CFA Institute Research Challenge

Hosted by
CFA Society Bangladesh
Pentachords/Jagannath University
 Pentachords -Jagannath University
This report is published for educational purposes Company: Bata Shoe Company (Bangladesh) Ltd.
only by students competing in The CFA Institute Sector: Tannery; Industry: Footwear
Research Challenge. Exchange: Dhaka Stock Exchange (“DSE”)

Date: 16/11/2017 Current Price: BDT 1,179.4 Recommendation: BUY (12.19% Upside)
Ticker: BATASHOE USD 1.00: BDT 81.15 Intrinsic Value: BDT 1,323.21

Highlights
Share Price & Index Movement
Bata Shoe Company (Bangladesh) Limited has been recommended a BUY
Price Index decision based on an intrinsic value of BDT 1323.21, offering 12.19% upside
1500 6,000 from its closing price of BDT 1179.4 on November 16 2017. The
1000 4,000
recommendation was primarily resultant by:

500 2,000 Management Platform: Bata Bangladesh is trying to adapt the changing
trends and environment by affiliating with the international renowned
0 -
Jan-14 Jan-15 Jan-16 brands and product development. Through its strong distribution network,
economies of scale and introduction of supply chain concept, Bata has been
Market Profile able to fulfill its local demand & maintain a stable margin growth.
Closing Price 1179.4
Growth Drivers: Bata Bangladesh has been able to grow their revenue with
52-week High/Low 1248/1105
the growing population and growth of per capita income. As the population
Average Volume (Nos) 6,912
rises, sales will also increase to support these growing pattern customers.
Diluted Share Out (mn) 13.68
On the other hand, increasing per capita income indicates a further growth
Market Cap (mn) 16,068.53
in sales revenue. The macro variables affect the sales revenue positively
Dividend Yield 2.76%
which flows the company in a profitable measurement. Now a days, the
EV/EBITDA 9.92X
company focuses on the premium level customers introducing new brands
Valuation i.e. Hush Puppies. This change will make sure the high profit margin for the
DCF DDM Multiples company as Hush Puppies sells with a high margin.
Estimated
1405.9 1167.6 1230.7 Valuation: We have found a weighted average current intrinsic value per
Value
share BDT 1,321.21 using three different valuation approaches. From three
Weights 60% 20% 20%
different approaches, we have found three different values. Finally, through
Intrinsic
1323.21 weighted average value per share, we acquire the intrinsic value per share.
Value
As the market price per share is BDT 1,179.4 and intrinsic value is BDT
Foreign Public Share 1,321.21, we recommend a strong buy decision for the investors.
Holdings, Holdings, Holdings Structure
Main Risk to Bata Shoe Company (Bangladesh) Limited: Entrance of new
2% 10%
companies, intense competition, execution of new business strategy and
high tax burden are some major business risks of Bata. Because of the
Istitution
unstable political situation, the economic risk is also high. Bata Shoe
Holdings, Director's
18% Holdings, 70% Company (Bangladesh) Ltd. is also exposed to exchange rate risk and oil
price movement in international market.

1
 Figure 1: SWOT Analysis Business Description
Bata Shoe Company (Bangladesh) Limited is a public limited company
2.10
Strength
incorporated in 1962 under the Companies Act 1913. The company is one of
2.00
1.90 the operating companies of worldwide Bata Shoe Organization (BSO). Bata
1.80
1.70 Shoe Company (Bangladesh) Limited have been registered in both stock
Threats 1.60 Weakness
exchange; Dhaka Stock Exchange (DSE) & Chittagong Stock Exchange (CSE).
The company is mainly engaged in manufacturing & trading of leather,
Opportunities rubber, canvas footwear, plastic, hosiery & different accessories items.
Manufacturing plants of the company are situated at Tongi & Dhamrai with
Source: Team’s Calculation an annual production capacity of 26.6 million pair of shoes.

Table 1: Profit Margin Company’s Strategies

Operating Profit Margin Focusing on Margin Increase
Year Manufacturing Trading Bata Shoe Company (Bangladesh) Limited is seeking to increase their
2012 13.2% 16.3% profit margin rather than increasing sales volume. In Footwear industry,
2013 15.1% 16.9% there exists an uneven competition where local enterprises don’t follow
2014 12.9% 14.5% tax law accurately. That makes critical situation for Bata to operate in
2015 14.4% 16.2% local market. Thus, Bata Bangladesh is now focusing on bottom line to
2016 16.7% 17.2% increase earnings.
Focusing on Trading Business
Net Profit Margin
As the profit earnings capacity of trading sector is increasing in
Year Manufacturing Trading compare to manufacturing, Bata Bangladesh is trying to give more
2012 8.2% 14.2% focus on trading business rather than manufacturing. The rental cost,
2013 9.8% 14.7% increased cost of imported raw materials, government implication of
2014 8.1% 12.4% holding tax etc. push forward the retail price in an uneven competitive
2015 9.2% 14.1% market. According to their plan on trading, Bata Bangladesh is going to
2016 11.4% 15.2% introduce many exclusive new line of shoes such as Nike, Comfit, Marie
Gross Profit Margin Claire, Hush Puppies, Scholl, Nike, Bubble gummers, Sandak,
Year Manufacturing Trading Weinbrenner, Adidas etc.
2012 34.7% 44.3% Targeting on Upper Class People
2013 37.7% 43.2% Due to uneven competition, Bata Bangladesh is focusing on higher-income
2014 38.0% 43.8% class people by introducing Hush Puppies and many other brands like Nike,
2015 39.6% 45.0% Adidas. The margin rate is higher for high priced shoes than the low-priced
2016 43.3% 44.6% shoes and it is expected that no competitor can compete with Bata in this
Source: Financial Statements segment. In 2016, Bata Bangladesh has introduced 11 new Hush Puppies
outlets (9 outlets renovated from family stores). Because of that Bata has
Figure 2: Shareholder Structure to reduce its Family Stores and Hush Puppies provides more margins than
City & Family stores (Around 20%-30%).

5% Structure
25%
Shareholder Structure
70%
Bata Bangladesh is owned by 4 major shareholder groups & the public. As of
0% December 2016, Bafin Nederland (B.V) owns 70% of common shares. The
local shareholder owns 25% of the outstanding shares. The third major
Bafin Nederland (Parent shareholder group is the non- resident shareholders owning around 5%
Company) Mr. Rashidul Hasan where some portion of shares belong to Audit head, Mr Rashidul Hasan.
(Audit Head) Non-resident Corporate Structure
shareholders Local shareholders Board of Director consists of five members, including Chairman and the Head
of Audit.
Source: Annual Report

2
 Figure 3: Corporate Management Team is consisted of nine executives, Including Managing
Management Structure Director and the Secretary.

Managing
Director
Audit Committee is consisted of five members, where all of the members are
directors.
FInancial Retail Human Product
Resource Development
Management Management
Department Management
Management & Governance
Non- Retail Supply Chain Marchandising For analyzing the risk of Bata Shoe Company (Bangladesh) Limited’s
Management Management Management
corporate governance, we have used the Institutional Shareholder Service
Secreterial
Body
Internel Audit
Department
(ISS) Rating Methodology on Corporate Governance. The rating on corporate
governances is as follows:
Source: Team Estimation
Keys
Figure 4: Board of Director 1 Insignificant threat to Shareholders
2 Low threat to Shareholders
3 Moderate threat to Shareholders
Mr. Rajeev
4 Significant threat to Shareholders
Gopalakrishnan
Chairman 5 High Threat to Shareholders
Mr. Chitpan Kanhasiri
Managing Director
Disclosure and Transparency (Score 3 out of 5)
Bata Shoe Bangladesh Provides quarterly data based on Income statement,
Mr. Shaibal Sinha
Director Balance Sheet & Cash Flow Statement stating fully transparent company.
Mr. Rashidul Hasan
However, these documents are not audited & analyzed in details, this
Independent Director
disclosure doesn’t represent full transparency. For audited report, we have
Mr. K. M. Rezaul Hasanat
Director
to wait annually which increase associated risk.
Source: Annual Report Executive Management (Score 3 out of 5)
Very experienced management with a determined growth strategy in the
Figure 5: Revenue Composition
long run. Management has successfully identified future targets for Bata&
implementing contingency planning to achieve that.
Board of Directors (Score 3 out of 5)
13%
The current structure of the Board of Directors is minimum threat to Bata’s
shareholders. 4 members out of 5 directors have less experience within the
board, which possess less risky management.

Takeover Defense (Score 1 out of 5)

87% The threat of a hostile takeover is low. Most of the share are obtained by
Bafin Nederland (B.V.), holding 70% of total shares. There are no
shareholders who have more than 10% shares in hand.

Manufacture Trade Rights and Obligations of Shareholders (Score 2 out of 5)

Source: Financial Statements
Every ordinary shareholder gets a voting right in Annual General Meeting.
Moreover, Shareholder voting is required for appointing Independent
Director. But no clear law is stated in annual report about the
participation of shareholder in decision making.

Average Score: 2.2/5 (Appendix B)

3
 Industry Overview and Competitive Positioning
Figure 6: Porter’s Five Forces The Footwear Industry in Bangladesh is at its early stage of development. As
Bargaining the absence of no mechanized Industry till early 1900’s, the whole industry
Power of was limited to cottage industries & family level small factories. The first
Customers
5 mechanized industry, Bata Shoe Company (Bangladesh) Limited, a
4
3 Intensity of multinational enterprise, followed by Eastern Progressive industries and
Barriers to 2 Competitiv
Entry 1
Bengal Leather which used to produce generally for domestic demand. The
0 e Rivalry shoe industry started introducing in Bangladesh in 1990 with encouraging
Bargaining government policy measures of granting fiscal and financial inducements for
Threat of
Power of production of leather footwear in the country. There has been a rapid
Substitutes
Suppliers growth in footwear production. Both complete leather shoes and sports
shoes manufacturing for export during last decade. Most of the mechanized
units are export oriented, though most of the units are non-mechanized
Proter's Five Forces with small & cottage unit.
Footwear industry, as a sub sector of Leather Sector, gets also importance
Source: Team Calculation (Appendix D)
from Government. But this sector as well was ignored by the Government
for many years. In recent years, due to globalization, nobody can find an
alternative of product variation. For this reason, government is now started
focusing on Footwear Sector rather than Jute.
Figure 7: Sector wise Market Share
Demand Drivers
The main demand driver for footwear industry in Bangladesh is the growing
population especially the increasing rate of working class people.
20% Uneven competition, sophisticated style and fashions, trends in disposable
14% income, the consideration of climate/season, ecology & environment makes
66% the market difficult. And these factors play a critical role in creating the
different patterns of demand. The demand side is influenced by different
consideration; as cold weather leads to an increasing demand and
consumption of hooded footwear. Fashion trend is thoroughly related with
Unorganized Sector the market demand. Demand side of the market mainly depends on: (Details
Organized Sector (other companies) in Appendix E)
BATA
Population Availability in the market side
Source: LFMEAB Weather and season Market trend and general tendency
Culture and heritage Fashion trend etc.
Adaptation of fashion

Macroeconomic Condition of Bangladesh

Figure 8: Macroeconomic Condition
of Bangladesh Bangladesh economy is an emerging and one of the most sustained growing
0.2 economy in the world. During the last decade (FY 2005-06 to FY 2014-15) the
economy grew at an average of at an average rate of 6.20%. The GDP growth is
0.15 7.11 which is significantly up from the last year. The per capita national income
reaches to $1602 from $1465 in compare to last year. With the continuance of
0.1 Per fiscal prudence, lower inflation, surplus current account balance etc. the
Capita economy faces a stable situation. The increasing amount of foreign direct
0.05 Income investment by aiding and long -term and medium loans in capital and financial
0 Inflation accounts, the foreign exchange reserve crossed a surplus of US$ 30 billion mark.
Exchange rate was remained stable during the FY 2016-
2012
2013
2014
2015
2016

17. As the lending interest rate is falling it is expected that it will encourage
investment further in the country.
Source: World Bank

4
 Competitive Positioning
Figure 9: Competitive Positioning To examine the competitive positioning, we have segmented the market in
different classes according to their business focus. In the Manufacturing
sector the most renowned companies are Bata Shoe Company (Bangladesh)
Limited, Orion Footwear Ltd., Bay Emporium Ltd. etc. among them Bata is
the only listed company which holds 21% of total market share of footwear
industry. Among export oriented companies Apex holds 15% share of leather
footwear export in Bangladesh. Multinational brands like Lotto and Bai Xui
Lian are also investing in footwear industry of Bangladesh. Some companies
like Jennys, Atlas etc. does mixed business.

Investment Summary
Based on our analysis and valuation using Discounted Cash Flow Model,
Dividend Discount Model and Relative Valuation Model, we suggest a ‘Buy
Recommendation’ of Bata Bangladesh share with an estimated value of BDT
1323.21 per share. The intrinsic value represents an upside profit of 12.19%
Source: Team’s Analysis from the closing price of BDT 1179.40 on 16th November 2017. We issue a
Figure 10: COGS (% of Sales) strong Buy Recommendation based on the following forces:
Cost of goods Sold Efficiency in Cost Management
63.90%

59.77%
23%61.

55%56.
65%61

Bata Bangladesh has 60.62% cost of goods sold on an average for last 5 years
65.00% till 2016 and the cost trend is declining where the nearest competitors of
.

60.00% Bata Bangladesh has more than 80% cost of goods sold. Besides now Bata
Bangladesh is concentrating more in trading business in which the cost of
55.00% goods sold will decrease. Despite lower cost of goods sold, Bata Bangladesh
50.00% is continuing its quality by taking the advantage of economies of scale.
2012 2013 2014 2015 2016 Strong Distribution Channel
Source: Team Calculation Bata Bangladesh has a widespread and strong distribution channel through
which it can reach its products to the customers easily which accelerates its
Figure 11: Affiliation with Global
cash generating power. It has the highest number of showrooms throughout
Brands the country compared to the competitors. Bata has 261 retail outlets
strategically in different places in the country. It has also 13 wholesale
depots around the country under which there have 471 Registered
Wholesale Depots (RWD) and 690 Dealer Support Programs (DSP) stores. On
the other hand, the nearest competitor Apex has 214 retail outlets and 401
authorized reseller and 10 depots.
Affiliation with Global Brands
Source: Team’s Analysis
Bata introduces world renowned brand toward the customer every year to
Figure 12: Dividend per Share
capture their interests. Already it has introduced North Star, Weinbrenner,
Bubble Gummers, Scholl, Ben10, Sandak, Nike, BFirst, Marie Claire, Hush
6432
2
7

8
3

5
6
2
9

2
7

6
8

4
8
3
1
.

34.00
Puppies, Sketchers etc. and most recently Adidas to response quickly to the
32.00
changing market.
30.00
28.00 Increasing Dividend and Financial Aspects
26.00 Bata Bangladesh is continuously providing almost stable rate of dividend and
24.00 the dividend yield is increasing year to year. Its equity portion of total asset
2012 2013 2014 2015 2016 is also stable indicating its financial solvency. The projected equity to total
Source: Financial Statements asset has been assumed around 62%.

5
 Financial Analysis
From Financial analysis, it has been revealed that in Bangladesh, Bata’s
Figure 13: Annual Dividend Growth prospect is moving upward based on our assumptions. As a market leader,
Bata is performing according to their potentiality and it will be continued as

69%
71%
%6.
15.00%

13.
22

3.
they are promoting their business based on their customer’s need. They
10.00%
include many internationally recognized brands like Hush Puppies, Adidas
etc. which will create the opportunity for grabbing the premium segment’s
5.00% people and earn more profit. Overall financial performance (Appendix F) of
Bata Shoe Company (Bangladesh) Limited has given below:
0.00% Profitability
2013 2014 2015 2016
-5.00%
In the profitability aspect of Bata Shoe Company (Bangladesh) Ltd, they
-6.36%

remain parallel to the industry on Return on Assets, Return on Equity, and

-10.00% Asset Turnover. The slightly decreasing rate of ROE arises in our estimation
because of increasing amount of shareholder’s equity by reserve and surplus
Source: Financial Statements and ROA arises because of our expansion plan of setting more lucrative
showrooms. The increasing rate of Gross profit margin, NOPAT margin, Net
Figure 14: Net Profit Margin income margin indicate that the overall operating performance or profit
generating power will be satisfactory in the near future.
14.00%
Asset Management
12.00%
Bata has better asset utilization ratios and it will remain in the forecasted
10.00%
periods. The company will able to invest effectively in its operating working
8.00% capital by taking full advantage of trade credit from its vendor and by
10%9

67%8

76%9
32%1

87%1

6.00% delaying payment of some of its operating expenses. It is also managing its
0.

1.
.

inventory more efficiently. So that the company has significantly lower

4.00%
capital tied up in its stores. The company’s long-term assets have good sales
2.00% generating power what we can observe by the good turnover rate of long
0.00% term and fixed assets.
2012 2013 2014 2015 2016 Liquidity
Source: Financial Statements In the liquidity phase of Bata Shoe Company Bangladesh’s financials, we see
the current, quick, cash and operating cash flow ratio end to remain
satisfactory for the respective years. The company has good current-, quick-
and cash-ratios which indicates that the company’s ability to repay its
current liabilities is very high. The company has enough power to repay its
current liabilities.
Figure 15: Return on Equity Debt & Coverage
40.00% Bata has very insignificant liabilities-to-equity ratio and no debt-to-equity,
35.00% net-debt-to-equity, debt-to-capital ratios which implies that the company
30.00%
has lower or no dependency on the debt to collect their total fund in
comparison to shareholders’ fund especially long-term debt. We can say that
25.00%
the company is primarily rely on non-interest-bearing liabilities such as
28.0
24%

03%

25%

33%

10.00%
36.

36.

27.

29.
5%

20.00% accounts payable and accrued expenses to finance its operations. Its interest
15.00% coverage ratios are comfortable which implies that the company has enough
power to cover its interest expense through its operating activities. This
5.00% insures that they are managing their credit wisely and can cover their debt.
0.00% ROE Decomposition (DuPont Analysis)
2012 2013 2014 2015 2016
Bata Bangladesh boasts a 2016 ROE of 29.33%, which we have projected to
Source: Financial Statements decline in 2019 to 26.48% and then further to 25.69% in 2022. The main reason
for that our equity is increasing by more additional reserve and surplus amount
and for decreasing financial leverage over time. (Appendix G)

6
 Table 2: Cost of Equity Valuation
Cost of Equity Calculations Intrinsic value: BDT 1323.21
Risk Free Rate 9% Recommendation: BUY
Equity Risk Premium 2.5% Various valuation methods have been used to derive an intrinsic value for
Company Specific 0.50% Bata Shoe Company (Bangladesh) Limited. Discounted Cash Flow (DCF),
Risk Premium Dividend Discount Model (DDM) and Relative valuation methods have been
Size Premium 0.50% used here. The reason for selecting 3 methods is to derive more genuine
intrinsic value and give a realistic recommendation for investors.
Cost of Equity 12.5%
Source: Team Calculation Discounted Cash Flow
Figure 16: Revenue and Growth as A Discounted Cash Flow method was used to estimate the intrinsic value of
per Product Segment Bata Shoe Company (Bangladesh) Limited’s share price due to the
predictability of cash flows in relation to growth and profitability. Several
Revenue & Growth (2012- assumptions were made while forecasting the Free Cash flow to the equity
2016) for the upcoming years. FCFE approach was used rather than FCFF as the
9,000.0 30% firm is a fully equity based firm. A very insignificant amount of short term
8,000.0 20% debt was in annual reports. Because there is no interest-bearing debt was
7,000.0 10% seen in financial positions, Bata Shoe Company (Bangladesh) Limited is
6,000.0 0% considered to be a full equity firm. Unlevered free cash flow to the equity
5,000.0 -10% was estimated through EBITDA approach. We have forecasted free cash flow
4,000.0 -20% for six periods and terminal growth rate was assumed to be 4%. 4% terminal
3,000.0 -30% growth is quite realistic for Bata Shoe Company (Bangladesh) Limited as the
2,000.0 -40% company is growing very smoothly. With the required rate of 12.5% and
1,000.0 -50%
terminal growth rate of 4%, the intrinsic equity value is BDT 1405.92 per
0.0 -60%
share. So DCF strongly suggests buying or holding the share as the market
2013 2014 2015 2016
value per share is BDT 1179.4 at 16th November 2017. But we can not only
Shoes (Million) rely on DCF for valuation. So, further methodologies were incorporated here
Hosiery & accessories (Million) to get the more reliable value per share of the company. (Appendix I)
Export (Million) Required Rate of Return: While valuing Bata Shoe Company (Bangladesh)
Growth (%) Limited, Build Up approach was taken for calculating Required Rate of Return.
As the company is a full equity based, WACC was not required here. For Build Up
Growth (%)
approach, several risks premiums were adjusted with risk free rate. Risk free
Growth (%) rate is 9% which is the interest rate of 10 years Treasury bond. Size premium is
.50% as Bata Shoe Company (Bangladesh) Limited is a matured and established
Source: Team Calculation
company. Company specific risk is lower for Bata Shoe Company (Bangladesh)
Figure 17: Dividend Payout Ratio Limited and thus company specific risk premium is .50%. Equity risk premium is
60.00% assumed to be 2.5% and after addition of all the premiums with Risk free rate,
required rate of return is 12.5%.
50.00%
Terminal Growth Rate: It is assumed that a company can grow at a half portion of
40.00% GDP growth for all of its remaining life. At present, GDP growth rate of
66%56.

73%49.

04%54.

77%51.

81%42.

Bangladesh is 7.11% and GDP is growing very promptly. Bata Shoe Company
30.00% (Bangladesh) Limited is an established company and it had not been collapsed
20.00% that much when the economy was worse. So, it is realistic to predict a 4%
terminal growth rate for Bata Shoe Company (Bangladesh) Limited.
10.00%

0.00%
2012 2013 2014 2015 2016
Source: Financial Statements

7
 Dividend Discount Model
Bata Shoe Company (Bangladesh) Limited has always been a constant dividend
paying company. So, we can value the share of the company using Dividend
Discount Model. Sales revenue, as well as net income of the company, increases
every year. Consistent with this, an 8% terminal growth for dividend was
Figure 18: Relative assumed for this method. The Implied equity value per share from this method
Valuation Multiples is BDT 1,167.63. So, it can be said that Bata Shoe Company (Bangladesh) Limited
is trading in market with slightly overvalued pricing. But we cannot recommend
any decision based on this single model. (Appendix K)
1300
Relative Valuation
1280 For more realistic and accurate valuation, Relative Multiples Valuation has
1260 also been assimilated here. Difficulties have been faced to select any
comparable company for Bata Shoe Company (Bangladesh) Limited because
1190.50

1192.28
1290.15

1240 any other footwear company structure doesn’t match with Bata Shoe
1249.73

1220 Company (Bangladesh) Limited. The closest comparable company with Bata
Shoe Company (Bangladesh) Limited is Apex footwear but P/E multiple is
1200 very high relative to Bata Shoe Company (Bangladesh) Limited. So we select
1180 4 foreign companies i.e. Bata India, Bata Pakistan, Relaxo Footwear and
Liberty Shoes to calculate the relative multiples and get the intrinsic value
1160
for Bata Shoe Company (Bangladesh) Limited. But again the multiples of
1140 these companies are so high that sales growth has been adjusted to get the
PEG ratio. Incorporating PEG ratio could not solve the unrealistic problem of
P/E multiple multiples.

EV/EBIT multiple When two previous approaches could not calculate the value per share
through multiples, historical data of Bata Shoe Company (Bangladesh)
EV/EBITDA Limited has been accepted with the assumption that we cannot expect or
P/B multiple predict higher or lower multiples than Bata Shoe Company (Bangladesh)
Limited had been given throughout the previous years.
Source: Team Calculation P/E multiple we get is 16.39 and Equity value per share is BDT 1249.73.
Calculating through EV/EBIT, EV/EBITDA and P/B multiples, we get value per
share BDT 1190.50, 1192.28 and 1290.15 respectively.
Giving equal weight to these four multiples, the weighted average implies
equity value per share is BDT 1230.67. Relative multiples valuation also
recommends buying the undervalued Bata Shoe Company (Bangladesh)
Limited’s share.
Figure 19: Valuation Summary
Valuation Summary
Comparison It would not be a wise decision to fully rely on any one type of valuation
approaches. All of these valuation techniques have many limitations. So,
1400.00
weights have been distributed according to their importance and
1200.00
limitations. 60% weight has been given on DCF model as it is the best ever
1000.00
model for using free cash flows rather than accounting figures. DDM and
800.00
4
1
1
7
9

Relative multiples valuation or Comparable method are equally weighted for

2
1
1
3
2
3

.
.

600.00 calculating the final summarized value per share.

400.00
After using the weighted average technique, we get implied equity value per
200.00
share is BDT 1323.21. So, valuation summary also advocates a strong buy
0.00 decision for Bata Shoe Company (Bangladesh) Limited.
Intrinsic Value Market Price
Monte Carlo Simulation
Source: Team’s Calculation (Appendix J)
For analyzing the potential outcomes of Bata Shoe Company (Bangladesh)
Limited’s growth prospects, we have used Monte Carlo Simulation. In
determining the intrinsic value of Bata Bangladesh’s stock, Monte Carlo
Simulation simulates a range of possible outcomes for the multiple variables.
The main factors for this model include Bata Bangladesh’s assumed required

8
 rate of return, perpetuity growth rate and enterprise value. The mentioned
inputs are vital to the DCF given its sensitivity to each input, especially the
perpetuity growth rate. There are 10,000 simulations were run which
showed for each possibility of a feasible change in important company
specific, industry macroeconomic factors. The model leads to a fair value of
BDT 1323.21 and a 73.49% certainty level in our Buy recommendation.

Monte Carlo Simulation – 5 - year base case

Investment Risk
Business Risk
Figure 20: Risk Assessment Chart Execution risk related to expansion of high margin product market (BR1)
3.5 Bata Bangladesh is planning to expand the market of Hush Puppies which
brings higher margin than family store or city store. So, they are planning to
BR2,ER1, 3,
3 focus less on the latter two segments. But this structure change may not be
2, 3 3
able to gain more sales.
2.5 More Tax Burden than Unorganized Market (BR2)
o
b

b
a

y
t
i
l
i

BR3, ERR2, BR1, Unorganized market has to pay less tax on both import and income. A huge
2 1, 2 2, 2 3, 2 amount of high margin footwear is being imported via unorganized market.
On the other hand, Bata Bangladesh has to pay tax on import at a rate much
1.5 higher. It’s because the tax policy assumes all imported product as sold and
applies tax accordingly. Also, unorganized sector pays less income tax than
ERR1,
1 established organized markets like Bata. Though Bata can collect higher
3, 1
margin by selling high end products but the volume of low end products can
0.5 decrease. So, it creates the risk of low sales than forecasted.
Entrance of new companies with high growth potential (BR3)
0 Many local and international companies have already entered the market and
0 2 4 are trying to establish their product with new ideas. These companies have
Efect high growth potential and huge untapped market to explore which can
become a risk for Bata Bangladesh as they are already planning to take away
their focus from the family store segment.

Exchange Rate Risk

More focus on trading will increase the exchange rate risk. (ERR1)
Bata Bangladesh is strongly associated with international brands Hush
Puppies, Nike, Adidas and Sketchers. As Bata Bangladesh is planning to focus
Source: Team Calculation

9
 Figure 21: ROE Decomposition on trading more than manufacturing the exchange rate risk will be greater
and will affect the earnings.
2 40
The cost of raw materials will be affected by the fluctuations of oil price in
1.5 30 international market. (ERR2)
Bata Bangladesh import raw materials from other countries. These raw
1 20
materials are oil derivatives. So, the price increase/decrease of oil in
0.5 10 international market also affects the cost of Bata Bangladesh.
0 0
Economic Risk
Financial Leverage (Times) Political instability hampers the overall business operation. (ER1)
Asset Turnover (Times) The political instability is a serious issue for all businesses operated in
ROE in % Bangladesh. In 2015 a report of World Bank stated that the total direct
Profit Margin in % production loss was around 2.2 billion. This political instability can affect both
Source: Team Calculation
manufacturing and trading activities inversely.

Figure 22: Crude Oil Price Movement

120.00
100.00
80.00
Oil Price

60.00
40.00
20.00
0.00
2012-11-14 2013-11-14 2014-11-14 2015-11-14 2016-11-14
Years

Source: Federal Reserve Economic Data

Conclusion
From our Valuation models, we can draw an inference with a Buy decision for Bata Shoe Company Bangladesh
limited as it trades in stock market with an undervalued position at an 12.19% upside. The company is planning to
change its business strategy and focus on trading segment rather than manufacturing one. As more net profit margin
is generating through trading segment, this decision will result in a high growth profit for Bata Shoe Company
Bangladesh limited. It is recommended for the investors to invest in Bata Shoe Company Bangladesh limited and thus
investors can gain more by investing in such a profitable company.

10
Disclosures:
Ownership and material conflicts of interest:
The author(s), or a member of their household, of this report does not hold a financial interest in the securities of this
company.
The author(s), or a member of their household, of this report does not know of the existence of any conflicts of interest
that might bias the content or publication of this report.
Receipt of compensation:
Compensation of the author(s) of this report is not based on investment banking revenue.
Position as an officer or director:
The author(s), or a member of their household, does not serve as an officer, director or advisory board member of the
subject company.
Market making:
The author(s) does not act as a market maker in the subject company’s securities.
Disclaimer:
The information set forth herein has been obtained or derived from sources generally available to the public and believed
by the author(s) to be reliable, but the author(s) does not make any representation or warranty, express or implied, as to
its accuracy or completeness. The information is not intended to be used as the basis of any investment decisions by any
person or entity. This information does not constitute investment advice, nor is it an offer or a solicitation of an offer to
buy or sell any security. This report should not be considered to be a recommendation by any individual affiliated with CFA
Society Bangladesh, CFA Institute or the CFA Institute Research Challenge with regard to this company’s stock.

CFA Institute Research Challenge

11
Appendix
Appendix A: Revenue Growth in Different Perspective

Yearly Growth Rate

14,000.00 70.00%
12,000.00 60.00%
10,000.00 50.00%
8,000.00 40.00%
6,000.00 30.00%
4,000.00 20.00%
2,000.00 10.00%
0.00 0.00%
2014 2015 2016 2017E 2018E 2019E

Revenue (In Million) Growth (%)

Revenue as per Business Segment (2013-2016)

9,000.0 25.0%
8,000.0 20.0%
7,000.0 15.0%
6,000.0 10.0%
5,000.0 5.0%
4,000.0 0.0%
3,000.0 -5.0%
2,000.0 -10.0%
1,000.0 -15.0%
0.0 -20.0%
2013 2014 2015 2016

Manufacturing (In Million) Trading (In Million) Growth (%) Growth (%)

Revenue From Product Segmentation 2016 (in million)

0%

4%

Shoes
Hosiery & accessories
Export

96%

i
Appendix B: Corporate Governance
Overall Score: 2.2/5

1. AUDIT AND RISK OVERSIGHT

No adverse opinion by the auditor in the past year Low
No changes in audit firm Low
Moderate
20% of the audit committee is independent High
The Audit Committee is comprised of all executives High
2. BOARD STRUCTURE
No women on the Board High
20% are independent director composition of the Board High
Maintains a formal Audit Committee Low
The executives serve on an excessive number of outside boards Moderate Moderate
20% of executive directors on the board has lengthy tenure low
the company disclosed the attendance of each director low
The Chairmen does not serve on outside board. Low
3. SHAREHOLDER RIGHTS AND TAKEOVER DEFENSES
Has no classes of stock with different voting rights, absolute voting right Low
ceiling and ownership ceilings for specific parties
Ownership factors affect takeover defenses Low
Directors are not elected annually High
Moderate
Poor level of disclosure on performance measures for other long-term plans Moderate

level of disclosure on performance measures for stock option plans Moderate

The company has a controlling shareholder Low
4. COMPENSATION AND RENUMERATION
Has no equity-based compensation plan Moderate
What are the pricing conditions for stock options granted to executives? Low
Moderate
All executive directors participate to performance related remuneration Moderate
Does not disclose details on executives’ remuneration High

ii
Appendix C: SWOT Analysis

Strength Weakness
 Global presence  Poor control over non-retail shop
 Market leader  Poor budgeting on market promotion
 Portfolio product  Loosing customer for family products
 Healthy financial conditions  Low varieties of design
 Huge retail channels  Decisions take long time to be implemented
 Skilled management team  VAT & tax barrier
 Huge loyal customers
Opportunities Threats
 Low switching cost for raw  Consumer perception regarding high price
materials  Disruption of consistent supply due to political
 Easy switching to upper unrest
segment  Changing trends towards fashionable products
 Women empowerment  Potential brands like Lotto, Bay Emporium,
 Franchisee opportunity with Jenny’s
global brands like Nike,  Uneven competition with local entrepreneurs
Reebok, Adidas.

SWOT Analysis in Radar Display

Strength
Competence
3
Cost/ Price Competitive Skill
2.5
2
Technical Skills 1.5 Financial Resource
1
0.5
Management 0 Reputation

Product Development Market Leadership

Marketing Effectiveness Economic of Scale

Competitive pressure

iii
 Weakness
Strategy
3
Profitability 2.5 Facilities
Cost Structure 2 Management
1.5
1
Financial Resources 0.5 Key Competiton
0

Marketing skills Strategy Implement

Market image Internl Operation

Product/survice line Property Development

Opportunity
Prospects
3
Regulatory Overhead 2.5 Markets
2
1.5
1 Product/service
Market growth 0.5 Enhancement
0

Rival Complacency Product line Expansion

Expansion of facilities Vertical Integration

Threat
Pricing
3
Technology 2.5 Subsitute Products
2
1.5
Entry Barriers 1 Market Growth
0.5
0

Demographics Regulatory Overhead

Market requirements Buyer power

Supplier Power

iv
SWOT Analysis AVG. Point Legends
Strength 2.08
Weakness 1.85 1 = Poor
2 = Moderate
Opportunities 1.78
3 = High
Threats 2.00

SWOT
Strength
2.10

2.00

1.90

1.80

1.70

Threats 1.60 Weakness

Opportunities

v
Appendix D: Porter’s Five Forces Model

Bargaining Power of Suppliers (Moderate)

Switching cost is very low both for local & imported materials. As the number of suppliers is huge,
the suppliers have to satisfy the shoe companies even though by increasing quality or decreasing
price. But such raw materials are also used in other demanded sectors which make the supplier
superior. As brand issue for lower & middle-class consumer is not critical issue, the threat of forward
integration by the suppliers is high.
Bargaining Power of Customers (Moderately High)
As new brands with changing trends and quality concerns is increasing day by day, the bargaining
power of buyers is also rising accordingly. Customers find it inexpensive to switch to different
alternative brands. Also, they possess a backward integration threat to the brands as switching cost
is low. However, volume of customer order size makes them less superior to the suppliers.
Intensity of Competitive Rivalry (Very High)
The market competition is rising day by day. Around 60% market share hold by the informal sector
creates a tough competition for the established brands such as Bata, Apex, Bay, Lotto etc. Again,
increasing tax & VAT barriers make it harder for them in market performance. Varieties of brand
make customer more concern about not only quality but also changing patterns of design which
make existing brands more competitive.
Threat of Substitutes (Very Low)
Threat of growth increases, such scenario of bare footed people is decreasing. Social concern about
sanitation also helps for such decreasing patterns. Substitute of shoes is very low as no one can think
a cheaper substitute of shoes or sandal. As the income
Barriers to Entry (Moderate)
Increasing production cost, VAT & tax barrier make the situation hard for new competitors. As the
local competition increasing, the demand for land & other capital requirements requires higher cost.
Economies of scale is difficult to gain for small newcomers. Already local entrepreneurs have
engaged in uneven competition with existing brands. Though such competition doesn’t exist in
upper class segments, established brands like Bata, Apex, Bay Emporium, Lotto have already
engaged in to capture this segments with different strategies. However, newer local entrepreneurs
with small capacity are rising as those local brans have an uneven advantage.
Table D1: Summary Table of Porter’s Five Forces Model
Threat Level Threat Types
Bargaining Power of Customers 4 Moderately High
Intensity of Competitive Rivalry 5 High Threat
Bargaining Power of Suppliers 3 Moderate
Threat of Substitutes 0 No threat
Barriers to Entry 3 Moderate

vi
 Proter's Five Forces Radar Display
Bargaining Power of
Customers
5
4
3
Barriers to Entry 2 Intensity of Competitive
1 Rivalry

Bargaining Power of
Threat of Substitutes
Suppliers

Proter's Five Forces

vii
Appendix E: Demand Drivers and Key Market Players
Table E1: List Demand Drivers
Population
As Bangladesh is an over-populated country, a huge
portion of this population is young generation who
are very much trendy. Such attitude effects on the
demand for fashionable shoes.
Weather and season
In winter, customers are more focused on
fashionable products. On the other hands,
demands for quality products are more in rainy
season.
Culture and Occasion
During different festivals like Eid, Puja, Boishakh
create extra demand for fashionable products
Adaptation of Fashion & Fashion trend
Due to globalization, trend for fashionable products
changes quickly over time. To adapt with such
trend, consumer put an extra demand for
fashionable products.
Key Market Players
  Local Entrepreneurs (Informal Market)
  Bata Shoe Company (Bangladesh) Limited
 Apex Footwear Limited
Cost of the Products
At present, there is a tendency of increasing cost of
the production in footwear industry which affects
the price of finished goods. Increase in such cost
negatively affects product demands. But this effect
is very low as there is no such substitute products
available.
Availability in the market side
Availability of different products refers to more
concern in buy decision which makes the
competition more acute and companies are trying
to develop their products. That refers to an increase
in market demand with high expectation.
Market trend and General Tendency
Continuous product development creates an
artificial market trend among the customers,
especially the young generation. And such trend
leads to increase market demand.
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Appendix F: Financial Performance Analysis

Table F1: Financial Performance of Bata at a glance

Years 2015A 2016A 2017E 2018E 2019E 2020E 2021E 2022E
Profitability Ratios
Return on Equity (ROE) in % 28.05 29.33 27.49 27.02 26.48 25.99 25.43 25.69
Return on Assets (ROA) in % 15.88 15.91 15.92 16.19 16.42 16.63 16.79 17.46
Gross Profit Margin in % 40.23 43.45 42.50 42.50 42.50 42.50 42.50 42.50
EBITDA Margin in % 15.67 17.93 17.61 18.06 18.53 19.00 19.47 20.44
NOPAT Margin in % 9.54 11.67 11.68 12.18 12.68 13.18 13.68 14.68
Net Income Margin in % 9.76 11.87 11.84 12.34 12.84 13.34 13.84 14.84
Asset Management Ratios
Total Asset Turnover 1.63 1.34 1.34 1.31 1.28 1.25 1.21 1.18
Net Long-term Asset Turnover 8.70 9.83 10.31 10.81 11.28 11.78 12.24 12.74
PP&E turnover 8.12 8.92 9.17 9.43 9.66 9.89 10.09 10.28
Operating Working Capital to
19.17 19.93 19.58 19.23 18.97 18.62 18.57 17.98
Sales Ratio in %
Operating Working Capital
5.22 5.02 5.11 5.20 5.27 5.37 5.39 5.56
Turnover
Accounts Receivable Turnover 9.40 8.63 8.33 8.70 9.09 9.52 10.00 11.11
Inventory turnover 2.25 1.79 2.05 2.09 2.13 2.17 2.19 2.21
Accounts payable turnover 11.83 5.56 7.69 8.00 8.33 8.70 9.09 9.52
Day's receivable 38.84 42.29 43.80 41.98 40.15 38.33 36.50 32.85
Day's inventory 162.4 204.2 177.7 174.6 171.4 168.2 166.3 165.0
Day's payable 30.86 65.61 47.45 45.63 43.80 41.98 40.15 38.33
Liquidity Ratios
Current ratio 1.95 1.98 2.19 2.33 2.49 2.67 2.86 3.08
Quick ratio 0.60 0.71 0.92 1.05 1.19 1.35 1.52 1.70
Cash ratio 0.17 0.34 0.49 0.63 0.78 0.94 1.11 1.33
Operating cash flow ratio 0.28 0.40
Debt & Coverage Ratios
Liabilities to equity 0.77 0.84 0.73 0.67 0.61 0.56 0.52 0.47
Interest Coverage (earnings
281.1 408.8 402.0 414.5 427.0 439.5 452.0 477.0
based)
Interest Coverage (cash flow
214.1 409.5
based)
Note: 1. Debt to Equity, Net Debt to Equity, Debt to Capital, and Net Debt to Capital is not needed to do for Bata Shoe
Company (Bangladesh) Limited as they don’t have any no long -term debt.

ix
 Appendix G: ROE Decomposition
Table G1: ROE Decomposition (DuPont Method)
ROE Decomposition 2015A 2016A 2017E 2018E 2019E 2020E 2021E 2022E
Profit Margin in % 9.76 11.87 11.84 12.34 12.84 13.34 13.84 14.84
Asset Turnover 1.63x 1.34x 1.34x 1.31x 1.28x 1.25x 1.21x 1.18x
Financial Leverage 1.77 1.84 1.73 1.67 1.61 1.56 1.52 1.47
ROE in % 28.05 29.33 27.49 27.02 26.48 25.99 25.43 25.69

Appendix H: Simulation and Sensitivity Analysis

Chart H1: Sensitivity of Equity Value per share

Table H1: Sensitivity Analysis

Required Rate of Return
9.50% 10.50% 11.50% 12.50% 13.50% 14.50% 15.50%
Growth Rate

2.50% 1779.71 1561.89 1392.85 1257.95 1147.85 1056.35 979.13

3.00% 1882.72 1637.13 1449.71 1302.08 1182.85 1084.60 1002.28
3.50% 2002.90 1723.12 1513.68 1351.11 1221.34 1115.41 1027.35
Termina

4.00% 2144.93 1822.34 1586.17 1405.92 1263.89 1149.17 1054.61

4.50% 2315.36 1938.09 1669.03 1467.57 1311.17 1186.30 1084.34
l

5.00% 2523.67 2074.89 1764.63 1537.44 1364.01 1227.33 1116.91

5.50% 2784.06 2239.05 1876.16 1617.30 1423.45 1272.93 1152.73

x
Appendix I: DCF Model

Table I1: Summary of DCF model

Terminal Value
Terminal Year Free Cash Flow 1,864.61
Perpetuity Growth Rate 4.00%
Terminal Year EBITDA 2,937.71
Terminal Value 22,814.09
Implied Exit Multiple 8.74x
Discount Period 5.125
Discount Factor 0.546818655
Present Value of Terminal Value 12,475.17
Present value of Free Cash Flow 5,845.50
Enterprise value 18,320.66
Less: Total debt 0.00
Plus: Cash and Cash Equivalent 912.26
Implied Equity Value 19,232.92
Outstanding shares 13.68
Implied Equity Value per Share 1405.92

Appendix J: Final Intrinsic Value

Table J1: Weighted Average Intrinsic Value per Share
Valuation Approaches
DCF DDM Relative valuation
Implied Share Price 1405.92 1167.63 1230.67
Weight 60% 20% 20%
Target Price 1323.21
Market Price 1179.4
Observation Undervalued
Recommendation BUY

xi
Appendix K: DDM Model

Table J1: Per Value of Share Calculation Using Dividend Discount Model
Items 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022
Total Dividend Paid (In Million) 380.71 404.39 378.67 430.60 446.48 566.76 644.14 727.61 820.68 920.18 1,066.35
No of Shares Outstanding (In Million) 13.68 13.68 13.68 13.68 13.68 13.68 13.68 13.68 13.68 13.68 13.68
Dividend Per Share (In TK) 27.83 29.56 27.68 31.48 32.64 41.43 47.09 53.19 59.99 67.26 77.95
0.125 1.125 2.125 3.125 4.125 5.125
Discount Factor 0.98538 0.8759 0.77858 0.692067 0.615171 0.546819
Present Value of Dividend (In TK) 40.82 41.24 41.41 41.52 41.38
Dividend Growth Rate 8%
Terminal Value(In TK) 1732.215
Present Value of Terminal Value(In TK) 961.256
Value of Per Share(In TK) 1167.63

xii