Chapter: 01 ( Introduction)

1.1 Background

APEXADELCHI FOOTWEAR LIMITED.

The history of Apex is not very old. Still it is one of the oldest Footwear and Leather Company in Bangladesh. The company was established in 1990 as a proprietorship company at Hazaribagh in Dhaka. In the very beginning, it used to operate as leather production from rawhide and exporting. From the year 1993/94, the firm started to deal as foreign buyer’s representative and leather chemical distributor .All functions of the company are related to leather only, from marketing up to technology transfer.

APEXADELCHI FOOTWEAR LIMITED, a leading manufacturer and exporter of leather footwear from Bangladesh to major shoe retailers in Western Europe, North America and Japan. The company has revenues of USD 42 million in 2006. AAFL pioneered the export of value added finished products export in the leather sector of Bangladesh and is also involved in the local footwear retail business with the second largest shoe retail network in the country. AAFL has equity, technical and marketing participation from La Nuova Adelchi one of the largest footwear manufacturers of Italy. Public listed and traded since 1993, AAFL is professionally managed, currently employs 3944 persons and is in full compliance with Corporate Governance Compliance Report under Section 2CC of the Securities Exchange Commission Notification Order.

VISION

“Honest Growth”

MISSION Sustainable GrowthVendor of Choicecreating value for our shareholdersProactive complianceCorporate Social Responsibility

COMPANY PROFILE

Name of the Company: APEX ADELCHI FOOTWEAR LIMITED

Date of Commencement of Business as Apex Footwear Limited: January 04, 1990Name Change to Apex Adelchi Footwear Limited: December 27, 2006

Type of Company: Public Limited Company

1.2 Objectives

#Respect for people- Demonstrate respect by developing our people and helping them to achieve high #performance standards.- Treat all people with dignity#Integrity- Honesty- Walk the talk#Sense of Urgency- Strive for speed and simplicity in everything we do.#Empowerment- Encourage and reward self-confidence and initiative- Require accountability#Courage- Face reality, make timely difficult decision

1.3 Scope

This paper will address the comprehensive idea about a company business analysis including strategy analysis, accounting analysis, financial analysis & prospective analysis through this term paper. This paper at best may be viewed as a guideline, a tool for analyzing business organization for the investors and respective people.

1.4 Methodology Sources of Information

We needed data to complete the term paper which requires taking information from both primary and secondary data. In order to complete such kind of term paper secondary data is very much necessary and we have taken more information from secondary sources than primary sources.

Primary source

Communicating through cell phone is the main source of collecting primary information regarding our term paper.

Secondary sources

Our secondary source is more informative than the primary sources.

Organization’s annual reports and other published materialsCompany’s web site.

1.5 Limitation

While preparing this term paper we faced the following troubles:

Some requisite information are not available in website Information is restricted to highly officials. Monetary and time constraints. The respondents did not give us much time.

Chapter 02: Business analysis of Apexadelchi footwear ltd

Business analysis is divided into some parts:

1. Industry analysis2. Company analysis3. SWOT analysis4. Technical analysis

1. Industry analysis:

Industry Lifecycle Analysis

By viewing Product lifecycle management as a system that includes brand and product strategies, disciplined development processes, efficient resource management, information technology enablers, and key performance measures, apparel companies are able to quickly react to emerging trends, draw on the experience of industry best practices and keep financial objectives on target (including maximizing cash flow) through effective project management. This often means doing things quite differently than tradition dictates. The combination of component-based product design and smarter sourcing can produce supply chain efficiencies, re-inspire consumers and enhance top line sales growth with “fast fashions”—the apparel industry response to the drive-through window.

Pioneering Phase: Industry Investment is high, return low, or negative.

Growth Phase: Investment high, sales explode, return also high, or higher return.Mature Growth: Investment gets slowed down, sales still grow but at a lower rate return becomes average or slightly above normal.Stabilization: Investment is consolidated, not expanded, return normal.Decline ration: Sales decline, smart investors switch to a different industry.

First, I have to find out sales and return position of Apex adelchi footwear ltd. Then I will say the life cycle position of apex adelchi footwear ltd.

2007 2008 2009 2010 2011 2012

Sales 4394617 5621399 5820870 6931517 9499257 9748379

1000000

3000000

5000000

7000000

9000000

11000000

Sales

2007 2008 2009 2010 2011 2012

Profit 169358 189828 211532 228227 261011 258855

25000

75000

125000

175000

225000

275000

Profit

Graphical presentation shown that apex adelchi footwear ltd. sales still grow; profit is slow or average growth. So we said that life cycle position of apex adelchi footwear ltd. is mature.

Analysis of industry (The Porter’s five forces model)

I) Rivalry among existing firms:

At present, apex adelchi footwear ltd has been competed with other existing footwear company. The growth rate of Bata Shoes Co. is more than Apex Adelchi footwear Ltd. Because Bata Shoes Company. Always concerned with their customers. And other competitors like:Fortuna Shoes Factory, Titas Footwear Bangladesh, Excelsior Shoes Ltd., Jennys Shoes Ltd, Rumana Shoe Inds. Ltd., Madina Shoe Industries Ltd., Sonali Aansh Trading (Pvt.) Ltd., Excelsior Trading Corpn. Ltd., Dada Shoes, Shampan shoes Ltd., Genuine Leather, Khan Shoes, Dhaka Footwear Ltd., Ruma Shoe Industries Ltd., Lonesin Footwear, Rumana Shoe Inds. Ltd., Capricorn Intil Trading Co. Ltd., Munumun Leathers (Pvt.) Ltd., Arku Industries Mfg. Ltd. have been working well in the current market in footwear industry is very limited that’s why rival company can intervene here easily. Bata is the major competition of apex. So Bata is not providing any special segmentation rather than apex is doing.

ii) Threat of new entrants:

Industry profitability is influenced by the opportunity of entering new firm. Since footwear industry places low exit and access barriers, as a result competition is increasing.

If any company enough capability and resources, they have the chance to “first mover advantage”. But things are not easy as many existing footwear industries are going strong.

Footwear shoes industry is the already established company. They are still producing “economics of scale”. So, new entrants have no chance to generate profit. Possible threats of new entrants can be Jennies and Bay Emporium for their rapid business expansion.

iii) Threat of substitute of product:

Quality substitute products are always challenging for existing firms. In the case of footwear industries, slippers and plastic sandals are always demandable for their reasonable price concentrating or segmentation, maximum companies are doing their marketing activities without any segmentation. As a result substitute products are linked with the existing products. So in context of substitute products, competition is very stiff. Though, price range between galleries Apex and Bata is nominal that means 50-60. So switching cost is nominal

as a result switching tendency among customers is high which threat is for existing firms. Substitute products of footwear industries are not more other than slippers and plastic sandals

IV) Bargaining power of the buyers:

When price sensitivity is prime issue, here there is a chance for bargaining power of buyers. As there is having many footwear industries. When quality is issue there is less chance to bargaining power of the buyers because only there are Bata and gallery apex that producing quality shoes. In this aspect product differentiation and switching cost are nominal. So, bargaining power of the buyers is limited.

V) Bargaining power of the suppliers:

Bargaining power of the suppliers is high in the footwear industry in Bangladesh. Because suppliers are highly concentrated and limiter numbers of suppliers are existing in this industry. Some suppliers go in to forward integration like apex, Bata etc. as a result, more quality products are being possible to produce by them. Since supplier’s product is critical to collect as a result market competition on is increasing. Raw material of footwear industries are not available, only few suppliers who are making raw material. So their bargaining power is very much high and related unfinished products are not available. As result, the bargaining power of supplier creates more competition position in our footwear industries. Apex ternary is their suppliers which is one of their another sister concern. They have good advantage in that particular aspect.

VI) Bargaining power of complementary product

Complementary products of footwear industries are sole of shoes, color polish, lace, glue, nylon reel, black shiner etc. here competitors have stiff chance to make concern. The complementary products of this industry are not available and the price is reasonably increased that’s why market competition is very high. The raw material related industry is not growing well in our market so the footwear industry look for outsourcing.

2. Company analysis

A. Competitive strategy analysis

Two generic competitive strategies are;

Cost leadership Differentiation

Cost leadership:

Cost leadership on tight cost control such as invest in scale plants, low cost product design, minimize overhead cost etc.

Differentiation:

Differentiation strategy involves providing a product/ service that is distinct in some important respect valued by the customer. Point is to be noted that, a company should adopt one strategy between two strategies in order to get success. Apex follows differentiations strategy because of their style and design, durability, reliability, brand image and goodwill and so on.

They do position themselves in unique style. Gallery apex has large product line; their showroom is spacious, unique logo, providing discounting sales.

B. Corporate strategy analysis

If the companies have multi business unit that called corporate level strategy Analyzing corporate strategy involves evaluating the economic consequences of managing more than one business units under one corporate umbrella.

Apex adelchi footwear ltd. is a renowned corporation consists of salary apex, apex tannery, and apex pharmaceutical. Apex Corporation tries to maximize their bargaining power. So, they for backward and forward integration. Gallery apex collects their raw materials from apex tannery.

So they get-

1. Raw material in time

2. Captured the scope of best quality raw materials which help to impose TQM.

3. Get raw materials in low cost.

However they also apply forward integration to facilitate their business. The apex set their showroom in all over country in suitable position. As a result

1. They get customer feedback directly

2. They capture the profit of retailer also.

3. The physical advertisement place in the front of showroom.

Moreover, they have some sister concern. There is a proverb in finance “do not put your all money in one pocket”. So Apex Corporation diversifies their investment to minimize risk. In top of that the sister concern centime the sustainability of gallery apex in contingency situation.

Apex Corporation lesser their transportation cost, legal cost and communication cost by using backward and forward integration which minimize the overall cost. So the sustainability is ensured and profit is maximized.

In their corporate strategy Gallery apex it is a middle and forward industry. Apex tannery is the backward industry. Apex pharma is under other subsidy.

Calculation

Some important ratios to select the company:

In 2012 performance of R.N. Spinning Mills Ltd is given bellow:

1. Return on Equity = Net Income

Total EquityCapital =

7551785702368798710

= 31.88%

2. Return on Asset = Net IncomeTotal Asset =

9159529981391412300 = 65.83%

3. Inventory Turnover = Sales

Inventory = 2685268974969706198 = 2.85 times

4. Earnings per Share (EPS) = Net Income

Sharesoutstanding =

755178570208418729

= Tk. 3.62

5. Book Value per Share = Total Equity

SharesOutstanding=¿

3884973495208418729 = Tk. 18.74

6. P/E Ratio = Price per ShareEarning per Share

= 28

3.62 = 7.73 times

7. Price to Book Value Ratio = Market price of StockBook ValuePer Share

= 28

18.74 = 1.49 times

8. Price to Cash Flow Ratio = Market priceof share

CashFlow Available per share =

30.503.61

= 8.45 times

9. Price to Sales Ratio = Market price of Share

Sales per Share =

30.5010.84

= 2.81 times

In the previous year these above ratios was-

Ratios 2011 2010 2009Return on Equity 65.83% 50.39% 14.37%Return on Asset 33.16% 43.43% 8.79%Inventory Turnover 3.51 4.02 3.22Earnings per Share 6.58 5.04 17.84Book Value per Share 18.97 16.10 121.7

3. SWOT Analysis

This is an analysis of the internal Strengths, Weaknesses and external Opportunities and Threats of the current and potential strategic environment. By analyzing overall situations, we have tried to find out the Strengths, Weaknesses, Threats, and Opportunities for Apex Footwear Ltd

Strength: Apex Adelchi footwear ltd. has the following distinct advantages as a leading footwear company in Bangladesh.

Big Leather Market: Bangladesh is a good source of high quality leather. During the Eid ul Azha a large number of cows and goats are slaughtered every year, so leather is the most easily getable raw materials for us. We are using 85% leather from local sources.

Low Labor cost: Bangladesh is one of the least development countries in the world it is populous also. Therefore, labor cost is a bit lower over here than many other countries in the world.

GSP Advantage: GSP from A allows preferential access to market no duty, no quota in EC or Japan.

Communication Advantage: Conversant with market trends and technological development due to constant interaction with market leaders of Europe and Japan.

Well Established factory: Marks and Spencer have approved Factory for ethical trading practices: compliant with all local and international industry standards.

Duty free advantage: Able to import any kind of raw material or component duty-free or re-export. No duty or quota for exports of Bangladeshi leather shoes to EC, UK Japan, Korea, and Canada.

Modern Technology: We are using the world’s most modern and cost effective machineries. Many of the engineers are hired from foreign countries to maintain the superior quality.

Weaknesses: Even though, leather footwear is one of the most revenue-earning products of Apex Adelchi footwear Ltd. However, it has few weaknesses too.

Price skimming strategy in Local: Apex is mainly export-based company, so normally it is using price-skimming strategy in local market, which is not attracting mass people in the local market. That is why people in local market have a bad impression on the high price of Apex product.

Lack of concentration in local market: UP until now, Apex is not taking any major steps to grab the major portion of the local market. Putting less effort and

attention on large portion of local market the company is loosing a big portion of revenue from it, which is a big potential of market development.

Major dependence on foreign expertise: Apex has to maintain a certain level of standards to need the requirement of foreign buyers. Therefore, they have to hire foreign expertise for the major position of the company to achieve superior quality that is how it is depending largely on foreign expertise.

Lack of Promotional strategies: The marketing strategy that Apex Adelchi footwear limited follows for their leather product is seams arrogant according to few researches. That means, when the competitors go for new promotional drive, Apex Adelchi footwear ltd. does not response timely with any effective counter strategy.

Opportunity: Apex Adelchi footwear Limited has some opportunities that it can use to flourish their market share in vast percentage in the industry. Always we should use our opportunities. Apex should also use these opportunities to hold their top position in the market.

Brand equity: Apex has a good reputation both in local market and overseas, especially in Italy. Customers in countries like Italy, UK, and Germany are loyal to Apex brand as footwear.

Single taxation: As Apex is still a rising company in footwear sector both Bangladesh and Italian government sign an agreement to eliminate both side taxation. That is why now Apex has to pay only one side tax of any kind for export.

Government incentives: Bangladesh government is encouraging investment on this type of high growth market that is why Apex is receiving 15% incentives every time they go for a big sum of exports.

Low cost labor: As Bangladesh is a populist country, necessary labor is available here, and hiring cost is very low.

Unique in exporting footwear: Apex is the only Bangladeshi footwear company, which is selling goods overseas, and it is a competitive advantage for us

Threat:

Competitive Labor cost: Countries like China, Pakistan, India and Indonesia, are good source of cheap labor cost. Therefore, Bangladesh is facing good challenges in this sector from those countries.

Increasing tariffs on raw materials: A good number of raw materials of the industry like chemicals and technology are to import from foreign countries, so increasing tariffs is a great threats for this industry.

The power of suppliers: If there are only a few suppliers of an important input, then suppliers can drive up the price of that input, and expensive inputs result in lower profits for the producer. Apex has a few of good suppliers also but due lack of available suppliers it has to depend mainly on them, which is not a better option. That is why in this sector Apex does face many threats from their suppliers.

High growth market: Footwear industry is one of the high growth markets in the world, so we have to develop ourselves to meet those challenges all the time.

4. Technical analysis:

Apex Adelchi Footwear Limited (DSE: APEXADELFT) had started its commercial operation in January 04, 1990 and got listed in Dhaka Stock Exchange in November 07, 1993. Main business of the company involves producing footwear and distributing final shoes in local market through own distribution outlet. In global market this company has high demand for its shoes especially in European countries and USA. In 2009 85% of the revenue came from exports. Current capacity as of December 2013 is 20,000 Pair of complete per day. It develop raw hide in own tannery plant. The company is subject to seasonal effect (Q2 (April-

June) generates highest growth in sales), Financial risk and demand of product in global market.2012 was a very challenging year for APEXADELFT. On the export front, as the EU continued to muddle through the debt crisis, demand for footwear fell by 9.17% in terms of pairage in 2012. The largest targeted foreign market, EU and North America already had high level of footwear consumption per capital especially at the medium to medium high price shoes. Consumer spending at this level is very sensitive to the financial turmoil and consumer confidence. All these factors resulted in declining shoes order in 2012. Apart from that increase of electricity cost by 68.07%, increase of rent by 91.80% and 18.90% in financial cost has eroded the profitability potentials of APEXADELFT. In local market, sales increased by 26.24% and steady growth of sales in pairage terms for last five years in local market indicates that the company has been successfully building its brand image in Bangladesh. Though earnings from international market fell, top line earnings in 2012 cushioned by 24.45% growth in sales volume in local market coupled with increase in average price of shoes.

APEXDELFT embarked on a major company-wide ERP implementation project with IFS World in 2012. The project on broads ‘IFS Application for Industry Manufacturing’ will build the foundation of the future growth and improved productivity, cost savings and improved profitability. The centralized ERP System is schedule to start in May 2013. On the export front, APEXADELFT has refocused on US and Japan market and in first three months of 2013 it has already started paying high return from export. Q1, 2013 revenue from sales has gone up by 43% compare to sales of same accounting period of 2012. Bangladesh has preferential market access to Japan as a LDC country that our competitors Vietnam and India do not enjoy. The company has already moving aggressively to Ancash this opportunity and management reported that at the end of March 2013 export to Japan has already doubled. Demand in local market has been growing gradually in last few years. Even after number of impediments like high inflation rate and credit crunch local market continues to grow and expected to upbeat in coming days.

Pro Forma Profit and Loss Statement of APEXADELFT:

In BDT ThousandParticulars Q1 2011 2011 Q1 2012 2012 Q1 2013 2013 EExport Sales 7496037 7215870Local Sales 2003219 2532509Sales 1984867 9499256 2030981 9748379 2901411 14320062COGS (1712765) (8139592) (1748938) (8201768) (2485496) (12117447)Gross Profit 272,102 1359664 282043 1546611 415915 2202615Operating expense (235887) (609128) (244730) (706769) (355375) (1002404)Profit from operation 36215 750536 37313 839842 60540 1200211Financial Cost (422058) (501850) (621820)

Other income 534 1071 1372Profit before wppf 329012 339063 579763Wppf (15667) (16146) (27608)Profit before tax 313345 322917 60540 552155Tax (6519) (52334) (6716) (64062) (12108) (94105)Profit after tax 29696 261011 30597 258855 48432 458050No of share 11250 11250 11250 11250 11250 11250EPS 2.64 23.20 2.72 23.01 4.31 40.72Forward annualized EPS 10.88 17.22

Our forecasting analysis on profitability suggests that in 2013 APEXADELFT would have around 47% growth in top line earnings and 77% in bottom line earnings. We expect that significant growth in export would be the main catalyst to high profitability in 2013. As per projection annual EPS estimated is 40.72. Cost of production may pile up at an increasing rate due to increasing trend cost of raw material, electricity and labor cost. However, we predict that if net sales can grow at current rate and export can grow at current double digit rate, APEXADELFT may offer high return on share investment in terms of earnings and capital gain.

Stock performance:

Historical P/E based price (Dec2013) P/E2008 14.132009 13.742010 20.272011 12.742012 10.04

Current for forward 15.20Average 2013 P/E 14.3538EPS 2013 E 40.72Historical PE Based Price 588

5 years PEG based pricingEPS 2008 16.87EPS 2012 23.01EPS 2013 E 40.72EPS growth 1 year 76.95%EPS growth 5 years 24.64%

APEXADELFT is a growth share with significant strength in business performance. Considering the projection of earnings for 2013, growth of EPS from 2012 to 2013 is expected to be 77% and 24.64% for last five years, which is significantly high. As the company has been pursuing cheaper source of fund raising from financial institutions, financial risk on investment may go up, nevertheless gratifying profitability is expected pay off shareholders of APEXADELFT.

For valuation purpose we have followed PE multiplier based valuation, which reveals the true value of this share to be BDT 588 as of December 2013. We expect market will catch up this value ahead of end of the year as profitable returns per share shows up in next quarters. PEG is a good measure for

growth share and we have got that for projected earnings growth. Hence, we would suggest BUY for this share as the market price is currently undervalued.