialization in producing higher quality new products than any other firms. So, RAK ceramics has sustainable competitive advantage.

COURCES OF ACTIONS FIRMS NEEED TO TAKE AND THE POLICY SHOULD BE IMPLEMENTED:

From the above analysis we conclude that RAK Ceramics has high growth prospects as its sustainability growth is higher and its growth opportunity is positive. So, to keep up its market opportunity and to sustain in long run, the RAK Ceramics should try to continue to produce higher quality, effectively usable, new dimensional innovative products and it has the ability to produce such types of products. It should keep its high value brand sustainable in long run. As its operating and free cash flow is positive, so it is in cash cow position. So the firm should properly use and invest the fund in more productive sectors. Beside these, the firm’s degree of operating leverage and financial leverage. So it should be more careful in taking about its financing. As its interest burden is more sensitive to its ROE, so the firm should be more conscious about its debt financing. The firm should be more careful about its contingent liabilities.