Keya Cosmetics Ltd 403748

INTRODUCTION Keya Cosmetics Ltd. incorporated as a Private Ltd Company in the year 1996. The next year it started commercial production. After two years it converted into Public Ltd Company. Keya Cosmetics Ltd (KCL) listed in Dhaka Stock Exchange on 16th Sep 2001. It also listed in Chittagong Stock Exchange in the same year. KCL manufactures and sells cosmetics and toiletries products and its segmented in the ‘Pharmaceuticals and Chemicals’ business segment. CORPORATE GOAL The mission of Keya Cosmetics Ltd. is to befit the consumers with continuous improved products so that the consumers feel better. The key objective of Keya Cosmetics is “No compromise with quality”. As stated in the annual reports- KEYA is ionate to serve high quality Cosmetics & Toiletries, Detergent powders, Glycerin Products and soap noodles, the major raw materials of beauty and laundry soap within an affordable price. KEYA is committed to serve their best towards the stakeholders. But what measures high quality products and what is the extent to their best service is not clearly stated in the annual reports. Keya Cosmetics Ltd nurtures a philosophy of continuous improvement of its products by product development, quality control and standardization. KEYA claims all its products are derived through rigorous research and each of them is incorporated with globally recognized quality norms. The export outlets of KCL are India, Bhutan, Saudi-Arabia, Nepal & Kuwait. Keya Cosmetics Ltd is an ISO 9001: 2000 certified company; it also has UKAS Quality Management certification. Corporate Social Responsibility of the firm: KCL is dedicated to sustainability and corporate social responsibility; as stated in its annual reports. It generates sales and profits while behaving in a socially responsible manner. KEYA believes that effective environmental protection together with social responsibility is in the long run essential to entrepreneurial success. Finding the right balance between economic, ecological and social aims has been a major priority of KCL. KEYA has aligned its research and development work to constantly improving its brands and technologies and their ability t make towards the people more befitting. KCL’s social commitment is focused by taking part in social activities on the areas of education and research, Environment and Nature Health, social needs, sports and culture. As per the annual reports, some CSR activities are as follows:

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Environment and Nature KCL invested BDT 1,383,500 for the plantation campaign named “Green Motherland”. Health Compensation and Social Needs: KCL provided various medical aided programs towards the poor people for medical treatment tk 140,000 as well as to compensate death of two workers tk 144,000. The company also took part in the donation to Elders Welfare Association for tk 100000. Education Sports and Culture The company has contributed tk 231,000 to Saidpur Union High School, Rajanagar to take part into introducing Science and Agricultural dept. An additional donation of 47,000 was also made. Employment Practices -Optimum benefit and safety -Professional training programs -Improved working condition -Proper remuneration VALUATION Book Value The book value is computed as total asset less total liabilities and intangible assets if any. The book value of Keya Cosmetics Ltd is: Total assets - total liabilities –intangible assets = 2,850,460,324 - 1,319,156,169 = BDT 1,531,304,155 Market Value The market value is determined by market capitalization plus the market value of debt on the valuation date. The Market value of Keya Cosmetics Ltd. is:

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Market Capitalization (on July 01, 2011) + Value of Debt = (No. of shares outstanding × Market price per share) + Value of Debt = (61,152,474 × 71.9) + 1,022,547,699 = BDT 5,419,410,580 Deriving the price of Keya Cosmetics using price-earning multiples of the industry Keya Cosmetics Ltd (KCL) belongs to the “Pharmaceuticals & Chemicals” segment of the stock market. This industry has total 20 companies. By using the price-earnings multiples of the industry, the price of KCL is as follows: ACI Ltd

ACI Formulation Ltd

Ambee Pharma

Beximco Pharma

Beximco Synthetics

Keya Cosmetics

Price

269.60

133.20

397.40

80.40

43.20

274.85

EPS P/E ratio

4.4

4.94

1.92

5.44

14.2

4.39

61.27

26.96

206.98

14.78

3.04

62.61

Here, the average of P/E ratios of five different companies belonging to the industry is taken as reference P/E for KCL and the EPS of current year is used to determine the price. Here the overvaluation of other companies may have impact on the price of the share KCL besides if 19 companies were considered other than 5 then there could be significant change in the price.

Computation of FCF and discount the FCFs at the cost of equity to find the stock of KCL: Assumptions: 1. 2. 3. 4. 5.

Sales growth rate is almost 30% (average of last 5 yrs) COGS 78% (average of last 5 yrs) Operating Expense 20.22% 3.5% terminal growth rate Income tax rate 27.5%

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The discount factor To discount forecasted FCFs the cost of equity is taken as discount rate. Cost of Equity: Ke =Rf + (Rm - Rf) β Where, Ke = Cost of Equity Rf = Risk free rate (Rate of 20 yrs. Treasury Bond) = 11.5% Rm = Calculated market return using last 60 month DSE general index = 44.95% β = Calculated beta for Keya Cosmetics Ltd. = 0.6662 (Annex-1) Ke = 11.5% + (44.95% – 11.5%) *0.6662 = 33.78% The enterprise value is found as BDT 718,867,832. The firm has outstanding shares of 61,152,474 with a face value of BDT 10. The calculated equity value per share is BDT 10.72. The calculation detail is given in Annex-3.

FINANCIAL STATEMENTS AND ANALYSIS Firms’ behavior with the analysis of structure, conduct and performance of the industry: As stated before, KCL belongs to the ‘Pharmaceuticals & Chemicals’ segment in the whole industry. There are total twenty companies in this segment. And the competition is immense among these companies. Besides there are lots of foreign imported products distributed via various companies which makes the business more competitive. From Porter’s five forces (Threat of new entrant, power of buyer, power of supplier, threat of substitute and intra industry rivalry) framework the following analysis can be stated in case of Keya Cosmetics Ltd. The intra industry rivalry is fierce. Keya cosmetics Ltd has to compete with companies like Reckitt Benckiser (Bd.) Ltd, Square Pharmaceuticals, Kohinoor Chemicals, Marico BD Ltd etc. The storage costs are high in case of the cosmetics besides there are seasonal products also. The power of buyer is also significant in case of this industry. As there are multiple products of various companies the customers can switch to another product without less cost. Besides, the companies have to be extra careful about the quality of the products as the consumers are driven vastly by the foreign branded products. As the products are directly consumed by the 4|Page

buyers hence the buyers seek for substitute in case of any deficiency of supply or scarcity. The quality deterioration is also a major reason for threat of substitution. KCL imports 40% of its raw materials and thus it faces difficulty if there is short supply. Thus there is potential threat in business if the suppliers increase price of their products. The switching between foreign suppliers is also costly if there is any due reason to do so. Thus the power of supplier is significant for this industry. There are already a number of companies in the industry where Keya Cosmetics is doing business. Hence the threat of new entry in this industry is relatively low as compared to other threats. Keya cosmetics Ltd follow a cost leadership strategy for competitive positioning. In 25th Dec 2010 the board of directors decided to amalgamate Keya Detergent Ltd and Keya Soap Chemicals with Keya cosmetics Ltd to strengthen its financial position, increase profitability and attend turnover growth.

Ratios to evaluate firm’s financial condition of recent five years: Liquidity Current Ratio (CR): Current ratio is the indicator of the company’s ability to pay current liabilities. It measures the ratio of current asset the company has over current liabilities. CurrentRatio 

CurrentAsset CurrentLiabilities

The current ratios of Keya Cosmetics Ltd. (KCL) of last five years are given below: Current Ratio

2.00 1.80 1.60 1.40 1.20 1.00 0.80

1.55

1.83

1.60 1.21

0.60

1.18

0.40 0.20 0.00 2006-07

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2007-08

2008-09

2009-10

2010-11

Explanation: The current ratio of KCL has been showing a fluctuating trend over 5 years. It was highest in 2007-08 (1.83:1) and lowest in 2010-11 (1.18:1). It indicates, previously KCL used to maintain conservative approach of keeping more current assets then liabilities and later years they are moving towards more aggressive one. It is due to mainly increase in short term funded facilities and cash credit from banks. Over the period CA does not increase in line with the liabilities.

Quick Ratio (QR): Quick ratio measure the liquid asset company has to pay its current liabilities. CurrentAsset  Inventory QuickRatio CurrentLiabilities 1.20 Quick Ratio

1.00

0.80

0.60

0.40

0.87

0.99

0.90 0.71

0.56

0.20

0.00 2006-07

2007-08

2008-09

2009-10

2010-11

Explanation: it is observed that the quick ratio of KCL has similar fluctuating trend over the years. It was lowest in 2010-11 (0.56:1) like CR but it was highest in 2009-10 (0.99:1). It is quite low compared to CR ratio as KCL maintains good quantity of inventory due to raw materials crisis. Overall, company’s quick ratio needs to be improved.

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Efficiency and activity Average collection period: A/R Turnover Ratio measures how many times the receivable converted into cash in a year. The inverse of this ratio times the number of days in a year yields the average collection period which calculates the average time that a receivable is outstanding. s Re ceivableTurnoverRatio( A / CTR ) 

NetCreditSales AverageAcc ounts Re ceivables

AverageCollectionPeriod 

Average Collection Period

70

63

60 50 40

360 A / CTR

57 47 36

30 20

10

10 0 2006-07

2007-08

2008-09

2009-10

2010-11

Explanation: Here, from the average collection trend of receivables we found that, on the year 2008-9 there was a massive improvement in the receivables collection ( 10 days) due to the receivables from export and distributors was significantly low. Other than that, it maintained a fluctuating trend in other years. But over all their highest collection period was 63 days which is also reasonable compare to their product lines as they distribute it on credit to the dealers of various parts of Bangladesh. During 2010-11, it fell slightly that means they are working to improve their average collection period.

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Inventory Conversion Period: It is usually computed as cost of sales divided by inventory. The inverse of this ratio times the number of days in a year yields the inventory collection period which indicates the average time that inventory takes to sold out. InventoryTurnoverRatio( ITR ) 

COGS AverageInv entory

InventoryConversionPeriod 

360 ITR

2006-07

2007-08

2008-09

2009-10

2010-11

99.52

118.08

67.45

107.20

154.28

Inventory Conversion Period

Inventory Conversion Period

180 160

154

140 120 100

118

107

100

80

67

60 40 20 0 2006-07

2007-08

2008-09

2009-10

2010-11

Explanation: The scenario in respect of inventory conversion period of Keya Cosmetics is quite high. Its seen that, the ITR is very low. And the inventory conversion period is high ranging from 67 days to 154 days. Though during 2008-9 there were vast inventory items on transit coming from abroad and hence inventory conversion period was only 67 days but in other years it was above 100 days or 3 months and it was highest in 2010-11 (154 days). It means the company takes a long period to sell its inventory after it is created. So, company has huge amount of 8|Page

unsold inventory. As it has an increasing trend, which is a bad signal that management has failed to reduce the conversion period. KCL must increase their sales either by enhancing credit limit or through implementing efficient marketing strategy. Total Asset Turnover (TAT): Total Asset Turnover ratio indicates how effectively the firm uses its total asset. TotalAssetTurnover 

NetSales TotalAssets

The Total Asset Turnover (TAT) of KCL of last five years is given below:

2006-07

2007-08

2008-09

2009-10

2010-11

1.15

1.20

1.21

0.95

0.85

Total Asset Turnover…

1.40 1.20 1.00 0.80 0.60

1.15

1.20

1.21 0.95

0.40

0.85

0.20 0.00 2006-07

2007-08

2008-09

2009-10

2010-11

Explanation: From the above bar chart its seen that the TAT was at an increasing rate upto 2008-2009 but in 2010 & in 2011 its in a decreasing rate. It happened due to the amalgamation process the asset quantity increased than that of sales.

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Operating Cycle & Cash Conversion Cycle: Operating cycle is the total time required to convert the inventory into cash. 

Operating Cycle = Average Collection Period + Inventory Conversion Period



Cash Conversion Cycle = Operating Cycle - Payment Deferral Period sPayable  OtherSales Re latedPayables  360 COGS

PaymentDeferralPeriod 

The Operating Cycle (OC) and Cash Conversion Cycle (CCC) of KCL of last five years are like

OC

2006-07 136

2007-08 165

2008-09 78

2009-10 170

2010-11 211

CCC

126

159

72

166

189

OC and CCC 250

Axis Title

200 150 OC 100

CCC

50 0 2006-07

2007-08

2008-09

2009-10

2010-11

Explanation: It is observed that cash conversion cycle of KCL is at a fluctuating trend. On 200809 it was the lowest as the A was the lowest then. From the graph it is also found that the Operating Cycle is slightly higher but close to CCC. Here the firm has to pay substantially earlier than receiving cash where the management has huge scope of improvement.

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SOLVENCY Debt Equity Ratio: Debt Equity Ratio indicates the relative proportion of shareholders' equity and debt used to finance a company's assets. DebtEquityRatio 

ShortTermD ebt  LongTermDe bt Shareholder ' sEquity

The Debt Equity Ratio of KCL of last five years is given below: Debt Equity Ratio

0.80 0.70 0.60 0.50 0.40 0.30

0.71

0.60

0.64

2007-08

2008-09

0.20

0.67 0.50

0.10 2006-07

2009-10

2010-11

Explanation: The debt equity ratio is at a fluctuating trend. A high debt/equity ratio generally means that the company has been aggressive in financing its growth with debt. This gives rise to additional interest expense. For KCL the long term debt on 2009-10 was lowest as the company had the minimum liability to the leasing companies.

Debt to Total Asset Ratio: This ratio determines how much of the company's assets have been financed by debt. DebtToTotalAssetRatio 

ShortTermDebt  LongTermDebt TotalAssets

The Debt to Total Asset Ratio of KCL of last five years is given below: 11 | P a g e

2006-07

2007-08

2008-09

2009-10

2010-11

0.37

0.34

0.35

0.3

0.36

Debt to Total Asset Ratio

0.40 0.35 0.30 0.25 0.20

0.37

0.15

0.34

0.35

2007-08

2008-09

0.30

0.36

0.10 0.05 2006-07

2009-10

2010-11

Explanation: The firm practices almost a same debt to total asset ratio. The debt portion has a constant relation to the amount of asset firm has. The lowest value to be found was 0.3 and the highest is 0.37. Debt Service Coverage Ratio: Debt Service Coverage Ratio (DSCR) refers to the amount of cash flow available to meet annual interest payments on debt. DebtServiceCoverageRatio 

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EarningsBeforeIntere st & Tax ( EBIT ) InterestEx penses

The Debt Service Coverage Ratio of KCL of last 5 yrs is as follows Debt Service Coverage Ratio

4.29

4.50 4.00

2.91

3.50 3.00

2.44

2.83 2.11

2.50 2.00 1.50 1.00 0.50 2006-07

2007-08

2008-09

2009-10

2010-11

Explanation: A DSCR over 1 means that the company generates sufficient cash flow to pay its debt obligations. A DSCR below 1.0 indicates that there is not enough cash flow to cover loan payments. From the bar chart it is clear that KCL has generated sufficient cast to cover its debt over last 5 yrs span.

PROFITABILITY Operating Profit Margin (OPM): From operating profit margin its derived how much a firm makes before interest and taxes on each year. OPM 

Operating Pr ofit NetSales

The OPM of KCL for last five years is as follows:

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16.00%

14.66%

Operating Profit Margin

14.00% 12.00% 10.00%

8.99% 9.04%

8.04%

8.00% 6.00% 4.00%

1.36%

2.00% 0.00% 2006-07

2007-08

2008-09

2009-10

2010-11

Explanation: From the above observation it is seen that KCL has OPM almost same for the years of 2007, 2008 and 2010. But the OPM was the lowest on 2009. Increased cost of production and operating expenses has created huge negative impact on OPM of 2009. Besides, the firm was stumbling to make its position steady in the industry by new product development and brand transformation programs. There was an increased rate in the commodity, food, utility and other essential items during this year. The global recession deemed to have a rub-off effect on the industries of Bangladesh as well.

Net Profit Margin (NPM): It is an overall measure of the company’s profitability. NPM excludes the Income Tax and other Non-operating expenses from the operating profit. NPM 

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NetIncome NetSales

16.00% Net Profit Margin

14.00% 12.00% 10.00% 8.00%

14.71%

6.00% 4.00%

11.14% 8.10%

7.82%

7.19%

2006-07

2007-08

2008-09

2.00% 0.00% 2009-10

2010-11

Explanation: NPM shows almost similar trend over the years. Only on 2010 the NPM is highest due to healthy amount of capital gain. Due to amalgamation of Keya detergent & keya soap chemicals with KCL; the NPM increased on 2011 as compared to 2007, 08 & 09. Return on Assets (ROA): An indicator of how profitable a company is relative to its total assets. ROA gives an idea as to how efficient management is at using its assets to generate earnings. ROA 

NetIncome TotalAssets

The ROA of KCL for last five years is as follows:

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16.00% Return on Assets (ROA)

14.04%

14.00% 12.00% 10.00%

9.32%

9.37%

2006-07

2007-08

9.42%

8.68%

8.00% 6.00% 4.00% 2.00% 0.00% 2008-09

2009-10

2010-11

Explanation: The ROA of KCL is almost continuous except 2009-10. This is because the net profit after tax was more as compared to the previous years. The NPM is more in 2011 but as the asset has also increased, hence the ratio is less than ROA of 2010.

Return on Equity (ROE): It measures a firm's efficiency at generating profits from every unit of shareholders' equity. ROE 

NetIncome CommonEqui ty

Return on Equity of KCL of last five years is given below:

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25.00% Return on Equity (ROE)

20.00%

15.00%

10.00%

22.98% 17.91%

16.46%

15.73%

2007-08

2008-09

17.53%

5.00%

0.00% 2006-07

2009-10

2010-11

Explanation: Similar to other profitability ratios ROE of KCL is almost same except 2009-10. The increased net profit after tax resulted higher ROE. NPM was more in 2011 but the shareholders equity was simultaneously increased in the same year.

MARKET Book Value to Market Value (BV/MV): The Book value to Market value ratio attempts to identify undervalued or overvalued securities by taking the book value of the company and dividing by its market value.

BV / MV 

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BookValueOfFirm MarketValueOfFirm

The BV/MV ratio is given below: 0.50 BV/MV

0.45 0.40 0.35 0.30 0.25 0.20

0.47

0.15

0.32

0.31

2008-09

2009-10

0.23

0.10

0.28

0.05 0.00 2006-07

2007-08

2010-11

Explanation: The stock is overvalued over the last five years. The recent overvaluation of the entire stock market is reflected here.

Price/Earnings (P/E) Ratio: The P/E ratio (price-to-earnings ratio) of a stock is a measure of the price paid for a share relative to the annual net income or profit earned by the firm per share.

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The P/E ratio of KCL for last five years is as follows:

25.00

22.58

P/E Ratio

20.00

16.38

15.77 15.00

11.96

10.00

8.01

5.00

0.00 2006-07

2007-08

2008-09

2009-10

2010-11

Explanation: The P/E ratio is fluctuating over the last five years. Though the EPS varied only from 3 to 5.26 but there was vigorous fluctuation in the market value of stock. Hence a sine wave is observed over the last five years of P/E ratio. TOBIN Q: The Q ratio is calculated as the market value of a company divided by the replacement value of the firm's assets. TobinQ 

MarketValueofAssets Re placementCostofAsset s



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MarketValueofEquity  BookvalueofDebt  ShortTermD ebt TotalValueofAssets

2.46

TOBIN Q

2.50 1.98 2.00

1.90

1.72

1.50 1.12 1.00

0.50

0.00 2006-07

2007-08

2008-09

2009-10

2010-11

Explanation: Last three years Tobin Q is almost the same. A ‘Q’ value of greater than 1.0 suggests that the market is overvaluing the company in consideration to its performance and growth potential. On the other hand, a below 1.0 ‘Q’ value suggests that the market may be undervaluing the company. Though there is fluctuation it is evident from the chart that the investors always perceived over valuation of the firm.

Five factor Du Pont Analysis In five factor Du Pont analysis the Return on Equity (ROE) is decomposed as follows:

 Sales InterestExpense  TotalAssets IncomeTax   EBIT ROE =      1   TotalAssets  CommonEquity  NetBeforeTax   Sales TotalAssets

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Components of ROE

2006-07

2007-08

2008-09

2009-10

2010-11

0.09

0.09

0.01

0.08

0.15

1.15

1.20

1.21

0.95

0.85

0.05

0.04

0.04

0.04

0.04

1.92

1.76

1.81

1.64

1.86

0.70

0.73

0.73

0.73

0.73

17.91%

16.46%

15.73%

22.98%

EBIT/Sales Sales/Total Assets Interest Expense/ Total Assets Total Assets/Common Equity (1-Income Tax/Net Before Tax) ROE

Course of actions to increase ROE: 

Increase EBIT



Lower interest expense



Increase net profit before tax

COST OF CAPITAL & CAPITAL STRUCTURE Cost of Equity, Cost of Debt & Cost of Capital(Hurdle rate) Cost of Equity: Ke =

Rf + (Rm - Rf) β

Where, Ke =

Cost of Equity

Rf =

Risk free rate (Rate of 20yrs. Treasury Bond) = 11.5%

Rm =

Calculated market return using last 60 month DSE general index = 44.95%

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17.53%

β =

Calculated beta for KCL (Annex – 1) = 0.6662

Therefore, cost of equity is: Ke = 11.5% + (44.95% – 11.5%) X 0.6662 = 33.78%

Cost of debt: Kd

= Rf + Risk

Credit Rating by crislbd.com as on June 30, 2011:

Rating

Risk

A

4.0%

Therefore, cost of Debt is: Kd

= 11.5% + 4% = 15.5%

Cost of Capital: WACC= We* Ke +Wd *Kd*(1-Tc) Where, WACC= Weighted Average Cost of Capital We = Weight of equity Wd = Weight of debt Tc = Corporate Tax rate = 27.5%

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Debt = BDT 1022547699 Market Capitalization = BDT 4,396,862,881 Therefore, We = 0.811 and Wd = 0.189 And, current cost of capital of Keya CosmeticsLimited is: WACC = 0.811*33.78% + 0.189*16.5 %*( 1-.275) = 29.53%

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DIVIDEND POLICY The last five years dividend pattern of Keya Cosmetics Limited is as follows: Dividend per share

2006-07

2007-08

2008-09

2009-10

2010-11

Cash Dividend

30%

30%

15%

15%

-

Stock bonus

-

-

-

-

21%

The mentioned parameters are calculated to assess the Dividend policy of the firm (details provided in Annex – 5): Parameters

2006-07

2007-08

2008-09

2009-10

2010-11

DPS

30% C

30%C

15%C

15%C

21%B

EPS

3.40

3.14

3.01

5.26

4.39

DPR

0.88

0.95

0.50

0.29

0.48

OCF per share

-1.85

2.77

8.10

0.46

2.50

FCF per share

11.18

6.20

16.32

7.13

14.33

8.01

22.58

15.77

11.96

16.38

P/E multiple of the industry

14.93

28.06

27.92

30.2

30.18

BV per share

18.96

19.11

19.11

22.87

25.04

5.13

5.27

6.78

10.54

1.94

Inflation rate

2.09% 7.22%

0.76% 9.93%

7.89% 6.66%

16.42% 7.31%

9.14% 8.27%

GDP growth rate

6.43%

6.19%

5.74%

6.07%

6.66%

P/E Ratio

Reserve and RE per share Sustainable Growth Rate (G)

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Few points regarding the stylized facts of the dividend behavior of Keya Cosmetics Ltd are as follows: 

The dividend per share (DPS) was reduced to 15% on 2008-09 as the operating profit was low but the management still kept DPS to 15% on the next year as to pay dividend at a satisfactory level within the limit of operating income.



For the long term financial benefits of the shareholders, the management of the company declared 21% stock dividend on 2010-2011. A regular performing company’s general shareholders have the expectation to have stock dividend and such stock dividend relates to continuous and sustainable growth of operating positive result of the company.



To avoid any negative impression, the management generally try not to decrease the dividend. As its observed on 2007-08, that the dividend remains 30% cash whereas the EPS has lowered from 3.4 to 3.14.

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