Assignment on Beta Calculation & Analysis of Leather Industry
Submitted to:
Ms. Sheikh Sharmin Shamaly
Course Instructor (FRL 411) Department of Business Administration University of Asia Pacific
Submitted By: Group 4 Name
Reg.#
Imroz Mahmud
08102069
Jesmin Naher Shiuly
08102020
Nayma Akther
08102007 0810200 7
Selina Akter
08102044
Md. Rafiul Islam
08102051
Asif Shahriar
08102041
Date of Submission: March 8, 2012
Letter of Transmittal 1|Page
March 8, 2012 To Ms. Sheikh Sharmin Shamaly
Course Instructor (FRL 411) The Department of Business Administration The University of Asia Pacific Subject: Subject: Prayer for acceptance of the assignment assignment on beta calculation calculation and beta analysis of leather industry.
Dear Madam, We had a great experience while doing this assignment. We tried our level best to prepare this assignment on beta calculation and beta analysis of leather industry. But our assignment was not very accurate because of our limited knowledge. Our hard work will result in success if our assignment is able to clarify and satisfy the requirements that were assigned to us. We give a sincere thanks to you for providing your generous help, wherever we felt the needs. Thank you, Sincerely yours, ……………………………… Imroz Mahmud (Group Leader)
Regi. No #08102069 On behalf of the members of my group Dept. of Business Administration The University of Asia Pacific
Acknowledgement 2|Page
We owe the depth of thanks to UAP administration for providing us with internet and library facility. This helped us for completing our assignment successfully. We want to thank Ms. Sheikh Sharmin our cour course se inst instru ruct ctor or,, for for assi assign gnin ing g us such such a usef useful ul Shamaly, our assignment and providing us with various information, experiences and knowledge while carrying out the work on the assignment.
Table of Contents 3|Page
Serial No 1
Topic
Page No
Risk
5-7
1.1
Definition of risk
5
1.2
Types Types of risk risk
5
1.3
Sources of Risk
7
2 2.1 2.2 2.3
Beta What is Beta History of Beta Estimation of Beta
8-11 8 9 10
3
Industrial Overview
11-12
4
Industry Analysis
12-15
5
Porters Five Forces
15-18
5.1 5.2
Threat Threat of New New Entrant Entrants s Threat of Substitute Substitutes s
16 16
5.3
Bargaining Power of Buyers
17
Bargaining Power of Suppliers
17
5.4
5.5
6
Intensity of Rivalry Beta Comparison of Five Leather Companies of Bangladesh
17
18-19
Bibliography Appendix
1.
Risk 4|Page
1.1 Definition of 'Risk'
R
isk isk is the the chan chance ce that that an investment investment's 's actua actuall return will be different different than expected return. Risk incl includ udes es the the poss possib ibil ilit ity y of losi losing ng some some or all of the the orig origin inal al inve invest stme ment nt.. Diffe Differen rentt vers versio ions ns of risk are usually measured by calculating the standard deviation of the histo torrical retu turrns or average returns of a spec specif ific ic inve invest stme ment nt.. High standard deviations indicate a high degree of risk. Many companies now allocate large amou amoun nts of money oney and and time time in developing risk management strategies to help mana manage ge risks risks asso associ ciate ated d with with their their busi busine ness ss and and inve invest stme ment nt deali dealing ngs. s. A key component of the risk management process is risk assessment, which involves the determination of the risks surrounding a business or investment. Investopedia explains 'Risk'
A fundamental idea in finance is the relationship between risk and return. The greater the the amou amoun nt of risk risk that that an inve inves stor tor is will willin ing g to take take on, on, the the gre greater ater the the potent potential ial return. return. The reason reason for this this is that that invest investors ors need need to be compen compensat sated ed for taking on additional risk. For example, a U.S. Treasu U.S. Treasury ry bond is considered to be one of the safest (risk-free) invest investmen ments ts and, and, when when compar compared ed to a corpo corporate rate bond bond,, prov provid ides es a lowe lowerr rate of return.. The reason for this is that a corporation is much more likely to return go bankrupt than the U.S. government. Because the risk of investing in a corporate bond is higher, investors are offered a higher rate of return.
1.2 Types of Risk
Syst System emat atic ic Risk Risk - Sy Syst stem emat atic ic ri risk sk influences a large number of assets. A significant political event, for example, could affect several of the assets in your portfolio. It is virtually impossible to protect yourself against this type of risk. 5|Page
Unsystematic Risk - Unsystematic risk is sometimes referred to as "specific risk". This kind of risk affects a very small number of assets. An example is news that affects a specific stock such as a sudden strike by employees. Diversification is the only way to protect you from unsystematic risk. (We will discuss diversification later in this tutorial).
Now that we've determined the fundamental types of risk, let's look at more specific types of risk, particularly when we talk about a bout stocks and bonds bonds..
Credit or Default Risk - Credit risk is the risk that a company or individual will be unable to pay the contractual interest or principal on its debt obligations. This type of risk is of particular particular concern to investors investors who hold bonds in their portfolios. Gove Governme rnment nt bond bonds s, esp especia eciallly thos those e issu issued ed by the the fede federa rall governmen government, t, have the least amount amount of default default risk and the lowest lowest returns, returns, while corporate bonds tend to have the highest amount of default risk but also higher interest rates. Bonds with a lower chance of default are considered to be investment grade, grade, while bonds with higher chances are considered to be junk bond bonds s. Bond Bond ratin rating g serv servic ices es,, such such as Mood Moody' y's, s, allow allows s inve invest stor ors s to determine which bonds are investment-grade, and which bonds are junk. (To read more, see Junk see Junk Bonds: Everything Everything You Need to Know, Know, Wh What at Is a Cor Corpor porate ate Credit Rating and Corporate Bonds: an Introduction To Credit Risk .) Risk .)
Country Risk - Cou Count ntry ry ri risk sk refers to the risk that a country won't be able to hon honor its its fin financi ancial al comm commiitmen tments ts.. When a cou country try defaults on its obligations, this can harm the performance of all other financial instruments in that country as well as other countries it has relations with. Country risk applies to stocks, bonds, mutual funds, options and futures that are issued within a particular country. This type of risk is most often seen in emerging markets or countries that have a severe deficit. (For related reading, see: What Is An Emerging Market Economy?) Economy?)
Foreign-Exchange Foreign-Exchange Risk - When investing in foreign countries you must consider the fact that currency exchange rates can change the price of the asset as well. Foreign-exchange risk applies to all financial instruments that are in a currency other than your domestic currency. As an example, if you are a resident of America and invest in some Canadian stock in Canadian dollars, even if the share value appreciates, a ppreciates, you may lose money if the Canadian dollar depreciates in relation to the American dollar.
Interest Rate Risk - Interest rate risk is the risk that an investment's value will change as a result of a change in interest rates. This risk affects the value of bonds more directly than stocks. (To learn more, read How Interest Rates Affectt The Stock Affec Stock Market .) .) 6|Page
Political Political Risk - Politi Political cal risk repre represe sent nts s the the finan financi cial al risk risk that that a coun countr try' y's s govern governmen mentt will will sudden suddenly ly change change its policie policies. s. This This is a major major reason reason why developing countries lack foreign investment.
Market Risk - This is the most familiar of all risks. Also referred to as volatility volatility,, market risk is the the day-to-day fluctuations in a stock's price. Market risk applies mainly to stocks and options. As a whole, stocks tend to perform well during a bull market and poorly during a bear market - volatility is not so much a cause but an effect of certain market forces. Volatility is a measure of risk because it refers to the behavior, or "temperament", of your investment rather than the reason for this behavior. Because market movement is the reason why people can make money from stocks, volatility is essential for returns, and the the more more unst unstab able le the the inve invest stme ment nt the the more more chan chance ce ther there e is that that it will will experience a dramatic change in either direction.
1.3 1.3 Sources rces of Risk isk Sources of risk can be organized into categories such as customer risk, risk, technic technical al (produ (product) ct) risk, and delivery delivery risk. Within Within each categ categor ory, y, spec specif ific ic sour source ces s of risk risk can can be iden identif tifie ied d and and risk risk reduction techniques applied.
Customer Risk
Customer risk is related to the customer’s key success factors for the project. project. A projec projectt is not succes successfu sfull if the custom customer er is not successful with the system. The key success factors are found in both the the customer’ er’s requirem rements and the con contex text or environment within which the system and its users will function. These will vary from customer customer to customer, customer, even for similar similar systems.
Technical Risk
Technical Technical risk arises arises from the capability capability of the technical technical solution to support the requirements of the customer. Until the system is actu actual ally ly cons constr truc ucte ted d and and test tested ed ever every y comp compon onen entt of the the architecture is a potential source of risk.
Delivery Risk
7|Page
Deli Delive very ry risk risk is rela relate ted d to the the abili ability ty of the the comp comple lete te team team (including vendors and subcontractors) to deliver against the plan at the cost and schedules estimated.
2.Beta 2.1 What is Beta: In finance, finance, the the Beta Beta (β) of of a stock or portfolio is a number describing the relation of its returns with those of the financial market as a whole.[1] An asset has a Beta of zero if its returns change independently of changes in the market's returns. A positive beta means that the asset's returns generally follow the market's returns, in the sense that they both tend to be above their respective averages together, or both tend to be below their respective averages together. A negative beta means that the asset's returns generally move opposite the market's returns: one will tend to be above its average when the other is below its it s average.[2] The beta coefficient coefficient is a key parameter in the capital asset pricing model (CAPM). It measu measures res the part part of the asset' asset's s statis statistic tical al variance that that cannot cannot be remove removed d by the diversification prov provid ided ed by the the portf portfol olio io of many many risk risky y asse assets ts,, beca becaus use e of the correlation of its returns with the returns of the other assets that are in the port portfo foli lio. o. Beta Beta can can be esti estima mate ted d for for indi indivi vidu dual al comp compan anie ies s usin using g regression analysis against a stock market index. index.
The formu formula la for for the beta of an asset within a portfolio portfolio is
Where r a measures the rate of return of the asset, r p measures the rate of return of the portfolio, and cov (r (r a,r p) is the covariance between the rates of return. The portfolio of interest in the CAPM formulation is the market portfolio that contains all risky assets, and so the r p terms in the formula are replaced by r m, the rate of return of the market. Beta is also referred to as financial elasticity or correlated relative volatility volatility,, and can be referred to as a measure of the sensitivity of the asset asset''s returns to market 8|Page
returns, returns, its non-diver non-diversifia sifiable ble risk risk,, its syste systematic matic risk risk,, or marke arkett risk risk.. On an individual asset level, measuring beta can give clues to volatility and liquidity in the marketplace. In fund management, measuring beta is thought to separate a manager's skill from his or her willingness to take risk. The beta coefficient coefficient was born out of linear of linear regression analysis. It is linked to a regression analysis of the returns of a portfolio (such as a stock st ock index) (x-axis) in a specific period versus the returns of an individual asset (y-axis) in a specific year. The regress regression ion line is then then called called the the Security characteristic Line (SCL).
‘
’ is
called
the
asset's alpha and is cal called the the asset' et's beta coeff efficient ent. Both coefficients have an important role in Modern portfolio theory. theory. For an example, in a year where the bro broad marke arkett or benchmark index returns 25% above the risk free rate supp suppos ose e two mana manage gers rs gain gain 50% 50% abov above e the the risk risk free free rate. rate. Beca Becaus use e this this high higher er retur return n is theo theore reti tica call lly y possible merely by taking a leveraged position in the broad market to double the beta so it is exactly 2.0, we would expect a skilled portfolio manager to have built the outperforming portfolio with a beta somewhat less than 2, such that the excess return not explained by the beta is positive. If one of the managers' portfolios has an average beta of 3.0, and the other's has a beta of only 1.5, then the CAPM simply states that the extra return of the first manager is not sufficient to compensate us for that manager's risk, whereas the second manager has done more than expected given the risk. Whether investors can expect the second mana manage gerr to dupl duplic icate ate that that perf perfor orma manc nce e in futu future re peri period ods s is of cour course se a different question.
2.2 History of Beta Beta (uppercase Β, lowerc lowercase ase β; Greek Greek:: βήτα) is the the seco secon nd lett letter er of the the Greek alphabet.. In Ancient Greek, alphabet Greek, beta represented the voiced bilabial plosive /b/. In Modern Greek,, it represents the voiced labiodental fricative /v/. Greek
The letter Beta was derived derived from the Phoenician letter Beth . Letters that arose from Beta include the Roman letter ⟨B⟨ and the Cyrillic letters ⟨Б⟨ and ⟨В⟨. In the system of Greek of Greek numerals Beta has a value of 2. 9|Page
Name
Like the names of most other Greek letters, the name of beta was adopted from the acrophobic name name of the the corr corres espo pond ndin ing g letter letter in Phoe Phoeni nici cian an,, whic which h was was the the *bayt ('house'). In Greek, the name was β ῆτ α bêta, bêta, common Semitic word *bayt ( pronounced [b̂ɛːta] in Ancien Ancientt Greek. Greek. It is spelle spelled d βήτα in the modern modern monoto monotonic nic orthography, and pronounced [ˈvita]. In English, the name is pronounced either / ˈbeɪtə/ (US) or /ˈbiːtə/ (UK)). Uses
The Greek alphabet alphabet on an ancient ancient black figure vessel, vessel, with the characteris characteristicall tically y angular beta of the time. Typography
In some high-quality typesetting, especially in the French tradition, a typographic variant of the lowercase letter without a descended is used within a word: βίβλος is printed βίϐλος.[1] In typesetting technical literature, it is a commonly made mistake to use the German letter ß (a double-s double-s ligature ligature)) as a replacement replacement for for β. The two letters letters resemble resemble each other in some fonts, but they are unrelated. Mathematics and science
Beta is often used to denote a variable in mathematics and physics, where it often has specific meanings for certain applications, such as representing beta radiation. radiation. In regression analysis, analysis, ⟨B⟨ symbolizes non-standardized partial slope coefficients, whereas ⟨β⟨ representsstandardized representsstandardized (standard deviation-score form) coefficients; coefficients; in both cases, the coefficients reflect the change in the criterion Y per one-unit change in the value of the t he associated predictor X. Finance
Beta is used in finance as a measure of investment portfolio risk. International Phonetic Alphabet
In the the Intern Internation ational al Phon Phonetic etic Alph Alphabet abet,, Gree Greek k minu minusc scul ule e beta beta deno denote tes s a voiced bilabial fricative [β]. Meteorology
The name Beta was used as a name during during the 20 2005 05 At Atlan lanti tic c hu hurr rric ican ane e season as Hurricane Beta. Beta.
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2.3 Estimation of Beta To estimate beta, beta, one needs a list of returns for the asset and returns for the index; these returns can be daily, weekly or any period. Then one uses standard formulas from linear linear regress regression ion.. The slope of the fitted line from the linea linearr leastleastsquares calculation is the estimated Beta. The y-intercept is the t he alpha. alpha. Myron Scholes and Josep and Joseph h Williams Williams (1977) (1977) provid provided ed a model model for estimat estimatin ing g betas betas [5] from nonsynchronous data. data. Beta is commonly misexplained as asset volatility relative to market volatility. If that were the case it should simply be the ratio of these volatilities. In fact, the standard estimation uses the slope of the least squares regression line—this gives a slope which is less than the volatility ratio. Specifically it gives the volatility ratio multiplied by the correlation of the plotted data. To take an extreme example, something may have a beta of zero even though it is highly volatile, provided it is uncorrelated with the market. Tofallis (2008) provides a discussion of this, together with a real example involving AT&T. AT&T. The graph showing monthly returns from AT&T is visibly more volatile than the index and yet the standard st andard estimate of beta for this is less than one. The relative volatility volatility ratio described described above is actually actually known as Total Beta (at least by appraisers who practice business valuation). Total Beta is equal to the identity: Beta/R or the standard deviation of the stock/standard deviation of the market (note: the relative volatility). Total Beta captures the security's risk as a stand-alone asset (because the correlation coefficient, R, has been removed from Beta), rather than part of a well-diversified portfolio. Because appraisers frequently value closely held companies as stand-alone assets, Total Beta is gaining acceptance in the business valuation industry. Appraisers can now use Total Beta in the following equation: Total Cost Cost of Equity Equity (TCOE (TCOE)) = risk-f risk-free ree rate rate + Total Total Beta*Eq Beta*Equit uity y Risk Risk Premiu Premium. m. Once Once appraisers have a number of TCOE benchmarks, they can compare/contrast the risk factors present in these publicly traded benchmarks and the risks in their closely held company to better defend/support their valuations
3. Industrial Industrial Overview Overview Leather Industry developed in Bangladesh on a large-scale basis from the 1970s. About 95% of leather and leather products of Bangladesh are marketed abroad, mostly mostly in the form form of crushe crushed d leathe leather, r, finish finished ed leathe leather, r, leathe leatherr garmen garments, ts, and footwear. Most leather and leather goods go to Germany, Italy, France, Netherlands, Spain, Russia, Brazil, Japan, China, Singapore and Taiwan. Value addition in these exports averages 85% local and 15% foreign. About 100 modern tannery units are now in operation in the industry. These are located mostly in the Hazaribagh area of Dhaka city. In 1998, the sector exported 178 million sq ft of leather and earned $160 11 | P a g e
million. The country's share in the worl world d leat leathe herr mark market et is 2%. 2%. The The export of finished products such as shoe shoes, s, slip slippe pers rs,, leat leathe herr jack jacket ets, s, hand gloves, bags, purses, wallets, and belts also earn a sizeab eable amount of foreign exchange. Bangla Banglades desh h intends intends to increa increase se its range of leather products to penetra penetrate te new market market segme segments nts.. The country country is endowed endowed with luxurious luxurious vegetation vegetation encouragin encouraging g a large livestock livestock population. The quality of the raw hide and skin is relatively good, as barbed wire fencing that damage the skins of animals is not used in the natural farms and fields. Black goatskin of kushtia is particularly noted for its finegrain structure and tensile stren strength gth.. The The tradi traditio tion n of huma humane ne care care of dome domest stic ic anim animal als s also also cont contrib ribut utes es significantly to keeping the leather quality high. About 40% of the supply of hide and skin comes from animals slaughtered during the annual annual Muslim Muslim festiv festival al of eid-u eid-ull azha. azha. In additio addition n to daily daily consum consumptio ption n of meat, meat, festivals, Muslim weddings, and other celebrations yield a substantial supply of hide and skin. The tanning industry got a big boost following the government decision to promo promote te more more value value additi addition on in export exports. s. The instal installed led capaci capacity ty for crust crust leathe leatherr production increased. At present, it is double the domestic supply of raw hide and skin. skin. Invest Investmen ments ts are also also made made in install installing ing new finish finishing ing capaci capacity. ty. The trends trends encour encourage age more more tanner tanneries ies to produc produce e finish finished ed leather leather on a commer commercia ciall basis. basis. The governmen governmentt of Bangladesh Bangladesh provides provides a support support to the leather industry industry through through various steps, including monitoring the export market, evaluating the performance of the sector sector by a perman permanent ent parlia parliamen mentar tary y commit committee tee,, and libera liberall bank bank credit. credit. During the 1990s, the export market for Bangladeshi leather grew at an average of 10 - 15% per annum annum.. The average average yearly yearly exports exports accoun accounted ted for $225 $225 millio million. n. Finegrain leather of Bangladesh enjoys preferential demand in Western Europe and Japan. Japan. Low wage level level and the ban on exportin exporting g wet blue leather leather helped helped the industr industry y receive a new thrust in the country. Environmental concerns arising out of the high concentration of production units in a small area of the older part of Dhaka city are being addressed with plans for their relocation outside the city. Leath eathe er good oods prod produ ucers ers in Ban Banglad glades esh h ten tend to be ass associa ociate ted d only only with with manufa manufactu cturin ring g and export exporting ing.. They They do not not have have much much control control over over downst downstrea ream m operations. However, the success of a number of Bangladeshi firms in attracting such brand names as Puma, Pivolinos and Hugo Boss to source from this country proves that there is ample scope for the t he industry's upward mobility. 12 | P a g e
4. Industry Industry Analys Analysis is Nature of competition:
This is the first growing growing sector sector for leather leather products.Pr products.Presen esently; tly; Bangladesh produces produces between 2 and 3 percent of the world’s leather market. The leather industry in Bangladesh is highly competitive. Bata Bata shoes, shoes, Apex Apex tanner tannery, y, Legacy Legacy footwe footwear, ar, Samata Samata leather leather and Apex Apex Adelch Adelchii footwear are renowned companies in Bangladesh. And they are listed in the stock market as well. But there are numerous other small and big manufacturers of leather product. At present there about 15 exports oriented shoe manufacturing units located mostly in and around Dhaka city. There are more than 2000 shoe making units supplying the domestic market. Market share for each company in the industry:
In Bangladesh, Bata started its operation in 1962 and now it is the market leader in the leather industry holding 22% of total market share. And the company is one of the larges largestt tax-p tax-payi aying ng corpor corporate ate bodies bodies contrib contributi uting ng Tk1.2 Tk1.2 billio billion n (year (year 2009) 2009) which which repr repres esen ents ts appr approx oxim imat atel ely y 70% 70% of tax tax paid paid by the the enti entire re foot footwe wear ar sect sector or of nd Bangladesh. With 6% of market share Apex Adelchi is in the 2 position, but Apex Adelchi is a leading export-oriented leather footwear manufacturer in Bangladesh. The export export by Apex Adelchi Adelchi accounts accounts for 45% of the total footwear footwear exports exports from Bangladesh.
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Next to Apex Adelchi, Apex tannery holds approximately 4% of the market share. Where Legacy footwear and Samata leather accounts for approximately 3% and 2% of total market share respectively.
Labor condition:
The labor intensive intensive leather is well suited to Bangladesh Bangladesh having having cheap and abundant abundant labor. Almost all the goods services required to produce leather goods come from the local market. Bangladesh has a domestic supply of good quality raw material, as hides and skins are a by product of large livestock industry but the industry lacks domestic technology and expertise and local support industries such as chemicals are still under-developed. Most of the company’s workforces are unionized. Sometimes clash of interest occurs between the employers and employees (workers). Regulatory condition:
Those companies companies that are formed formed in accordanc accordance e with the company company Act of 1994 are regulated by the Act. But most of the leather goods producers are either formed as solesole-pro propet petors orship hip on partne partnersh rship ip busine business. ss. The regulat regulation ions s for these these forms forms of organizatio organizations ns are not as strict strict as company. The leather industry of Bangladesh Bangladesh is subject to many other rules and regulations. Environmental Regulations:
The Enviro Environmen nmental tal Conse Conservati rvation on Act Act 1995 1995 (ECA) (ECA) and and the the Environm Environmental ental Conservatio Conservation n Rules 1997 (ECR) provide for regulatory measures concerning industrial waste and pollution. Besides, the Factory Act 1965 and the Factory rules 1979 are directed to regulate industry industry related environmental environmental problems. problems. The Departmen Departmentt of Environm Environment ent (DoE) (DoE) headed by the Director General (DG) under the Ministry of Environment and Forest is the regulatory Body responsible for enforcing the ECA’95 and ECR’97. As per provisions of the ECA’95 and ECR’97 all new and existing industrial units are obliged to apply a pply for an Environment Clearance Certificate (ECC) from the DoE. For the purpose of granting ECC, industrials i ndustrials units are classified into four categories depending upon their environmental impact. The four four Categories requiring a gradually higher level of regulations are: •
Green
•
Orange A
•
Orange B 14 | P a g e
•
Red
Leather processing (tannery) is classified in the red category and requires detailed Environmental Impact Assessment Assessment (EIA) including Effluent Treatment T reatment Plant (ETP) and Environment Management Plan (EMP) for ECC from the DoE. The regulatory body, DoE, DoE, howeve however, r, lacks lacks the institu institutio tional nal and technic technical al capabi capabiliti lities es to deal deal with the tannery related environmental problems.
Price Elasticity:
Pric Price e elas elasti tici city ty of deman emand d is a meas easure used sed in eco econom nomies ies to show show the the responsiveness, or elasticity, of the quality demanded of a good or service to a chan change ge in its pric price. e. More More prec precis isel ely, y, it give gives s the the perc percen entag tage e chan change ge in qual qualit ity y demanded in response to a one percent change in price (holding constant all the other determinants of demand, such as income). The demand demand of finished finished leather leather has higher higher degrees degrees of price elasticity elasticity than the demand for raw hides and skins by tanneries. Leather is principally used by footwear, leather leather goods, goods, uphols upholstery tery and leather leather garmen garments ts manufa manufactu cturin ring g indust industrie ries. s. The primary factors that determine the use of leather in leather products are; availability of leather of sufficient quality and type; prevailing price of leather; and the traditional prefer preferenc ences es of specif specific ic market markets s for the produc products. ts. Typica Typicall leathe leatherr produ products cts like luggage, small leather goods, briefcase, handbag, travel goods, etc., in many cases, are manufactured from non-leather materials or leather substitutes depending on market demands. In the footwear sector, many components are being produced from alternative materials. Soles and lining, for instance are made of leather, textile fabric, plastic, or other synthetic material. Many shoes and sandals today are manufactured from synthetic materials. About 35% of the footwear made in developed countries is from non-leather materials, which is as high as about 85% in developing countries. However, leather substitutes are more common among lower-end products rather than in higher end costly items. The price elastici elasticity ty of demand demand are supply supply is elastic. elastic. Moreover, Moreover, we can see see a seasonal seasonal demand and supply trend for our leather industry. During the winter season the leather industry experiences a higher demand for its product. Most of the supply of major raw materials i.e. hides of livestock comes during the Eidul-Azha.
Sensitivity of demand to economic conditions:
The demand demand for leather good is sensitive sensitive to economic economic condition. condition. When the economic economic condition is good the income of people is also higher as well. This results in a higher demand for leather products.
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5. Porters Porters Five Five Forces Forces Defining an industry
An industry is a group of firms that market products which are close substitutes for each other (e.g. the car industry, the travel industry). Some industries are more profita profitable ble than than others. others. Why? Why? The answer answer lies in under understa standi nding ng the dynam dynamics ics of compet competitiv itive e struc structur ture e in an indust industry ry.. The most most influe influenti ntial al analyt analytica icall model model for assessing the nature of competition in an industry is Michael Porter's Five Forces Model, which is described below:
Porter explains that there are five forces that determine industry attractiveness and long-run industry profitability. These five "competitive forces" are 16 | P a g e
- The threat of entry of new competitors (new entrants) - The threat of substitutes - The bargaining power of buyers - The bargaining power of suppliers - The degree of rivalry ri valry between existing competitors
5.1 Threat of New Entrants
New entrants to an industry can raise the level of competition, thereby reducing its attractiveness. The threat of new entrants largely depends on the barriers to entry. High entry barriers exist in some industries (e.g. shipbuilding, Telecommunication) but in leather industry it is easy to enter, key barriers to entry include
The threat threat of new entrant entrants s in leather leather industry industry is highest highest becaus because e economies economies of of scale are low. Most of the leather products are undifferentiated. The capital capital requiremen requirementt required required to enter enter in leather leather industry industry are very very low. low. In leather industry the customer switching cost are low. The indus industry try distri distributio bution n channel channel is easily easily access accessible. ible.
5.2 Threat of Substitutes
The presen presence ce of substitute substitute products products can lower lower industry industry attracti attractivene veness ss and and profita profitability bility because they limit price levels. The threat of substitute products depends on:
Buyer’s willingness to substitute. For example: In the footwear industry, leather is not only the major raw material. These days we can see the shoes and other footwear’s are made of rubber, cloth, plastic. In manufacturing Wallet, ladies bag, belt etc. use of plastic and rubber these increasing day by day.
The relativ relative e price price and and perform performance ance of substitu substitute te product. product. For exampl example: e: The The Price of substitutes like rubber and plastic is very low-compared to leather. These products products are also very long lasting, lasting, convenient convenient and safe from affect of water.
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The cost cost of of switchin switching g to substitutes substitutes is very very low. low.
5.3 Bargaining Power of Buyers
Buyers are the people / organizations who create demand in an industry
In the leather industry buyers are concentrated and buy in high volume. The leather leather products products are are undiff undifferenti erentiated. ated. Buyers have the power to integrate backward. Buyers have the knowledge about the production cost. Product has little impact on quality of the buyer’s final product.
5.4 Bargaining Power of Suppliers
Suppliers are the businesses that supply materials & other products into the industry. The cost of items items bought bought from suppli suppliers ers (e.g. (e.g. raw materials, materials, compon components) ents) can can have a significan significantt impact impact on a company' company's s profitability profitability.. If suppliers suppliers have high bargaining bargaining power over a company, then in theory the company's industry is less attractive.
In our leather industry there are many buyers and few dominant suppliers.
The products are undifferentiated.
There is a threat that the suppliers can integrate forward in to the industry.
The industry is not a key customer group to the suppliers.
5.5 Intensity of Rivalry
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The intens intensity ity of rivalry rivalry between between compet competitors itors in an industry industry will depend depend on: on:
- The structure of competition - for example, rivalry is more intense where there are many small or equally sized competitors; rivalry is less when an industry has a clear market leader. In our country Bata Shoes is the clear market leader with 22% market share, but there are numerous companies and rivalry among them is very intense. - The structure of industry costs - for example, industries with high fixed costs encourage competitors to fill unused capacity by price cutting. But the leather industry requires average or often low fixed costs. - Degree of differentiation - industries where products are commodities (e.g. steel, coal) have greater rivalry; industries where competitors can differentiate their products have less rivalry. Although companies try to differentiate the products, but most of the products are undifferentiated. - Switching costs - rivalry is reduced where buyers have high switching costs i.e. there is a significant cost associated with the decision to buy a product from an alternative supplier. But it is not seen in our leather industry, because the switching cost is not so high. - Strategic Strategic objectives objectives - when competitors competitors are pursuing pursuing aggressive aggressive growth growth strategies, rivalry is more intense. Where competitors are "milking" profits in a mature industry, the degree of rivalry is less - Exit barriers - when barriers to leaving an industry are high (e.g. the cost of closing down factories) - then competitors tend to exhibit greater rivalry. But the barriers are at moderate condition for our leather le ather industry.
6. Beta Compar pariso ison Bangladesh
of
Five ive
Leather
Companies ies
of
For better comparison of beta among five listed leather companies we have drawn those companies’ beta in the following graph. From our calculations (see Appendix) we have found that, Samata Leather has the highest beta among the five companies. Its beta is 2.097775, which means that security returns of Samata Leather is 2.097775 times as volatile as market return. Legacy Footwear’s beta also shows that its security return is 1.83983 times volatile than the market return.
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The market leader Bata has a beta of 0.829409, 0.829409, which is less than the 1.0 (market beta). This indicates that on average, Bata’s stock returns have less volatility than the market return. Apex Tanary has a beta of 1.450982, 1.450982, as it is higher than the market beta, i.e. 1, that means the security returns of Apex Tanary is 1.450982 times volatile than the market return. The leading leading export export oriented oriented footwear footwear company, company, Apex Adelchi Adelchi Footwear Footwear has the smallest beta of 0.771178; the security return from this industry is least volatile among the other companies.
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Bibliography Book Investment Analysis and Management -By Charles P. Jones (10th Edition), Published by John Wiley & Sons
Web www.bdsdf.org www.banglapedia.org/httpdocs/HT/L_0084.HTM www.unctad.org/trade_env/test1/meetings/dhaka/tanning.pdf www.bata www. batabd.com/about-us.html bd.com/about-us.html
http://www.thedailystar.net/newDesign/ http://www.thedaily star.net/newDesign/news-details.ph news-details.php?nid=11447 p?nid=11447 www.apex www. apexadelchi.com adelchi.com www.bdstock www. bdstock.com/ .com/ www.businessdictionary.com/definition/ industry industry--analysis analysis.html .html www.alibaba.com/countrysearch/BD/ leather .htm .htm
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http://en.wikipedia.org/wiki/Bangladesh_Coll http://en.wikipedia.org/w iki/Bangladesh_College_of_Leather_En ege_of_Leather_Engineering_and_Tech gineering_and_Technol nol ogy www.investopedia.com/terms/r/risk www.investopedia.com/terms/r/ risk.asp .asp www.investopedia.com/terms/b/beta www.investopedia.com/terms/b/ beta.asp .asp www.coursework4you.co. www.coursew ork4you.co.uk/essays-and.. uk/essays-and.../ ./porter porter -5-forces forces.php .php
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