Analysis on Cement Sector

Core Company: DG KHAN

3/21/2012

Submitted to: Submitted By:

Sir Zain Javed

Mian Ali Ilyas Tufail ahmed Ikhlaque Hussain Ravi kumar Mehran Khan Aamir Bashir

Letter of Transmittal
MR. Zain Javed Facult y Member, Anal ysis Of Financial Statements Iqra Universit y, Defense View Karachi Dear MR. Javed: We are submitting here our term report on the Anal ysis of Cement Sector . Initial pages of this report also contain the brief information about Industry background and the players in market of Pakistan. . All the information provided in the report is comprehensivel y discussed with a satisfactory background of valid facts and figures. If there are any questions or queries you have about the materia l presented in this report, we will be extremel y glad to appear before you. Sincerel y, All Group members

Acknowledgement
With the blessings of ALLAH the almighty, the report enclosed has reached its stage of final completion. This report is a result of exhaustive and much enthusiastic work. We extend our heartiest thanks to Mr. Zain Javed , for conducting this course and maki ng it interesting and knowledgeable, without his efforts and co -operation the report would not have been possible. We also thank for his confidence and trust he had in us, importance of which can in no way be under estimated. We are equall y grateful to IQRA University for providing us the opportunities to pursue our endeavor. We also appreciate the students of Iqra Universit y, who assisted us in providing us all the necessary information and feedback that we required for completing this task. We hope readers of this report can complement the depth of the study and efforts put into it. Thanking You Sincerel y, All Group members

Introduction: Cement sector is a leading Industry in Pakistan. In Pakistan there are 29 players out of which 19 are listed in Karachi Stock Exchange. Top 3 Players in Cement industry Company name Market Share Lucky 18.56%, DG khan 10% Bestway cement Co: 8% The cement industry is considered a highly important segment of industrial sector that plays a pivotal role in the socio-economic development. Though the cement industry in Pakistan has witnessed its lows and highs in recent past, it has recovered during the last couple of years and is optimistic once again. Pakistan is rich in cement raw material. Currently many cement plants are operating in private sector. Pakistan Cement industry has huge potential for export of cement to neighboring countries like India, United Arab Emirates, Afghanistan, Iraq & Russian States. There has been a robust growth of cement demand seen both in domestic and export market. Construction sector exhibited a strong 15.3% growth in FY-10 compared with a contraction of 11.2% in FY-09.

Province-wise distribution of cement plants. Province Punjab Sindh Baluchistan K-P-K Total Unit 12 8 6 3 29 Capacity in Million Tones 19.66 10.10 12.96 1.99 44.715

Contribution to National Economy by Cement Sector Direct and indirect taxes 23.50 billion Value of fixed asset deposit 85.21 billion Loans from financial institutions 79.53 billion Share holder equity 80.00 billion Employment (direct and indirect) 150,000 ( approx)

Types of Cement production in Pakistan. Ordinary Portland cement(OPC). Sulphate resisting cement (SRC). White cement Production Process Dry process Semi wet process Wet process

Our Core company: D.G. KHAN CEMENT PROFILE: D.G. Khan Cement Company Limited (DGKCC), a unit of Nishat group, is the largest cementmanufacturing unit in Pakistan with a production capacity of 5,500 tons clinker per day. It has a countrywide distribution network and its products are preferred on projects of national repute both locally and internationally due to the unparallel and consistent quality. It is list on all the Stock Exchanges of Pakistan. DGKCC was established under the management control of State Cement Corporation of Pakistan Limited (SCCP) in 1978. FINANCIAL ANALYSIS OF CEMENT INDUSTRY TOP PLAYERS: Profit and Loss Statement Analysis: 1) Gross profit margin:

s.no 1 2 3 2)

Name of company D. G. Khan Lucky Cement Attock Cement

2008 32% 26% 22%

2009 16% 37% 32%

2010 17% 33% 26%

Net Profit Margin: 2008 -0.43% 15.79% 8.70% 2009 2.91% 17.46% 17.54% 2010 1.43% 12.80% 13.26%

1 2 3 3)

D. G. Khan Lucky Cement Attock Cement

Operating Profit Margin: 2008 2009 2010 12.11% 18.76% 13.89% 18.14% 27.41% 17.31% 16.57% 24.78% 19.12%

1 2 3

D. G. Khan Lucky Cement Attock Cement

4)

Interest Coverage Ratio: 2008 -0.14% 21.13% 2.83% 2009 0.30% 3.72% 12.47% 2010 0.19 4.19 17.88

1 2 3

D. G. Khan Lucky Cement Attock Cement

G.P.M: Gross Profit margin is not good as it was double 2 years back and it is also not good as compare to Lucky cement and Attock. In 2008 our G.p.m was much better than our major 2 competitors but in 2010 we are suffering in G.p.m, which shows that we dont have the control on our cost of sales ,so we need to manage our cost of sales to compete them in efficient and effective way N.P.M: In 2010 our net profit is very low as compare to our major competitors, our net profit is 1.43% where as the net profit of lucky and Attock are 12.8% and 13.26% respectively. That shows that we do have control on our expense and we have lot of debt which cost high finance charges which result the 12.46% of sales as finance charges, so we need to decreases our debts to maintain net profit. I.C.R: Interest coverage ratio does not depict a good picture because our I.C.R is too low 0.19 , whereas ICR of lucky and Attock are 4.19 and 17.88 respectively, that shows that we have taken too much debt and not more capable to borrow more funds, so we need improve that by putting profit back into business or by converting idle fixed asset in to cash to pay our current liabilities.

Balance Sheet Analysis 1) Current Ratio: 2007 1 2 3 D. G. Khan Lucky Cement Attock Cement 1.59 1.06 1.51 2008 0.84 1.30 2.43 2009 1.19 0.71 2.62

2)

Quick Ratio: 2008 1.56 0.99 1.09 2009 0.78 0.73 1.89 2010 1.12 0.65 2.28

1 2 3

D. G. Khan Lucky Cement Attock Cement

3)

Total Assets Turnover: 2008 0.24 0.61 0.85 2009 0.42 0.81 1.22 2010 0.35 0.64 1.09

1 2 3

D. G. Khan Lucky Cement Attock Cement

4)

Debt to Total Assets: 2008 1 2 3 D. G. Khan Lucky Cement Attock Cement 0.42 0.46 0.40 2009 0.51 0.39 0.31 2010 0.44 0.34 0.24

Interpretation: Current ratio: current ratio is increasing in current year and as compare to major competitors it is better than lucky and lesser than attock. But it is greater than 1 so it shows the company is in liquid position. But current ratio does not show a clear picture so we need to compare the Quick Ratio to see actual story. Quick Ratio: Quick ratio is 1.12 in 2010 and it was 0.78 in 2009 , that shows that company managing its quick assets well to pay out its current liabilities, whereas as compare to major competitors it is better than lucky and greater than 1. Total asset turnover: Total asset turn over decreased in current year as compared to previous year and it is also not good as compare to major competitors that shows company is not utilizing its Assets to generate sufficient capacity. Debt to Total Assets: Debt to asset is 44% in current year, it is better than previous year, it was 51% , so it is decreasing that means debts are decreasing but it need to be more improvements because the major competitors has the debt ratio is Lucky (34%) and Attock (24%)

CASH FLOW

It is determined by looking at three components by which cash enters and leaves a company. Components are operating, investing and financing. Cash flows from operating activities It tells the working position of a company. In 2008 the negative amount of Net cash generated from operating activities shows that company is giving tough time because working capital is not managing. And company has has taken long term loans and short term borrowing thats why they have to pay high finance cost on it. In 2009 cash from operating activity increased by 88% as compare with 2008, it means company has managed their working capital well. In 2010 it decreased by 27% which means working capital is not managing well, and the decrease in operating cash flow is because it has paid more retirement and other benefits also taxes paid as compare with 2008 and 2009. Cash flows from investing activities Usually cash changes from investing are a cash out items because it used to buy new equipment, building or short-term assets such as marketable securities. Purchase of property, plant and equipment and also Purchase of investments increased in 2008 and then decreased in 2009 by 61%. And in 2010 the increase in investment but at the same time Capital expenditure including purchase of property, plant and equipment decreased by 42% as compare with 2009. Cash flows from financing activities Change in debt, loans or dividends are accounted for in cash financing. Changing in cash from financing are cash in when capital is raised and they have cash out when dividends are paid. In 2008 company has paid more payment of long term finance, liabilities and also paid dividend as compare with 2009, thats why in 2009 the increase in financing activities by 191%. In 2010 the financing activities decreased by 50% because company has repayment of long term finance is increased as compare with 2009.

SWOT ANALYSIS: STRENGTHS: Financially supported by Nishat group of companies. Sale is increasing consistently. High quality cements commanding premium prices. WEAKNESSES: Total asset turnover is declining as compare to competitors. Interest coverage ratio is very low as compare to other competitors. Loss of market leader position to weaken pricing power. OPPORTUNITIES: Increase in Consumer & Industrial Demand up to 13% every year. Construction of mega dam projects in future, so it is the opportunity to rise market share. THREATS: Rising prices of coal, fuel Highest taxes as compared to any country in cement Flood tax charged by Government of Sindh Ongoing tussle between the cement manufacturers and Monopoly Control Authority (which is being given increased regulatory powers).

RECOMMENDATIONS: 1. Company point of view:

To compete with its market players/competitors D.G khan has to do following steps. It should Control its Production Cost & Improve its operating activities. It should cut down its administrative and Operating Expenses. It should improve its production & distribution efficiency. Sales are decreasing so It has to increase their sales Faster than the costs and should decrease its cost of Sales.

2. Investor point of view: Investor will be de motivated to invest in D.G khan because it has low G.P and is decreased from 32% to 16% in previous 2 years and that shows that DG has not control on its cost of sale. N.P is also declining consistently. Interest coverage ratio is 0.19 and consistently declining that shows company has taken too much debts.