A report on

Financial Statement Analysis and Valuation

(NATIONAL TUBES LIMITED)

Department of Finance
Faculty of Business Studies
University of Dhaka

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A report on

Financial Statement Analysis and Valuation

(NATIONAL TUBES LIMITED)
Course Title: Financial Statement Analysis and Valuation
Course Code: F-401

Prepared For
Prof. Dr. Mahmood Osman Imam
Professor
Department of Finance
University of Dhaka

Prepared By
Muhammad Shamim Hossain
16-151; Section: A
Department of Finance
University of Dhaka

Date of Submission:
July 27, 2013

Executive Summary
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The project on Financial Statements Analysis and Valuation has been a very
good experience. Every investor whether individual or organization have
conducted Financial Statements Analysis and Valuation in their investment
and managerial decisions. An individual or organization investors expected
return can be earned by conducting Financial Statements Analysis and
Valuation efficiently.
This project is a sincere effort to study and analyze the Financial Statements
Analysis and Valuation of National Tubes Ltd. The project focused on making
a financial overview of the company by conducting Financial Statements
Analysis and Valuation analysis of National Tubes Ltd for the 2008 to 2012
and & various other industry and macroeconomic analysis correlated with
the analysis.
The report is a bridge between the institute and the organization. This made
us to be involved in a project that helped us to employ my theoretical
knowledge about the myriad and fascinating facets of finance. Moreover, in
the process I could contribute substantially to the organizations growth. The
experience that I gathered over the past two months has certainly provided
the orientation, which I believe will help me in shouldering any responsibility
in future.

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Contents

1. Introduction
05
2. Analysis of the performance of National Tubes Ltd.
08
3. Dupont Analysis
09
4. Identification of red flags
10
5. Analysis of Cash Flow Statement
11
6. Analysis of Sustainable Growth
12
7. Operating and Financial Leverage
13
8. Comments on disclosures practices
14
9. Economic characteristics and strategies
15
10.
Pro-forma Statements and FCF valuation
17
11.
20

Policy implications and conclusion

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Introduction
About
National Tubes Limited was established in 1964 in the private sector. It was
nationalized and placed under Bangladesh Steel & Engineering Corporation
(BSEC) in 1972. It is the only Govt owned steel pipe producer in Bangladesh.
In 1989 the enterprise was transformed into a public limited company by offloading 49 percent shares to the general public. Now a sovereign Board of
Directors manages the company.
The factory situated on the Dhaka-Mymensingh highway on 14.31. acre land
at 131-142 Tongi Industrial Aarea- 20 km north of the capital city.of
Bangladesh.
Mission
To contribute to the well being of the nation by producing high quality
import-substitute Gas/Oil line pipes according to the specifications (Spec. QI
& 5L) of American Petroleum Institute (API) and water line pipes (GI)
according to British Standard (BS - 1387 & BS-729). As an API Licensee and
an ISO 9001 : 2000 Certified Company, we are firmly committed to all our
stakeholders such as : Our valued customers, business associates,
shareholders and above all fellow citizens.
Vision
Building a unique enterprise reflecting utmost integrity, transparency and
accountability at all levels, thereby marketing products manufactured under
uncompromising quality program. We aspire to achieve continuous
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improvements for customers satisfaction with modern technology, innovative

vision and motivated workforce developed through strategic management of
human resource.
Strategy
The strategy of the company is to expand its production facilities & diversify
its products to cater the future needs of the country. Introduction of modern
technology in production & quality control activity is also under
consideration.
THE PLANT:
Consists of 3 units.
The first unit with 6000 metric tons per year welding capacity was
established in 1964 and abandoned in 1993 due to exhaustion of its useful
life. The second unit with product range-1/2 inch. to 4 inch. dia was
established in 1980 has welding capacity of 9000 metric tons. The third unit
with product range -4 inch. to 8 inch. dia was established in 1982, The
welding capacity of this unit is 30000 metric tons per year and the total
WELDING capacity of both the operative units is 39000 metric tons per year.
PRODUCT
National Tubes produces two types of steel pipes:
1. GENERAL PURPOSE MS AND GI PIPES (1/2 inch. to 8 inch. dia) are
produced according to the British Standard BS-1387 and Bangladesh
Standard BDS1031:2006. Galvanizing is done according to the British
Standard BS-729 which is equivalent to DIN-2444 and IS-4736. The gi pipes
are used for water supply and irrigation.
2. THE API PIPES (3/4 API to 8-5/8 API) are produced under the license from
American Petroleum Institute (API). These pipes are produced strictly
according to the requirements of API Spec. Ql & 5L which correspond to the
Grade A-53B of the ASTM (American Society for Testing and Materials)
specification. The Major Buyer of the Entire Quantity of API Pipes are Gas
Transmission & Distribution Companies of Petrobangla- i.e. Titas Gas,
Bakhrabad Gas, Jalalabad Gas and Pashchimanchal Gas Company. API Pipes
are used for Transmission & Distribution of Natural Gas & Oil.
NTL has acquired ISO 9001: 2008 Certificate for its quality system for MS, GI
and API Line Pipes in 2004.
INDUSTRY ANALYSIS

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Degree of actual and potential competition:

National Tubes Limited belongs to Engineering industry. This industry is at
matured stage. There are around 16 firms in this industry. Most of the firms
have been doing business for 15 years. Average size of the firms is almost
similar and there are not any giant firms in the industry. The products
produced by the firms are not similar there is high switching cost. Fixed
variable cost proportion are very high. Most of the firms have huge
sophisticated plant and equipment. There is economics of scale in
production. There exists excess capacity as industry is larger than customers
demand.
Threat of new entrants in this industry are moderate as industry are at
matured stage, has excess capacity, large economics of scale.
The products are much differentiated and their performance, price differs
significantly. So threat of substitutes products is moderate.
Bargaining power in input and output markets:
NTL produces two types of steel pipes in different sizes and shapes. These
include GENERAL PURPOSE MS AND GI PIPES and THE API PIPES. 95% of the
NTLs products are bought by the firms of petrobangla. Number of buyers is
not large and concentrated to only gas transmission firms under petrobangla.
There is little substitutes of NTL products. Quality of NTLs products is high
and certified by American Petroleum Institute.
NTL purchase raw material like steel strips from domestic and foreign
suppliers and there are large number of suppliers. NTL can switch from one
supplier to another and raw materials are not differentiated.

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Ratio Analysis

Particulars
01. Liquidity
Current raio
Quick ratio

NTL

AZIZ PIPES

1.777513992
0.893193542

0.569119739
0.316428689

02. Activitiy/Efficiency
avg. collection period
inverntory turnover
fixed assets turnover

33.9671401
0.630985772
0.047850144

109.4883545
3.005816576
2.763348209

03. Leverage/Solvency
Debt to Assets
time interest earned
fixed charges coverage

0.035678402
-0.80874644
N/A

0.332191394
31.51547746
N/A

04. Profitability
Profint margin on sales
ROE
ROA

-0.11399831
-0.0080996
-0.00745335

0.010143287
-0.009273162
0.004446238

05. Market Ratio

P/E
P/NAV
P/Cashflow
P/EBITDA
P/Book Value

-16.5887027
0.134361833
67.13244003
-0.000001471
4.18

44.87179487
-0.416270219
10.11560694
0.0000043049
1.75

NTLs liquidity position is better than its peer firm AZIZ PIPES having more than
double liquidity. NTLs activity or efficiency are very low than competitors. This is
due to the less production as a result of postponed gas line supply. Being a govt.
organization, its debt position is very low than its competitors. NTL is allowed to
have interest free loan from govt. NTL is not earning any profit for last two years
rather incurring net losses. As a result its profit margin is very low and it can to
utilizing its assets.
Market condition of NTL is not satisfactory. All market based ratios are less than its
competitors except P/Cash flow ratio.

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Du-pont Analysis

In the dupont analysis, we done the five factor analysis by the following
subcomponents and the results are shown in the below table. The roe shows
a decreasing trend in last three years.
ROE= O. profit margin * Total asset Turnover * interest burden * after tax
retention rate * financial leverage

Particulars
O. Profit margin

2010
2011
0.126777944 -0.05898231

total asset turnover

interest burden
after tax retention rate
financial leverage

0.577303262
1.070176118
0.725000012
2.004535385

0.36001165
0.460435588
1.194670236
2.116802657

2012
0.113998305
0.041992371
1.513001926
1.029065617
1.086706224

ROE

0.11383

-0.02472

-0.00810

We also checked the sensitivity of roe in terms of O. profit margin, Total

assets turnover, interest burden, after tax retention rat and financial
leverage. Roe is -450% sensitive to O. Profit margin. -40% sensitive to total
asset turnover, 166% sensitive to interest burden, 154% sensitive to after
tax retention rate and -126% sensitive to financial leverage. So the most
sensitive is O. Profit margin and least sensitive to financial leverage. The
calculation is given in Appendix.

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Red Flags and Earning Quality

There is significant gap between the reported operating cash flow and
cash flow from operating activities.
Firm revalued its fixed assets in only 2012 for which rationales are not
explained.
There is increasing gap between firms reported income and its tax
income.

Earnings quality of NTL is not neither sustainable nor predictable. Both in

terms of balanced sheet based aggregate accruals ratio and Cash flow based
aggregate accruals ratio shows very fluctuating result over the year. In terms
of Balanced Sheet Based Aggregate Accruals Ratio it shows very high
increasing rations over the year from 2008 to 2012.
In terms of Cash Flow Based Aggregate Accruals Ratio, it shows very
fluctuating results. In 2008 it was very low (high earning quality) and 2009 to
2011 it was increasing and became low in 2012 indicating high earnings
quality in that year. Over all earnings quality is not satisfactory level.
Particulars
Operating Assets
Operating Liabilities
Net operating Assets
Balanced Sheet Based
Aggregate Accruals
Balanced Sheet Based
Aggregate Accruals Ratio

Net income

CFO
CFI

2,008
981,34
7,069
330613
669
650,73
3,400

2009
796,928
,085
370219
991
426,70
8,094

2010
842,18
9,534
379031
642
463,15
7,892

2,011
910,35
6,295
364799
707
545,55
6,588

2012
6,080,20
8,861
2686910
31
5,811,5
17,830

(224,02
5,306)

36,449,
798

82,398,
696

5,265,96
1,242

-42%

8%

16%

166%

854366
48

509081
98

968737
41

661459
0

194640

211252

107363
70
963197
43
194211

4540152
5
1457118
18
0

931507
41
138899
969
388052

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1
Cash flow based Aggregate
Accruals

235931
231

Cash flow based Aggregate

Accruals ratio

6
949068
7
-1.76%

2
445048
60

875254
85

1003102
93

10.00
%

17.35
%

3.16%

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Analysis of Cash Flow Statement

Free Cash Flow of NTL show a decreasing trend over the last four years and
in 2011 it becomes negative duce to the huge working capital requirement
financing.
Operating Cash Flow is also decreasing over the year significantly because of
less sales and high fixed operating cost.
Particulars
Free cash flow

2009
332,170,021

2010
28,113,51
7

2011
(67,527,186
)

Operating cash
flow

9,6873,741

6,614,590

-9,6319,743

OCF/Net sales

11.25%

1.28%

-29.11%

2012
5,784,855
145,711,8
18
-56.96%

We calculate OCF/Net Sales ratio over the years which is also significantly
low. The firm can retain 11.25% and 1.28% taka in 2009 and 2010
respectively. After 2010 firms can not retain any cash from its sales rather
incurring high cost/loss. The comprehensive calculations are given in
Appendix.
In terms of FCF and OCF we can classify the NTL. As FCF is positive and OCF
is negative in 2012, NTL is a divestiture firm.
400,000,000
300,000,000
200,000,000
FCF

100,000,000
0
2009

OCF
2010

2011

2012

-100,000,000
-200,000,000

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Figure: FCF and OCF

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Analysis of Sustainable Growth

The path for survival for a business may be found in the business's
sustainable growth rate. In basic terms, the growth of a business is often
limited by the amount of equity in the business. The more equity the
business has, the more potential the business has for growth. However, if a
business grows too fast, then there might not be enough equity to sustain
the growth.
If a business grows too slow, then it may begin to become stagnate. It is
important for a company to find an optimal growth rate which can be
sustained through the ever changing economic, political, consumer and
competitive landscape. The sustainable growth rate helps a company project
its future equity, based on the earnings that can be achieved from the
current equity and the percentage of those earnings reinvested in equity.
Since this information can keep a company on track, it is very important that
the company knows how to calculate their sustainable growth rate.

Particulars
ROE
Dividend Payout ratio

2008
23.70%
0.73268
3

2009
19.68%
0.6390
7

2010
11.38%
0.73735
7

SGR

6.34%

7.10%

2.99%

2011
-2.47%
2.7970
3
-9.39%

2012
-0.81%
0.3968
6
-1.13%

NTLS sustainable growth rate shows a declining trend in last 5 years. This
declining trend in sustainable growth rate is due to mainly low level of sales
and profit margin. NTLs level of sales is decreasing from 2008 due to less
demand of products which is caused by stoppage of gas transmission line
etc.

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NTLs actual growth of ROE and SGR both has positive correlation and both
are declining in the last five years. SGR is very different form actual growth
as large changes in profitability and long term financing

.Operating &

Financial Leverage

Degree of operating leverage

The degree of operating leverage measures a companys earnings volatility
at a given level of sales. Companies with a high operating leverage have a
higher degree of operating leverage, and vice versa. Degree of operating
leverage is not a constant: it has a negative relationship with the level of
sales.
Particulars
% EBIT
% SALES
% change in EBIT/%
change in sales

2008 2009
.
-0.08845
.
-0.06125
1.443967

2010
-0.43416
-0.39871
1.088903

2011
2012
-1.00703 51.70984
-0.36061 -0.22702
2.7926
-227.781

NTLs DOL was at a normal increasing trend up to year 2011 but after that it
was significantly abnormal in 2012 and the degree becomes negative. The
degree increases as the level of sales decreases over time. NTLs earnings
was very volatile in the past business years.
Degree of financial leverage
The degree of financial leverage calculates the proportional change in net
income that is caused by a change in the capital structure of a business to
either increase or decrease the amount of debt for which the company is
liable. When a company has a high degree of financial leverage, the volatility
of its stock price will likely increase the reflect the volatility of its earnings.
When a company has a high level of stock price volatility, it must record a
higher expense associated with any stock options it has granted. This
constitutes an additional cost of taking on more debt.
Particulars
% EPS

2008
.

2009
0.3269
3

2010
0.5473
6

2011
1.2005
6

2012
0.6480
4
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% EBIT

% change in EPS/ %change in EBIT

0.0884
5
3.6964
23

0.4341
6
1.2607
27

1.0070
3
1.1921
78

51.709
84
0.0125
3

NTLs DFL shows a decline trend over the last five years. This indicates that
EPS was not very volatile. NTLs debt undertaking was very low and literally
has no cost of debt. As a govt. controlled firms it gets the interest free loan
from govt.

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Comments on Disclosures Practices

Disclosures quality of the firms was good except in some cases and complies with
accounting rules and guidelines by BAS. They have shown detailed derivations of
the accounts title of the major financial statements. They presented the financial
statements in accordance with BAS.
The accounts of the company have been prepared as a going concern following
consistency with the last accounts. The accounts have been prepared under GAAP
on Historical cost convention. While preparing the statements, attention has been
given for the requirements of the companies act 1994, SEC ruels,1987 and other
relevant laws where applicable and the accounting standards as adopted by the
ICAB.
Some new accounting policy adoption like fixed asset revaluations are not explained
in details. Firm does not give any reasons of this revaluation of fixed assets. Some
assets items are not explained in notes and no calculations are given in notes.
For valuation of closing stocks NTL follows actual average cost for raw materials,
cost of average quantity for store and spares, materials used and proportionate
production expenses for work in-process, finished goods are valued at cost or
market price which is lower following conservatism. Depreciations on fixed assets
are charged on reducing balance method.
NTLS management provides report to the shareholders about the business
operations, reasons of undertakings any changes in the accounting policies,
strategies for increasing sales, corporate social responsibility, percentage of each
director holding of shares dividend etc each year. There is no individual report from
chief executive officers of the firm.
Auditors report to shareholders is given and auditors give their audit opinion for
financial statements prepared in accordance with BAS.

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Economic Characteristics and Strategies

Our operating industrial units are engaged to produce and provide quality products
at lower cost and services leading to growth of the company. Imbibed with good
governance practices, enthusiasm and technology we try to translate dreams into
reality.
National Tubes Ltd. has been delivering significant contributions towards
industrialization and development of the country through relentless and untiring
efforts. We impart maximum attention to the quality of products and services
recognizing the environment sensitive issues and global challenges.

Strategies

Proper and exact utilization and application of knowledge and facilities.

Ensure pragmatic and cost effective planning and production process.

Development of technical and management skill of personnel at all levels.

Conform to relevant international standards.

Application of Total Quality Management system.

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Valuation

Free Cash Flow Valuation

Particulars
EBIT
EBIT (1-tax
rate)
Depreciation
Capital
expenditure
Change
NWC
Free
flow

2013
153866
20.6
111552
99.94
250982
825.5

2014
1615595
1.82
1171306
5.07
2465745
80.8

2015
16963749.
41
12298718.
32
24229205
4.9

2016
17811936.
88
12913654.
24
22638311
1.5

2017
1870253
3.73
1355933
6.95
2217622
22.6

109,11
5,827

106,888,
576

104,706,7
86

102,569,5
31

302,49
9,580

276,947,
880

406,829,5
56

973,663,0
96

100,475,
902
(
997,614,
339)

68,754
,372
0.9335
50

88,228,
342
0.871517
16

(47,531,9
97)
0.8136055
74

(631,796,
799)
0.
75954216
3

1,333,4
11,800
0.
7090712

64,185,
702

76,892,5
14

(38,672,2
97)

(479,876,
307)

945,483,
932
18843561205

in

2018

cash

Present
value
discount
factor
Present
value of free
cash flow
Terminal
value

Enterprise value
Cash
Interest-bearing
debt

1,360,0
80,036

2,171,145,75
4
11,218,904
217,332,410

Equity value

1,965,032,24
8

Value per share

109.06
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Assumptions made:
1. To normalize the affairs it was assumed that NTLs other income will
increase by 5% rate each year.
3. In annual report of this company we found that the firm has no interest
income.
4. To normalize the affairs it was assumed that NTLs return on short-term
investment will 15% each year.
6. Investment in subsidiaries will remain unchanged for upcoming years.
7. As per stated in the annual report, there will be a new business contract
with petrobangla's gas transmission firm in place. So we assume the growth
rate will be 5%.
8. Tax rate is 27.5%.
9. Capital expenditures will be financed by long-term loan.
10. Since there was no purchase of PPE, it was assumed that the existing
long-term loan proportion to sales
11. The risk free rate is based on the 91 day T bill rate. The rate is 8.25 %.
12. Perpetual growth rate 2%.
13. Revaluation reserve will remain unchanged over the years.
14. To normalize the affair it was assumed that inventory will be 48% of sales

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Relative Valuation:
Particula
rs

NTL

AZIZ PIPES

Particulars

NTL

AZIZ
PIPES

P/E

16.588702
69
0.1343618
33

44.87179487

EBITDA

406516
0

-0.416270219

EPS

2841139
3
2.519787
311.1002
5
-0.0081

P/NAV

NAV
P/Cash
flow

67.132440
03

P/EBITDA

P/Book
Value
Debt to
Equity

10.11560694

0.000004305
(0.0000014
712)
4.18

1.75

0.03877

0 (no interest
bearing debt)

ROE

0.39
-42.04

Op. Margin

0.113998

0.0092
7
0.0104
76

Book Value
Per share
Cash flow
per share

10

10

0.622649
8

1.73

National Tubes Ltd and Aziz pipes ltd both are similar firm in terms of business
model, products and maturity. If we analyze them in terms of traditional criteria like
P/E, we see Aziz pipes are far better than NTL. In terms of EBITDA which is a better
measure of performance Aziz pipes is significantly in a better position. In terms of
NAV and ROE National tubes ltd is in a better position.
Aziz pipes are generating TK.1.73 cash per share which is better than NTL. Aziz
pipes have no interest bearing debt whereas NTL D/E is 0.03877
Finally using above valuation criteria recorded on 31st December, 2012 Aziz pipes
Ltd is relatively in a better position than National Tubes Ltd.

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Policy Implications and Conclusions

The Boston Matrix, also called the Boston Consulting Group (BCG) Matrix, is a
simple, visual way to examine the likely financial performance of your
product or business portfolio.
As we mentioned earlier about types of products of NTL, they produce two
types of steel pipes. The gi pipes are used for water supply and irrigation.
Major Buyer of the Entire Quantity of API Pipes is Gas Transmission &
Distribution Companies of Petrobangla- i.e. Titas Gas, Bakhrabad Gas,
Jalalabad Gas and Pashchimanchal Gas Company. API Pipes are used for
Transmission & Distribution of Natural Gas & Oil.
General purpose GI pipes are in Questions having low market position and
high market growth. This unit requires high cash demand and generate low
return because of their low market share. The firm should invest heavily for
increasing market share or can divest it or can try to get any possible cash
from it.
The API pipes are in Cash Cow having high relative market position and low
market growth. These units will reach their optimum profitability and
management have easy job. It does not require much investment and one
day it will become stars which are the future foundation of the company.
Recommendations:
National tubes limited should reduce the dependence on imported raw
materials. Every year NLT is buying raw materials from abroad. They should
identify new domestic suppliers.

Creation of skilled people by the training in home and abroad.

Taking an important part for the development of steel and engineering
sector.
Increase in sell by advertisement.
Ensuring the clearness to buy raw materials, products produced and
sell.
Costing of the products in order to get least profit.
At present many low cost substitutes products are in market. So NTL have to
diversify its production to take competitive position.
24 | P a g e

 Its marketing activities are literally none. So it should increase its marketing
activities like advertisements, sales promotion activities etc.
APPENDIX:
1.
2.
3.
4.
5.

Pro-forma statements
WACC
Working capital
Du pont analysis
Earnings quality estimation

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Pro-Forma Income Statement

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Pro-Forma Balance Sheet

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WACC Calculation

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Working Capital Calculation

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Du Pont Analysis and Sensitivity

Earnings Quality Estimation

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