ACI BANGLADESH LIMITED: A CALL FOR

OPPORTUNITY

Winter is coming
It was a morning in early November 2008. Dr. Arif Doula was going to ACI Center for an
important meeting with his CFO and Director of Business Development. Through the car
window, he saw some students wearing full sleeve shirts were going to school. Winter is
coming he said to himself. Everyone had started taking preparation to fight the winter. But its
not only winter for which Dr. Arif Doula needed to take preparation. He had bigger fishes to fry.
ACI Bangladesh Limited had to take some important decisions to make its future secure and
sustainable. It had earned nearly 50% growth in 2008 compared to 2007 and he had strong
determination to maintain the success rate in next year.
He reached ACI Centre thinking about all these things. Before entering into the meeting room,
he was trying to remember all the necessary information regarding the meeting.

The Company
ACI Bangladesh Limited, headquartered in Tejgaon Industrial Area, Dhaka, was one of the
leading business conglomerates in Bangladesh. It operated with three strategic business units
(pharmaceuticals, consumer brands and agribusiness. It had two successful joint venture
businesses named- Tetley ACI (BD) Ltd. and ACI Godrej Agrovet Pvt. Ltd. and one associate
company called Asian Consumer Care Ltd (as of 2008).
ACI was established as the subsidiary of Imperial Chemical Industry (ICI) in the then East
Pakistan in 1968. After independence, the company had been incorporated in Bangladesh on the
24th of January, 1973 as ICI Bangladesh Manufacturers Limited and also as public limited
company. Its first trading of shares took place in DSE on 9 march, 1994. In 2007, ACI BD Ltd.
had sales of almost BDT 5.75 billion.
In 2007, healthcare division was responsible for 36.3% of total sales whereas consumer brands
division and agribusiness division was responsible for 29.2 and 34.5 percent. 2008 was much
more promising than 2007 for ACI. It had been a year of remarkable growth for ACI, both in
terms of turnover and diversity of products, services and competencies. There were more
demand for ACIs products and supply. It had encouraged the top management for expanding
business by gaining more production capacity in order to capture existing market opportunity.
(See Exhibit 1 for six years comparative statistics of ACI Limited, Exhibit 2 for comparison of
turnover and cost over last year and Exhibit 3, 4, 5 and 6 for financial statements of last year.)

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This case was written by Shadman Sadique Kamal, Shoumik Shahriar, Tasnim Hadi Shamma, Mehedi Hasan Mim
and Tasnim Tabassum Tore, students of Department of Finance, Faculty of Business Studies, University of Dhaka
under the supervision of faculty member Md. Saimum Hossain.
Strategic Business Units of ACI

Health Care Division

Health care division was responsible for the 36.3% of total sales of the company product in 2007
and it seemed that it would continue its huge contribution to the portfolio in 2008. This division
registered a growth of 33% in 2007. The market growth was 16%. New product introduction was
one of the driving forces of ACI pharmaceuticals growing business. In 2007 ACI
Pharmaceuticals launched 76 new products in the market that added significant business volume
to the portfolio. The division also increased its size of export consistently. ACI Pharmaceuticals
exports grew by 71% over the previous year and they were preparing to export in new markets.

Consumer Brands
2008 had been a great year for the total portfolio of consumer brands until November. Two new
businesses named ACI Foods and ACI Pure Flour were launched. Consumer brands developed
significantly till November and management was expecting an increase in turnover by 35%-40%.
ACI Aerosol, Savlon, ACI Salt showed substantial improvement in both turnover and
profitability. ACI Salts turnover grew 24% and the product had become the number one in its
category. Performance in product like Colgate, Nivea, Godrej Hair Care showed a considerable
growth. That was an indication how successfully ACI represented these world reputed
companies as exclusive marketing partner and distributor for Bangladesh.

Agribusiness
Agribusiness division brought nearly 40% of total sales till November, 2008. But its growth in
2008 was not as satisfactory as the growth in 2007. The business in 2008 saw 19% growth
whereas the growth in 2007 was 43%. The main reason was the adverse market condition
resulting from the bird flu attack. This division consists of crop care and public health,
Fertilizers, seeds, crop exchange and motor department. Agribusiness division was focused on
achieving growth by new product introduction, increasing production capacity, quality services
to customers and educating the farmers about the products.

The Meeting Room

After entering into the meeting room, Dr. Arif Doula saw that two of ACI Bangladesh Limiteds
generals were waiting for him. They were Mr. Muallem A. Chowdhury, CFO and Executive
Director (Finance & Planning) and Mr. Towfiqur Rahman, Director (Business Development). He
invited only these two people in that days meeting. Mr. Towfiqur had some plans to discuss for
utilizing future opportunities. He had discussed those with Dr. Arif earlier. Dr. Arif tagged Mr.
Muallem with him so that they can together make a strong plan with financial feasibilities. These
two were going to pitch the results of their combined effort. I know your team has worked
really hard for the projects we are going to discuss today. I have been eagerly waiting for this
meeting. So lets start. Dr. Arif said. We initially started with five projects. We have made a

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priority list. We are going to discuss the top two projects from the priority list. We believe these
two projects will help us to optimize the opportunities, said Mr. Chowdhury.

ACI Salt Limited

ACI Salt Limited was incorporated on June 13, 2004 as a private limited company under the
Companies Act 1994. The principle activity of the company was manufacturing and marketing of
edible branded salt. (See Exhibit 7, 8, 9 and 10 for financial statements of ACI Salt Limited.)
ACI Pure salt continued to maintain its strong position in the market despite having tremendous
external challenges in the form of high raw material price, increasing price of energy, severe gas
supply crisis and production shortage. In fact, it improved significantly in both turnover and
profitability and had become the number one product in its category. Compared to previous year,
the turnover in 2008 was expected to grow over 20%. ACI Salt received the Best Brand Award
of 2008 this year in the category of Food & beverage through a survey of Bangladesh Brand
Forum and Nielsen. This improved the product image in the mind of the consumers.
Throughout the year, the demand for ACI Pure Salt was a lot more than its production. As a
result, the executive management was thinking of setting up another state-of-the-art production
plant imported from Evatherm of Switzerland with 22 metric tons/hour capacity or roughly
10,000 metric tons annually. With this new plant, ACI Salt Limited would emerge as the
countrys largest salt refinery project. This was the most modern vacuum evaporation system,
which ensured 100% pure, crystal white, properly iodized and free flowing edible salt.

Need for Capital Expenditure

The existing production plant had reached its full capacity. However, the demand was a lot more
than the production capacity. In order to continue the growth momentum and increase the market
share, a new production plant had to be built. It would take two and a half years to complete the
construction of the proposed production plant. If the proposal was approved, construction would
start in January of 2009. It was expected to be completed by May of 2011. Commercial
production of salt in this plant would start from the beginning of June of 2011. The required
capital expenditures would be as follows.

Year Amount in BDT

Particulars
2009 2010 2011

Plant & Equipment (79, 082,118) (535,007,549) (227,957,682)

In 2008, the edible salt market size in Bangladesh was roughly 10 lac metric tons. The existing
salt production plant had capacity to produce around 4,000 tons/month or around 48,000 tons
annually. Though ACI salt was the leader in branded salt market, it had roughly 5% market share
in the edible salt market. With the new plant, total capacity was estimated to be 13,000-14,000
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tons annually. Sales was expected to be boosted by supplying the excess demand of branded
edible salt. The sales projection, generated from this project, was as follows.

Year Amount in BDT

Particulars
2011 2012 2013 2014 2015 2016

Sales 388,259,718 513,393,948 699,378,521 897,590,040 ? ?

These were the sales projections from the year 2011-2014. However, turnover in the year 2015
and 2016 were not projected in the same way. Since 2015 was far in future, they decided to
depend on the general growth rate of the edible salt industry. The general growth rate of edible
salt industry was around 10%.
The major cost of operating the existing plant was the energy consumption. As a result, the gross
margin for the company in previous years varied from 17-20%. But the new machine is much
more efficient and would consume much less energy compared to the existing one. This would
result in an average gross margin of around 26% in the coming years. There would also be
decrease in selling and general administrative and increase in operating margin. Previously, the
operating margin of the company used to vary from 4.8-8.3%. This plant was expected to
increase the operating margin significantly by around 14.5% in the coming years.
This project not only required capital investment to procure plant and equipment but also
investment in working capital in the form of increased inventory and trade receivables. The
change in net working capital would be as follows.

Year Amount in BDT

Particular
s
2011 2012 2013 2014 2015 2016

Inventory (100,992,665 (168,377,305 92,818,644 162,972,94 986,739 687,881

) ) 0

Trade (5,577,824) (4,188,265) (13,022,933 (1,986,954) (1,143,768 (863,957

Receivable ) ) )
s

All items on plant and equipment were depreciated in straight-line basis. Depreciation on
additions were charged at 50% of normal rate only in the year of acquisition and no depreciation
was charged in the year of disposal. Depreciation was charged at a rate of 20%. No depreciation
was charged for land and capital work-in-progress. Capital work-in-progress represented the cost

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incurred for acquisition and/or construction of items of property, plant and equipment that were
not ready for use.
The applicable tax rate for the company is 27.5%. Public limited companies are entitled to a 10%
tax rebate if dividend declared is more than 20% of the paid up capital. ACI Limited (the
publicly traded company) was hoping to take advantage of this rule in the subsequent years. The
cost of capital is 14%.

ACI Godrej Agrovet Private Limited

ACI Godrej Agrovet Private Limited was a 50:50 joint venture company formed by Godrej
Agrovet Limited- India, a reputed company belonging to the Godrej Group of India and ACI
Limited, a highly respected and leading conglomerate in Bangladesh. The companys
investments included a feed mill project in Sirajganj, a hatchery project near Joina Bazar,
Gazipur and a breeder farm in North Bengal in Panchagarh.
Over the past few years, the poultry farming had slowly transformed from the backyard venture
to full scaled scientific manner. The basic purpose of the breeding farm was to provide quality
chickens from the commercial broiler farmers of this country thereby playing a pivotal role to
satisfy the growing protein needs of the country.
The company was on a high growth path. Commercial operations started in the end of the year
2005. In the year 2006, only poultry feed business commenced, which generated revenue of BDT
205.7 million. In the year 2007, Fish feed business was started and together the two product
categories earned a revenue of BDT 770.1 million. The fish feed business became the second
largest in the country by market share by 2008. Also in late 2007, Broiler DOC was sold to the
farmers. These DOCs were provided from the market leader Hubbard Classic Breed whose
parent stock was directly imported from Europe and USA. The sale of DOC was catching up
very fast with the demand for these quality chickens far exceeding what could be produced.
There was a good demand for the quality products produced by the company. Due to this, all of
the product mix was growing at a growth level much higher than the industry. (See Exhibit 11
for the projected year-on-year turnover and Exhibit 12 for the product mix of the company and
the industry overview.)

Need for Capital Expenditure

The existing asset base had reached 85-90% capacity utilizations. In order to continue the growth
momentum, additional investments were required for BDT 353.1 million to beef up the feed
milling capacity, start a new extruder plant for floating fish feed and complete the existing
Kazirhat Breeding Farm. The details of the existing capacities of the Feed Mill, Breeding Farm
& Hatchery along with the planned asset expansions were as follows.

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 Factory/Location Product Mix Existing Capacity Proposed Capacity
(Annual) (Annual)

Feed Mill- Sirajganj Poultry, Fish (Sinking) 96,000 Tons 186,000 Tons
& Cattle Feeds

Feed Mill- Sirajganj Floating Fish Feed 30,000 Tons

Breeding Farm- Hatchable Egg 9,636,000 Pcs 14,454,000 Pcs

Panchagarh

Hatchery Broiler DOC 6,168,000 Pcs 14,568,000 Pcs

Out of the total capital expenditure requirement of BDT 353.1 million, BDT 195.7 million would
be utilized to put up a Feed Mill of 15 metric tons/ hour capacity (expandable to 30 metric
tons/hour capacity) and a 5 metric tons/ hour Extruder Plant (expandable to 10 metric tons/
hour). Both of these plants would be housed in a one lac square feet godown which would be
constructed at the existing factory site in Sirajganj, the land that was already owned. (See
Exhibit 13 for the allocation of fund and Exhibit 14 for the details of necessary capital
expenditures.)
The creation of these plants were expected to continue the momentum of aggressive growths and
generate a satisfying amount of revenue by 2014. The projected income statement was as
follows.

Year Amount in BDT Million

Particulars
2009 2010 2011 2012 2013 2014

Turnover 1,837.7 2,582.2 3,076.6 3,596.4 4,065.9 4,559.3

Contribution 177.0 280.5 323.6 365.0 392.2 421.0

Fixed Overhead 109.0 169.8 172.4 170.8 173.9 174.5

PBT 67.9 110.7 151.1 194.2 218.2 246.6

PBT % 9.44 10.86 10.52 10.15 9.65 9.23

Con. % 3.68 2.61 3.22 4.03 4.79 8.14

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The contribution margin would vary from 9.25% to 10.5% over the project period until 2014.
The contribution margins from operations would be enhancing due to increase in the proportion
of imports of raw materials to total imports, and because of incorporation on nutritional
advancements in product quality upgradations. The PBT would jump significantly by reaching
scale of economies. (See Exhibit 15 for the year-on-year sales growth projections.)
The applicable tax rate for the company is 27.5%. Public limited companies are entitled to a 10%
tax rebate if dividend declared is more than 20% of the paid up capital. ACI Limited (the
publicly traded company) was hoping to take advantage of this rule in the subsequent years. The
cost of capital is 14%.

The Final Problem

ACI Bangladesh Limited became a leading conglomerate in the country by optimizing every
opportunity it got in the past. Now Mr. Muallem A. Chowdhury and Mr. Towfiqur Rahman came
up with two more investment opportunities. But were these lucrative enough for the company to
invest in? How long would it take to get the invested amount back considering the risk? Would it
generate enough return to cover the cost of the fund for the company? Would it add any value to
the company or rather destroy it? Mr. Muallem A. Chowdhury and Mr. Towfiqur Rahman would
have to justify the answers of these questions to Dr. Arif Doula.

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 Exhibit 1: Six years comparative statistics, from 2002-2007

Particulars (In millions) 2002 2003 2004 2005 2006 2007

Authorized capital 500 500 500 500 500 500

Issued and paid capital 162 162 162 162 162 162

Current asset 1099 1396 1342 1537 1755 3121

Tangible fixed asset 468 668 1006 1087 1131 1541

Shareowners equity 590 668 861 906 974 1272

Turnover 2053 2240 2558 3089 3516 4917

Gross profit 631 639 740 957 1176 1667

Profit before tax 164 93 141 169 233 432

Profit after tax 109 85 90 112 154 313

Dividends 61 65 69 73 97 137

Current ratio 1.2 1.2 1.2 1 1 1

Quick ratio 0.5 0.5 0.5 0.6 0.6 0.6

Return on equity 18.5 12.7 10.4 12.4 15.8 24.6

Inventory turnover 2.7 2.3 2.4 3.0 3.3 3.6

Debtors turnover 23 16 12 11 10 8

Fixed asset turnover 8.8 7.3 3.8 4.2 5.1 5.7

Net asset per share 36.5 41.3 53.3 56 60.2 78.7

Market price per share 54.2 66.7 94.4 69.6 70.2 181.7

Earnings per share 6.75 5.25 5.54 6.94 9.51 19.36

Dividend per share 3.75 4 4.25 4.5 6.00 8.50

Dividend rate 37.5 40 42.5 45 60 85

Dividend payout ratio 55.6 76.2 76.7 64 63.1 43.9

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Price earnings ratio 8 12.7 17 10 7.4 9.4

Dividend yields 6.9 6 4.5 6.5 8.5 4.7

Number of employees 1662 1883 1931 2000 2476 3050

Exhibit 2: Comparison of turnover and cost over last year

2007 % 2006 %

Turnover (Gross) 5397.49 100 3898.43 100

Cost of materials 2908.85 53.38 2077.14 53.28

Salaries, wages to the employee 584.85 10.84 442.78 11.36

Expenses 852.75 15.80 675.67 17.33

Duties and taxes to the govt. 738.53 13.63 549.02 14.08

Profit 313.04 5.8 153.82 3.95

Total 5397.49 100 3898.43 100

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Exhibit 3: Balance Sheet of ACI Limited

10
Exhibit 4: Income Statement of ACI Limited

11
Exhibit 5: Statement of Changes in Equity of ACI Limited

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Exhibit 6: Cash Flow Statement of ACI Limited

13
Exhibit 7: Balance Sheet of ACI Salt Limited

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Exhibit 8: Income Statement of ACI Salt Limited

15
Exhibit 9: Statement of Changes in Equity of ACI Salt Limited

16
Exhibit 10: Cash Flow Statement of ACI Salt Limited

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 Exhibit 11: Projected Year-on-Year Turnover & Growth Rate

Year Revenue (in BDT million) Growth Rate Over Last Year (%)

2008 14.6

2009 205.7 1309

2010 770.1 274

2011 1293.9 68

2012 1866.0 44

Exhibit 12: Product Mix & Industry Overview

Product Mix: Given below is the product mix of ACI Godrej Agrovet Private Limited:
a) Poultry Feed (Broiler & Layer)
b) Fish Feed (Sinking)
c) Cattle Feed
d) Broiler DOC

Overview of Fish Feed Industry: In Bangladesh fish is the major part of staple diet. Its
consumption rate is gradually increasing. However, the proportion of cultured fish has cranked
up more than 50% of the total fish catch due to the scientific advancements in last few years.
According to industry experts, the cultured can bring more profits to farmers as intensive
farming can be done which increases their profitability. Also with growing commercializing and
urbanization, the demand of fish species like Telapia and Thai Koi is increasing.
Demand & Supply Gap of Fish Feed: Almost 50% of the sector is still unorganized. So theres a
huge gap in demand and supply. Efforts of industry members are required to change the scenario.
The organized Fish Feed market is around 180,000 Mt wherein we are placed at number two
with total market share of 12.5%. We have achieved this position within two years of business
and we can expect to witness a huge increase in the coming years from this particular product
line.
Overview of Broiler DOC Industry: The Broiler DOC industry forms essential inputs to the
poultry feed industry and its demand-supply has a great impact on sales.

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Demand-Supply Scenario: Industry expert argue that due to the biasness of farmers to use chicks
mainly for broiler meat, there is a large crisis for parent stock. The increased sales of parent
stock and so commercial DOC will lead to more broiler feed sales.
Overview of Cattle Feed Industry: The Cattle Feed Industry is still unorganized with raw
materials consisting more than 95% of the total nutrition requirement of cattle population.
Analysis says that there is a large untapped market of cattle which have marketable surplus of
milk. These areas are being targeted for creating markets for cattle feeds.

Exhibit 13: Allocation of Fund (in million)

Total Fund 353.1

Application of Fund

Feed Mill of 15 MTPH 195.7

5 MTPH Extruder Plant 104.5

Expansion of Breeding Farm 52.9

Total Application of Fund 353.1

Exhibit 14: Details of Necessary Capital Expenditures

a) Feed Mill of 15 MTPH Amount

Civil Construction with Prefabrication Warehouse (93,000 sq.ft) 69,750,000

Civil Construction with Prefabrication for New Plant 9,962,500

Plant & Machineries 112,482,940

Land Development 3,500,000

Sub: Total 195,695,440

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b) 5 MTPH Extruder Plant

Civil Construction with Prefabrication for Extruder 13,650,000

Plant & Machineries 90,841,940

Sub: Total 104,491,940

c) Breeding Farm

Building and Civil Construction 52,916,55

Total Estimated Expansion Cost 353,103,435

Exhibit 15: Year-on-Year Sales Growth Projections from this Project

Year Revenue (in BDT million) Growth Rate (%)

2009 1866.0 44

2010 2582.2 39

2011 3076.6 18

2012 3596.4 17

2013 4070.0 13

2014 4560.0 12

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