Equity research on Grameen Phone

Abstract

This internship report reflects my experiences as an intern in the research department of the head office in BRAC EPL Stock Brokerage LTD. The report also discusses the overview of the company and my project “Equity Research on Grameen Phone”. The report thoroughly analyzes the organizational structure of the company and its policies. Moreover, the report looks at the products and services offered by the company. Financial performance of the company is analyzed and compared with last 5 years performances. It will be seen that due to the covid pandemic, the company’s financial performance has been low compared to last few years’ performance. Furthermore, a strategic analysis of the company has been conducted, exploring the company’s strengths, weaknesses, opportunities and threats. The company’s main strength has been observed to be its dominant market share of over 55% in the foreign portfolio investment execution segment and the biggest weakness of BESL is comparatively less presence in the retail investment than other brokerage houses. A nation's economic development and growth are dependent on well-productive investments. However, it would be impossible to achieve without securing the availability of long-term funding and their effective and efficient applications. Stock market plays a significant role in this matter. Alile (1984) argued that overall growth of an economy depends on how efficiently a stock market is working in channeling funds into productive economic units. Economic growth in emerging economies is strongly depending on stock market (Mauro, 2000). A capital market can play an important role in capital formation and allocation because it provides a platform for investment opportunities with a competitive pricing mechanism, which in turn influences investors' sentiment to save and invest domestically. However, the success of a capital market is largely determined by how investors react to information about capital markets while making investment decisions. v Bangladesh, as a developing country, continues to offer domestic and foreign investors numerous potential investment opportunities in the capital market. The Dhaka Stock Exchange (DSE), the largest of Bangladesh's two stock exchanges, has emerging market characteristics. DSE has recently experienced a remarkable shift in its operations. The Dhaka Stock Exchange's (DSE) benchmark index DSEX crossed 6,400 points for the first time in its history. On 25th July, DSEX rose 0.29% to reach 6,424 points, earlier the DESX’s highest position was 6338 points on 26 November,2017 since it’s launching in 2014. Grameenphone Limited (GP) is the largest service provider in the telecommunication sector in Bangladesh. Telenor Mobile Communications AS is the immediate parent of GP is and Telenor ASA is the ultimate parent, both of these companies were incorporated in Norway. Grameenphone has a very efficient management that accelerating solid growth in subscriber acquisition, net profit with well controlled OP-EX even in a difficult business environment. Grameenphone has been maintaining a strong brand image and active subscribers base have positioned the company leading of its competitors. The purpose of this report is to provide an investment recommendation on Grameenphone. Grameenphone was listed in 2009 in Dhaka Stock Exchange (DSE) with launching the biggest IPO during that time since the independent in 1971. It has an authorized capital of 40,000,000,000 and a paid-up Capital of 13,503,000,000. The sponsor group Norway's telecom giant Telenor & directors holding the 90% of the share, while 4.66%,3.16% & 2.18% of the shares are held by Institutions, Foreign and General Public, respectively (as of 19th July, 2021). It has positioned in A category of the market and AAA credit rating score that reflects its high quality of earnings. The board of directors places a high value on excellent corporate governance and is committed to ensuring the Company's business and operations' long-term viability by incorporating good vi governance ethics and business integrity into the company's plans and operations. Individually, the present board of directors and management committee are highly competent and have extensive expertise in several fields. Mr. Yasir Azman was appointed as CEO of Grameenphone in 2020. He was previously the Deputy Chief Executive Officer of Grameenphone. He also worked for Grameenphone as the Chief Marketing Officer. Mr. Azman formerly worked as the Telenor Group's Head of Distribution and eBusiness, where he was responsible for all of Telenor's operations. In addition, Grameenphone's senior management and board of directors have extensive expertise in their respective areas as well as in-depth understanding of the business in order to preserve Grameenphone's competitive advantage as a market leader. Bangladesh had seen an increase in mobile internet penetration in last 10 years and increase in data usage for the adoption to mobile broadband technologies that facilitate an unprecedented data revenue growth in the telecommunication sector in Bangladesh hence the revenue growth of Grameenphone since Grameenphone alone holds the 40% market share in the industry. However, during last year, Grameenphone faced few restrictions imposed by Bangladesh Telecommunication Regulatory Commission (BTRC) that had a huge impact on Grameenphone year-on-year revenue growth. Bangladesh will experience unprecedented rise in data revenue. The increase will be fueled by both an increase in data subscribers and an increase in data usage. We breakdown Grameenphone revenue into two sources: Data Revenue and Voice & Other revenues. We estimated data revenue will growth at CAGR of 15% and voice & other revenues will grow at CAGR 4% for next 4 years. Investment risk is categorized into three parts. These are market risk, financial risk and operational risk. Transformation/ Modernization Risk is the market risk, operational risk consists of network risk, cyber-attacks risk, and regulatory risk, financial risks are credit risk, liquidity risk, exchange vii rate risk and interest rate risk. Financial risk is low to medium for Grameenphone as Grameenphone is not exposed to any kind of financial risk, Market risk is low to medium since Bangladesh are already adopting with new technology and operation risk is medium to high since there might be regulatory changes from BRTC. To perform valuation till now FCF model have been used. In the FCFE model, the WACC (Weighed Average Cost of Capital) was calculated 8.65%, where as the cost of equity was calculated following the CAPM model which is 13.4% and after-tax cost of debt was calculated which is 5.4%. With the FCF model we got a fair value of BDT 407 for Grameenphone. I am yet to perform the Relative valuation for Grameenphone with its peer companies from local and oversee. It will be done by the submission of second draft. After that I will be able to get a weightage price from both valuation method. GP’s valuation was based on the macro, sector and company analysis. The market price on 12 September, 2021 was BDT 387.8. So, from the FCF valuation it can be deducted that GP will have a 5% price upside in December 2021. So, this report provides a BUY recommendation on Grameenphone.