Sir Farukh's Report

7/28/2019 Sir Farukh's Report

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INTRODUCTION

A Brief Overview of Cement industry in Pakistan:

Growth of cement industry is rightly considered a barometer for economic activity. In 1947,

Pakistan had inherited 4 cement plants with a total capacity of 0.5 million tons. Some expansion

took place in 1956-66 but could not keep pace with the economic development and the country

had to resort to imports of cement in 1976-77 and continued to do so till 1994-95. The industry

was privatized in 1990 which led to setting up of new plants. Although an oligopoly market,

there exists fierce competition between members of the cartel today.

The industry comprises of 29 firms (19 units in the north and 10 units in the south), with the

installed production capacity of 44.09 million tons. The north with installed production capacity

of 35.18 million tons (80 percent) whiles the south with installed production capacity of 8.89

million tons (20 percent); compete for the domestic market of over 19 million tons. There are

four foreign companies, three armed forces companies and 16 private companies listed in the

stock exchanges. The industry is divided into two broad regions, the northern region and the

southern region. The northern region has around 80 percent share in total cement dispatches

while the units based in the southern region contributes 20 percent to the annual cement sales.

Cement industry is indeed a highly important segment of industrial sector that plays a pivotal

role in the socio-economic development. Since cement is a specialized product, requiring

sophisticated infrastructure and production location. Mostly of the cement industries in Pakistan

are located near/within mountainous regions that are rich in clay, iron and mineral capacity.

Cement industries in Pakistan are currently operating at their maximum capacity due to the boom

in commercial and industrial construction within Pakistan.

The cement industry in Pakistan has grown steadily over time. At the time of freedom in 1947,

there were only 4 cement factories with a total output of nearly 0.5 million tons. By 1972, the

number of cement factories increased to 14 and the total output also increased to 2.5 million ton

but this pace could not be continued in parallel with the countrys financial growth. Both

Government and private sectors worked on proposals to set up new factories. Following the new

policy of the Government of Pakistan, cement industry was also nationalized along other


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industries in 1972 and the State Cement Corporation of Pakistan (SCCP) was constituted and

given the responsibility of production of cement in the country. Taking into account the high

cement demand as compared to supply, cement import was also allowed in financial year (FY)

76-77 and continued until FY 94-95. With a change in strategy of Government control over

industrial units, the nationalized cement factories were put up for privatization along with other

factories. The private sector was allowed to take over cement manufacturing. As a result, the role

of SCCP as market leader went astray gradually and at present it owns only four factories, of

which two have been closed down due to effectiveness and productivity issues. In view of the

high demand during the period of free economic policy, a number of new plants were set up and

many others introduced great extensions to increase their existing output.


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SWOT Analysis

Internal Factor STRENGTHS OF LUCKY CEMENT

1. Strong Financial Position.

2. High Product Quality.

3. High Pay scale.

4. Highest Export Share.

5. Support by Yunus Group

WEAKNESSES OF LUCKY CEMENT

1. Low Advertising and Less Exposure.

2. Low Gratuity and PF funds.

3. Increasing General & Administrative Expenses

External Factor OPPORTUNITIES OF LUCKY CEMENT

1. Upcoming national building projects.

2. Demand for cement in Gulf region

3. Less freight charges for export of cement

4. Expansion in cement industry due to house building loans by banks.

5. Advancements in technology.

THREATS OF LUCKY CEMENT1. Government Regulations on Slots

2. Price Competition

3. Alliance Opposition.

4. Labor Union Problems.


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SWOT ANALYSIS (In detail): Strength

1. Cement export to India through railwayMost of the cement export to India is through railway. In order to facilitate cement export to

India, the railways has doubled its cement capacity and increase its frequency of trains to India

from Pakistan. This step has been taken by Pakistan Railways in order to increase cement export

to India. This is regarded as a highly profitable market.

2. Use of Coal:Coal is found in all the four provinces of Pakistan. The country has huge coal resources,

about185 billion tones, out of which 3.3 billion tones are in proven/measured category and about11 billions are indicated reserves, the bulk of it is found in Sindh. At present most of the cement

companies have switch to coal or gas as their basic fuel; the process has been completed in the

last 6 to 7 years. According to the data of the All Pakistan Cement Manufacturing Association of

mid-2007, the cost of cement production per tone by furnace oil was around Rs2,083 whereas the

cost of production per tone by coal wasRs8,68,saving Rs1,215 per tone. Similarly, the saving per

bag was Rs60.75, which is a huge difference. Reserves of coal can become strength for Pakistani

cement industry if Pakistan import sulfur washing plant from European country than Pakistan

cement industry is able to utilize local coal to meet its energy requirement

3. Cheaper labor:The labor of Pakistan is very cheap. This is the important strength of the cement industry as the

cement companies of Pakistan has to pay less to there labor which result in saving of there

income which later on can be utilized in the expansion of cement plant. This will increase the

cement production

4. Good Domestic and Foreign Market:The export may reach to $ 500 million increase during 2008. Data for the first quarter of

FY08shows that Afghanistan is Pakistans largest cement export market. The prospects for

cement exports seem bright in the medium term due to rising domestic as well as regional

cement demand.


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5. Good Government Policies:Government policies are in the favor of cement sector. Due to the government favorable policies

the cement sector gets the highest growth rate of 21.11% among all the industries of Pakistan in

year 2006-07. The total industry installed capacity is expected to reach 49.1 million tons per

annum by FY10

6. High Quality of Cement:Pakistan produces good quality of cement. This is the main reason due to which recently Russia

is offering high price for Pakistani cement. Globally Pakistan is recognized for producing good

quality of cement due to which countries like Afghanistan, India, Middle east and some African

countries prefer to import cement from Pakistan.

Weakness:1. Increase freight charges:

Exporters of the cement often complain that railways freight charges for carrying cement from

Lahore city to the border of India are Rs500 per ton ($8 per ton) while it covers only 35km.

Against this, they say on the Indian side, the freight is only $3 per ton for bringing goods from

Chundrigar to the border area. Cement exports have been badly hit by high fee that is being

charged by trucks and also by foreign shipping companies for the haulage of cement fromPakistan to India. This increase in freight charges effect our exports due to which our exports is

declining

2. Logistic ProblemSome of the cement companies of Pakistan have received orders from Russia with a price tag

of Rs 860 per bag. But our logistics is the biggest hurdle in the way as our transportation system

isnot good enough to transport cement to Russia due to which our cement companies might lose

the chance to capture the Russian market which is a highly profitable market.

3. Usage of Paper bag:Pakistani cement companies export there cement in paper bags because paper bags are cheap as

compared to plastic bags. But the Cement exported in paper bags is against the International

standards and companies have to pack the cement in plastic bag. The cement export to India

could be affected by the shortage of plastic bags used for transporting the commodity. Although


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there are two companies that are manufacturing plastic bags for cement but they are not able

meet the demand. So thats why Pakistan cement companies export cement in paper bags

Opportunities1. Government Development Expenditure

Government development expenditures count for one third of total cement consumption. Increase

in development expenditures has helped cement demand to grow at very high rates. Increase

imps- as announced in Medium Term Development Framework 2005-10 made the cement

demand to grow in the country. Infrastructure development in a region triggers private

development projects having even positive impact on cement demand.

2. Construction of large damsConstruction of four large dams will generate demand of 3.7mn tons as construction activities start.

Our estimate does not include demand generation from Skardu-Katzarah dam as its feasibility study in not

yet completed. Extent of demand generation will depend on size of dam, type of dam, and extent

of relocation/resettlement activities required. Bhasha dam will generate maximum demand as it is RCC concrete

dam whereas other dams being Earth fill/Rock fill dams will require less cement for their construction. Resettlement

activities for Kalabagh dam will generate maximum demand as it is located in a highly populated area.

3. Improved access to regional marketAfghanistan is Pakistans largest cement export market. The prospects for cement exports

seem bright in the medium term due to rising domestic as well as regional cement

demand. Pakistan also achieved improved access to India after the complete removal of the 12.5

percent custom duty on Portland cement imports in this country from January 2007, showing

improved export opportunities for Pakistan. India is planning to import more cement from

Pakistan to stabilize prices in the market and the government wants a balance in demand and

supply of cement in the current fiscal year. The import of cement from Pakistan has

increased manifold during last four months. India has registered a number of Pakistani cement

manufacturers, a requirement to facilitate import of cement. Pakistan has already increased

the frequency of trains from one to three in a week to carry cement from Pakistan to Wagah

border. Due to boom in the construction industry, India needs cement in bulk to meet its growing

needs.

4. Demand of Pakistani cement by Russia


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Fresh enquiries have been received from Russia and buyers are quoting very attractive prices as

Pakistani cement quality is of very high standard and holds good strength.

5. Earthquake in ChinaIn the month of May china is hit by severe earthquake having the magnitude of 7.8 this

earthquake has cause the serious destruction in china. This disaster is also an opportunity for

Pakistan cement industry to export cement to china.

6. High prices of cement in the international marketCement exports are expected to soar by a massive 107 per cent due to the primary source

of overall cement growth in FY08, the high exports owing to the cement supply shortage in India

and Middle East which lead to rocketing cement prices in the region.

7. Increase in demand of cement due to the upcoming sports eventSouth Africa is schedule to host the football world cup of 2010 due to which they need to make

the football stadiums for the World Cup and Sri Lanka are also expected to approach Pakistani

companies for cement imports because sri-lanka to co-host the cricket world cup of 2011.

Threats1. Indian and Iran industry is also expanding its cement capacity

Presently, India faces an acute cement shortage in its Southern states of Tamil ado and Madras

and in north Punjab. However, reports indicated that the Indian industry is also working on a fastt r a c k t o e x p a n d t h e i r c a p a c i t y i n t h e s e r e g i o n s t o o f f - s e t t h e s h o r t f a l l

Ma j o r c a p a c i t i e s o f countries like India and Iran are expected to come online by FY10 and

onwards which are likely to convert these countries from dependent importers to potential

exporters.

2. High energy pricesRecently cement industry of Pakistan is facing high energy prices due to increase in the

international prices of coal and oil. As our coal contain high percentage of sulfur. Due to which

Pakistan cement industry is not able to use local coal as a source of energy. Due to which

Pakistan cement industry has to import coal from different countries at high prices.


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Analysis of Cement industry.

We have chosen the following companies from cement industry; here we will use lucky

cement as a main company for our analysis for the year of 2007 to 2011 and also compare

this analysis with the industry analysis.

s. no companies

01 Lucky cement ltd

02 Attock Cement Pakistan Ltd

03 Bestway Cement Ltd.

04 Fauji Cement Company Ltd.

05 Fecto Cement Ltd.

Following are the ratios which we will find for using the data of above companies.

LIQUIDITY RATIO. Quick ratio Current ratio

PROFITABILITY RAIO. Net Profit ROA ROE

LONG TERM SOLVINCY RATIO Time int. ratio Debt ratio

ACTIVITY RATIO Receivable turnover Inventory turnover Operating cycle


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RATIO ANALYSIS

I. 2007

II. 2008

RATIOS Lucky Attock Bestway Fauji Fecto Industry Comparison

Quick 0.460 0.455 0.238 1.693 0.265 0.622 low

Current 1.087 1.510 0.696 2.157 1.214 1.333 low

Net profit 20.267 37.925 40.547 28.684 19.551 29.395 low

Inventory turnover 15.292 3.592 17.556 2.734 11.124 10.059 high

Receivable turnover 0.158 0.135 0.023 0.117 -0.035 0.079 high

Operating cycle 35.558 41.516 58.103 31.417 30.676 39.454 low

Debt ratio 0.455 0.398 0.730 0.255 0.615 0.491 low

Time int. ratio 0.301 0.221 1.621 0.237 -2.494 -0.023 high

RATIOS Lucky Attock Bestway Fauji Fecto Industry Comparison

Quick 0.430 0.649 0.426 0.902 0.092 0.500 low

Current 0.850 1.269 0.822 1.354 1.348 1.129 low

Net profit 27.519 33.108 22.581 27.823 9.451 24.097 high


Receivable turnover 0.203 0.175 0.009 0.187 0.009 0.117 high

Operating cycle 41.223 34.679 27.975 29.856 11.588 29.064 high

Debt ratio 0.636 0.413 0.741 0.416 0.549 0.551 high

Time int. ratio 0.274 0.075 0.955 0.204 0.704 0.442 low


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III. 2009RATIOS Lucky Attock Bestway Fauji Fecto Industry Comparison

Quick 0.360 1.357 0.265 0.182 0.134 0.459 low

Current 0.864 2.433 0.648 0.629 1.107 1.136 low

Net profit 20.267 38.099 37.858 13.642 23.770 27.889 low




Debt ratio 0.455 0.315 0.709 0.548 0.550 0.503 low


IV. 2010RATIOS Lucky Attock Bestway Fauji Fecto Industry Comparison

Quick 0.230 1.668 0.193 0.229 0.120 0.488 low

Current 0.713 2.622 0.521 0.520 0.704 1.016 low

Net profit 13.259 23.085 24.452 10.570 14.232 17.120 low


Receivable turnover 0.128 0.133 -0.091 0.066 -0.072 0.033 low


Debt ratio 0.345 0.236 0.751 0.626 0.691 0.530 low

Time int. ratio 0.135 0.045 2.852 0.094 -0.379 0.549 low


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V. 2011RATIOS Lucky Attock Bestway Fauji Fecto Industry Comparison

Quick 0.180 0.335 0.156 0.344 0.051 0.213 low

Current 0.883 1.703 0.530 0.890 0.603 0.922 low

Net profit 25.972 28.545 41.129 45.366 14.633 31.129 low



Operating cycle 34.564 30.681 48.607 48.171 16.672 35.739 low

Debt ratio 0.326 0.251 0.627 0.559 0.669 0.486 low


RESULTS

Ratio Analysis is a form of Financial Statement Analysis that is used to obtain a quick indication

of a firm's financial performance in several key areas. The ratios are categorized as Short-term

Solvency Ratios, Debt Management Ratios, Asset Management Ratios, Profitability Ratios, and

Market Value Ratios.

Ratio Analysis as a tool possesses several important features. The data, which are provided by

financial statements, are readily available. The computation of ratios facilitates the comparison

of firms which differ in size. Ratios can be used to compare a firm's financial performance with

industry averages. In addition, ratios can be used in a form of trend analysis to identify areas

where performance has improved or deteriorated over time.

Because Ratio Analysis is based upon Accounting information, its effectiveness is limited by the

distortions which arise in financial statements due to such things as Historical Cost Accounting

and inflation. Therefore, Ratio Analysis should only be used as a first step in financial analysis,


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to obtain a quick indication of a firm's performance and to identify areas which need to be

investigated further.

As far as quick, current and net profit ratios are concerned it remains low as compared to

Industry average. Whereas inventory and receivable turnover are high and operating cycle is also

high with industry average which the good for the Lucky cement.

TREND ANALYSIS

TREND 2007 2008 2009 2010 2011 Average

sales 100% 135% 155% 93% 106% 118%

operating expenses 100% 210% 203% 140% 98% 150%

net income 100% 89% 193% 62% 122% 113%

cash 100% 22% 389% 32% 105% 129%

accounts receivable 100% 151% 176% 61% 80% 114%

accounts payable 100% 140% 158% 114% 129% 128%

inventory 100% 105% 169% 51% 205% 126%

COGS 100% 142% 131% 100% 105% 116%

current assets 100% 155% 94% 87% 137% 115%

fixed assets 100% 127% 118% 103% 101% 110%current liabilities 100% 121% 118% 106% 111% 111%

fixed liabilities 100% 79% 77% 59% 77% 78%

equity 100% 114% 171% 105% 119% 122%

Trend analysis is also a tool used for projection and this analysis is made on certain key elements

such as sales, income, costs and assets etc. we also made such analysis the results of which are

pasted above.


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Fore casted Income statement

For the year 2012 31 July, 2011 31 July, 2012sales 26,017,519 30,697,197

less: cost of goods sold17,306,400

20,016,356

gross profit 8,711,119 10,680,841

less: operating expenses3,549,814

5,329,242

operating income 5,161,305 5,351,599

Fore casted Balance sheet

For the year 2012 31 July, 2011 31 July,2012

Current assets 9,444,466 10,834,520

Fixed assets 31,765,389 34,900,123

Total 41,209,855 45,734,643

current liabilities 10,696,789 11,900,862

fixed liabilities 2,740,237 2,143,801

equity 22,772,829 27,741,409

Total 41,209,855 41,786,073


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Conclusion

In this study we used ratio and trend analysis to make the projected financial statement for Lucky

cement. Income statement and balance sheet both are projected on the basis of 2011 results.

When we look at the balance sheet we have to make a decision regarding financing the firm

trough equity or debt.

It is advisable for the firm that he makes further financing through equity because through this

way their cost of capital will be low. And if we look at their debt ratio over in the past years so

we can easily conclude that low debt ratio is beneficial for this firm and it is making huge profits.

Sir Farukh's Report

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