Oxford Brookes University

OXFORD BROOKES UNIVERSITY

BS (Hons) Applied Accounting

Research and Analysis Project Research Report

Analysis of business and financial performance over a three year period of:

DERA GHAZI KHAN CEMENT LIMITED (DGKCL)

Student Name: KHAWAJA DANYAL TARIQ

Registration Number: 1760726

OCTOBER 2011 2

Word count: 6,499 3

Table of Contents TOPIC PAGE#

1. Project objectives and overall research approach 1.1 Reasons for selecting topic and company 3. 1.2 Project objectives and research questions 3. 1.3 Research approach 4.

2. Information gathered and business techniques used 2.1 Sources of information 5. 2.2 Description of method used to gather information 5. 2.3 Limitations of information 6. 2.4 Ethical issues 6. 2.5 Business techniques used and their limitations 7.

3. Analysis and conclusion 3.1 Cement sector analysis 9. 3.2 Company profile 9. 3.3 Ratio analysis 10. 3.4 Porter’s five force analysis 17. 3.5 SWOT analysis 18. 3.6 Conclusion and recommendations 20.

Appendix A: Bibliography and referencing 22. Appendix B: Sample questionnaire and its response 24. Appendix C: Ratios sheet 26. Appendix D: Balance sheet and Income statement 27 Appendix E: Graph 31. Appendix F: Graph 32. Appendix G: Graph 33. 4

1. PROJECT OBJECTIVES AND OVERALL RESEARCH APPROACH

1.1 REASONS FOR SELECTING TOPIC AND COMPANY I chose analysis of business and financial performance as it is relevant to a major portion of my studies and I wanted to apply the knowledge which I had gained throughout my ACCA study days in real life context.

Moreover, this topic is easily understandable compared to the rest of others. Information about it is relatively easily assessable and Dera Ghazi Khan Cement (DGKCL), being a public limited company with a high turnover and also provided with an extensive infrastructure consisting of relevant, accurate, reliable and up-to-date information.

Analyzing the financial situation, performance measurement and environmental analysis is an integral part of the syllabus for the ACCA professional examinations, and various papers covered this topic comprehensively. I have studied all these papers and I thought it would be a good chance to apply the concepts, which I have learned theoretically.

Another reason for this particular topic is that the cement sector has the distinction of being a very important economic sector of Pakistan, logical, as its raw material is abundantly available in the country. In addition to all the above, I was encouraged by my uncle to choose this topic as he is an active investor in Karachi Stock Exchange and he understands the importance of financial analytical skills.

1.2 PROJECT OBJECTIVES AND RESEARCH QUESTIONS Each type of analysis has a purpose or use that determines the different relationships emphasized in that analysis. (Brigham, 1979)

The aims and objectives of this research report are as follows:  To analyze the cement sector performance  To have an overview of DGKCL’s history and business profile  To analyze the DGKCL’s financial position in terms of:  Profitability to assess a firm’s ability to create economic value in excess of value expended, to grow, remain solvent and repay debt. (McKinley, 1984)  Liquidity to measure the short-term financial health of the organization; to assess the ability of the firm to pay its short-term debts. (Stimpson, 2002)  Debt and capital structure to measure the financial risk in company’s long-term capital structure. (FTC, 2008)  Investment ratios to assess the value and quality of investment in the ordinary shares of a company and the prospects of financial gain. (BPP, 2009)  SWOT analysis is to conduct a general and quick examination of a business’s current position so that it can identify preferred and likely directions in future. It involves looking at the internal strengths and weaknesses of a business and the external opportunities and threats. (Hall et al 1999)  Five forces analysis to assess the competitive position of DGKCL in the cement industry  Draw a conclusion regarding the current financial position and prospects of DGKCL’s performance based on my analysis. 5

 Giving recommendations and suggesting improvements with a view to bring improvement in the company.

I formulated the following research questions for the accomplishment of above aims and objectives of the project and conducted my research smoothly.

 What are the reliable sources of information gathering?  What sources can be used to collect the desired information for the research work?  Are these sources of information easily accessible?  What accounting and business techniques can be used to analyse the business and financial performance of the company?  What ratios are useful for the purpose of analysis?  What are the strengths, weaknesses, opportunities and threats facing DGKCL?  What problems are faced by DGKCL in its current competitive environment?  What are the IT skills required to prepare the research project?  What are the basic interpersonal and communication skills needed to interact with the people involved in the research project?

1.3 RESEARCH APPROACH The overall research approach that I adopted is as follows: Firstly I short listed a number of topics that I found interesting for the research project. Then I selected the topic that I thought I was able to complete efficiently which was “The business and financial performance of an organisation over a three year period”. I selected DGKCL for the purpose of analysis as it is a listed company and its information is easily accessible. Then I identified the aims and objectives of the project and also identified the sources and methods to obtain relevant information for the project. I identified the accounting and business techniques that I used to analyse the performance of the company and limitations of those techniques. I also identified the problems I faced during information gathering and the use of the accounting and business techniques. I analysed the performance of the company by using ratio analysis and reviewed the company’s profitability, liquidity and capital and debt structure and also review the company with an investor’s perspectives. I identified the strengths and weaknesses of the organisation and the opportunities and threats faced by it. I considered each and every aspect of the company and drew a conclusion and provided a recommendation on certain courses of action. 6

2. INFORMATION GATHERED AND BUSINESS TECHNIQUES USED

2.1 SOURCES OF INFORMATION Primary data is the data which is collected by the researcher directly from his own observations and experiences. However Secondary data is data present elsewhere having been compiled for some other purpose. There are various sources of secondary data like research papers, periodicals, encyclopedias, published researches, database companies etc. (www.blurtit.com)

Primary sources included interview held with key personnel of DGKCL and questionnaire that I prepared for them to answer.

Secondary sources on the other hand included annual reports of DGKCL, ACCA textbooks, Reference books, Business journals, Newspapers, Analytical reports and information obtained from surfing the web.

2.2 DESCRIPTION OF METHOD USED TO GATHER INFORMATION An interview was held with Mr. Ali Raza, production manager of the company. The fundamental purpose of the interview was to get familiar with the company’s profile, to acquire about the business and corporate strategies they tend to follow and to assess how the business is performing with respect to its competitors. As the annual accounts for all the three financial years were not available on company’s web-site therefore, I also requested him to provide me the copies of respective annual reports. The meeting with him gave me a clearer viewpoint of the DGKCL’s operations in its environment and of how they plan to go in future to cope with the increasing local and global competition.

Later, another meeting was arranged with Mr. Amir Zaidi, member of Business Strategy Committee of the company. This meeting was reasonably informative and supported a great deal in finding, in depth, the opportunities and threats DGKCL is facing. What I learned in this meeting helped in my SWOT analysis and as well as in analysis of company’s competitive position under porter’s five forces model.

Secondary data was collected from a numerous sources. The list of them is given below.  Annual reports of the company were one of the ultimate sources to get the financial information which is essential for ratio analysis of a company.  I consulted BPP and FTC textbooks for ACCA to ensure I was not misleading the report by any improper understanding of the analysis models. Therefore, to attain in depth knowledge of the analytical techniques I was using and to get rid of any ambiguities I had in mind they were the best solution.  I read different local newspapers (e.g. Dawn, The News, Business Recorder and others) including both old and new press releases to keep myself up-to-date with changes which affected DGKCL and cement industry.  I got annual report of LCL for FY09, the other main player in the local industry, to assess DGKCL’s performance in comparison to it. 7

 I went through articles of different business magazines such as Pakistan Economist and they helped me in keeping a track of DGKCL’s changing business environment. I also used Student Accountant Magazine for clarity of concepts at times.  Another source I used to keep myself up-to-date with news related to the industry was www.onlinenews.com.pk. I surfed through internet to find as much data as I could about the analytical techniques and DGKCL and its industry. It included using search engines like www.google.com.pk, DGKCL’s company website www.dgcement.com, Karachi Stock Exchange’s website www.kse.com.pk and many others.  I also visited different libraries and went through different analysts reports in their catalogues on cement sector of Pakistan and DGKCL. These reports were a helping hand too.  I also consulted a few analyst reports to assess my understanding in light of an expert’s opinion.

2.3 LIMITATIONS OF INFORMATION There were some limitations of information during the process of making RAP:

 I faced problems in consulting newspapers and magazines because I never had an idea of searching through business magazines. So my friend assisted me in this regard.  Annual reports of DGKCL for the three years were not available on the website so I requested company’s manager to provide a copy of those reports.  My college library is not very big, so I found some difficulties in getting relevant books from there. Then I asked my brother in helping me access library of Lahore University of Management Sciences (LUMS) which was well maintained.  I have studied some of ACCA papers under old scheme but many changes have been introduced now so I had to read the new books for this purpose.  Searching for required material on internet proved harder than expected, as so much information was available on the topic, so identifying the most relevant information was time consuming and difficult.

2.4 ETHICAL ISSUES I already had quite clear idea of dealing with ethical issues when I faced a few ethical issues while gathering information I managed them sensibly. One of these was when getting questionnaires filled by employees of DGKCL as some of the staff members were concerned about the confidentiality of the information involved. Being aware of the consequences of giving out confidential information I got a senior officer’s authorization before pursuing the answers to the questionnaires. Another factor which I had to be careful of was to ensure that I correctly referenced all the information that I used in the project to ensure that any use of information did not fall under the head of plagiarism. 8

2.5 BUSINESS TECHNIQUES USED AND THEIR LIMITATIONS

RATIOS Ratio analysis is a way of expressing relationships between a firm's accounting numbers and their trends over time that analysts use to establish values and evaluate risks. (Steven M. Bragg, 2006)

LIMITATIONS OF RATIOS  Many ratios are calculated on the basis of the balance-sheet figures. These figures are as on the balance-sheet date only and may not be indicative of the year-round position.  Comparing the ratios with past trends and with competitors may not give a correct picture as the figures may not be easily comparable due to the difference in accounting policies, accounting period etc.  It gives current and past trends, but not future trends.  Impact of inflation is not properly reflected, as many figures are taken at historical numbers, several years old.  There are differences in approach among financial analysts on how to treat certain items, how to interpret ratios etc.  The ratios are only as good or bad as the underlying information used to calculate them. (wiki.answers.com)

FIVE FORCES Porter explained that five forces which derived industry competition like threat of new entrants, bargaining power of suppliers, bargaining power of buyers, threat of substitute products and rivalry among existing firms. (Michael E. Porter, 1985)

LIMITATIONS OF FIVE FORCES  Five forces model is mainly based on the economic situation of the eighties characterized by strong competition and relatively stable market structures. It is not able to take into account new business models and the dynamics of markets which implies that this model is hardly still applicable in current rapid change market.  Another limitation of the five forces is that it provides a good framework for analysis but does not really consider issues around implementing changes to reposition for strategic advantage.  This model also overemphasizes the importance of industry structure as a determinant of company performance and underemphasizes the importance of differences between companies within an industry. The model focuses on an industry as a whole not on individual firms.(www.echeat.com) 9

SWOT The SWOT analysis is an very useful tool which helps organizations and businesses to understand situation and deal with them. SWOT is an acronym which stands for Strengths, Weaknesses, Opportunities, and Threats. A SWOT analysis is a subjective assessment of data, which is organized by the SWOT format into a logical and presentable order that improves the ability to understand, present, discuss any matter and make take appropriate actions. (www.businessballs.com)

LIMITATIONS OF SWOT  The SWOT framework has a tendency to oversimplify the situation by classifying the firm environmental factors into categories which they may not always fit and situations may vary for each company.  The classification of some factors as strengths or weaknesses or as opportunities or threats is somewhat arbitrary.  It can be very difficult to classify any factor as a strength weakness opportunity or threat sometimes. For example a particular company culture can be either strength or a weakness. In such situations what is more important than the apparently uncomplicated classification of these factors is that the firm should be aware of its development continuously and should develop a strategic plan to use them to its advantage. (www.netmba.com) 10

3. ANALYSIS

3.1 CEMENT SECTOR ANALYSIS “The cement sector posted a marginal growth of 2% as the total sales volume increased by only 0.484million tons to reach 30.77 million tons by June 09. Local cement demand declined by 13% to 19.4million tons in FY09 against 22.4million tons in FY08. Adverse economic conditions resulted in the slow down in construction activities while cut in infrastructure spending both in public and private sectors caused the cement demand to drop. Pakistan's per capita cement consumption at the end of FY09 was recorded at 120kg as compared to 139kg in last year (representing a decline of 14%). The local cement sales volume dropped by 14% to 19.4million tons in FY09 as compared to 22.6million tons in FY08.” (Aisha Kirmani, 2009)

The 2% overall growth in the industry was mainly due to increased exports in FY09. The exports of the industry increased by 47% to 11.4million tons in FY09 as against 7.7million tons in FY08. Despite the economical downturn in the international markets throughout the year, export demand for cement remained high due to previously initiated projects in the Middle East and reconstruction activities after wars in Iraq & Afghanistan. Thus, despite decrease in local sales, the industry was able to post improved results. Exports formed 37% of the total sales volume of the sector. (Business Recorder, 2009)

Capacity utilization is an important aspect of the performance of the cement industry. The overall capacity utilization of cement plants declined to 74% in FY09 from 81% in FY08 owing to capacity expansions in the sector. According to recent statistics released by All Pakistan Cement Manufacturers Association (APCMA, 5million tons of capacity expansion took place in FY09 (as compared to 7million tons in FY08). The total cement production capacity of the industry stood at 42million tons by end of FY09 as against 37million tons in FY08. (APCMA, 2009) 3.2 COMPANY PROFILE DGKCL is one of Pakistan’s leading cement manufacturers, and a part of the Nishat Group of companies. DGKCL, when established in 1978, was under the control of State Cement Corporation of Pakistan Limited. DGKCL started its commercial production in April 1986 with 2000tons per day (TPD) clinker based on dry process technology. Plant & Machinery at that time was supplied by the Japanese UBE Industries. It is listed on all the Stock Exchanges of Pakistan. (Daily Times, 2006)

DGKCL has two plants at Dera Ghazi Khan in Punjab and a new Greenfield cement plant at Khairpur village, which commenced in FY04 and began production in June 07. The plant has a capacity of 2.1million tons per annum. The start of production in the new plant and efficient operations by the management in existing plants led to 66% increase in the volume of cement production. (Business Recorder, 2010) 11

3.3 RATIO ANALYSIS

3.3.1 Sales and production

DGKCL DGKCL DGKCL LCL FY09 FY08 FY07 FY09 Turnover (Rupees in million) 18,038 12,446 6,420 26,330 Turnover growth (%) 44.94 93.86 (19.30) 55.27

In FY09 DGKCL’s sales grew by 44.94% from Rs.12,446million to Rs.18,038million though the percentage of growth in sales was lower than FY08 . Local sales had decreased by 14%, while the export sales had almost doubled and played a major part in the overall increasing sales revenue of DGKCL (Iftikhar Baig, 2009). Demand of cement in the local market decreased as the buying power of the major customers was looking bleak due to global recession and the credit crunch. During FY09 the company's production of cement was 8.3% less than the FY08 due to lack of resources like power and also due to reduced government spending on development projects and adverse business activities in the country. The sales revenue increased due to sole reason of increase in cement prices as the volumetric sales reduced due to lower domestic sales.

The sales of DGKCL ballooned by 93.86% to Rs.12,446million from Rs.6,420million in FY08 as compared to FY07. Local cement sales grew by 52% while the export cement sales posted a tremendous hike and augmented by 331% in comparison with the last year, owing to exports to neighboring countries. This huge increase in sales was attributed to 68% increase in sales volume and the remaining 25.86% was due to hike in cement prices as the selling prices of cement increased from Rs2,566 to Rs.2,939 per ton during FY08 (Business day, 2009). This increase in sales volume was because the expansion plant started operation in Khairpur. During FY07 the cement sales of DGKCL had fallen by 19.3% to Rs.6,420million from Rs.7,955million due to decline in selling prices as the cartel mechanism broke during that year.

The sales growth of LCL was much higher than DGKCL mainly because LCL focused more on export sales. LCL is the market leader and the size of its sales is almost 1.5times that of DGKCL. 12

3.3.2 Profitability analysis

DGKCL DGKCL DGKCL LCL FY09 FY08 FY07 FY09 Gross profit (Rupees in million) 5,679 1,915 2,032 9,811 Gross profit margin (%) 31.98 15.38 31.65 37.26 Operating profit margin (%) 18.75 12.11 34.30 27.41 Pre tax profit/(Loss) (Rupees in million) 776 (250) 1,730 5,177 Net profit margin (%) 4.30 (2.00) 26.94 19.67 Return on capital employed (%) 2.08 (3.71) 4.91 16.68 Return on assets (%) 1.22 (0.10) 3.13 11.97

Gross profit margin The gross profit margin of the DGKCL was 31.98% which is doubled than the margin of FY08 which was 15.38%. Against the sales of 44.94% the cost of sales increased by 17.36% during FY09. Ultimately as a result of increase in sales prices the gross profit in the absolute terms also improved to Rs.5,679million from 1,915million. Fuel costs constituted 65% of the total cost of sales and it showed an incredible increase during FY09 as a result of higher coal prices which is a main ingredient in cement manufacturing. Average coal costs witnessed an increase of around 39% both due to increased international prices as well as high inland transportation costs.

The gross profit margin decreased in FY08 to 15.38% from a high margin of 31.65% in FY07. The reason of this was increase in prices of fuel in the international market during FY08, contributing to 140% upshot in cost of sales that offset 93.86% increase in sales revenue. Similarly increased gas tariff and cost of electricity along with the severe inflation (reducing buying power of consumers) in the country were also the major contributors of the squeezed margin during FY08. Prices of coal, used in cement industry, increased by nearly 50% during FY08 compared to last year. Also, since July FY07, Oil and Gas Regulatory Authority increased gas tariff by 40% for cement sector and over 38% for power generation. (The Dawn, 2008)

As compared to the gross margin of DGKCL, LCL’s margin in FY09 was higher at 37.26% and this was the trickle down effect of higher sales revenue as a result of export sales.

Net margin The huge amount of the exports was stimulated by the Government by announcing rebates in FY09 and which helped DGKCL recover from the huge loss accumulated in FY08. The rebate given to DGKCL was Rs.11.6million on account of improvement of the cement industry. The net margin of the company improved during FY09 to 4.30% as compared to the FY2008 in which DGKCL incurred loss of 2.00%. All of the associated companies owned by this group earned profit so unlike FY08 the company didn't have to share the loss of Rs.8.6million which was suffered on investments. The finance cost of 13 the company was also quite high as it had acquired Short-term borrowings at high floating rates during FY09 by 48.91% to Rs2,606million.

The net margin plummeted during FY08 to a loss compared to 26.94% profit in FY07 mainly due to higher financing costs backed up by the Short term borrowings taken by the company a huge share of loss of an associated company also contributed to it. Selling and distribution costs increased to 8.62times their size in FY07.

The net margin of LCL was excessively greater than DGKCL due to higher profits during FY09 at 19.67%, as LCL was able to control its finance and other costs effectively.

Return on capital employed During FY09 the ROCE also came back to the positive figure of 2.08% after being negative 3.71% due to the loss of FY08. However it has not yet recovered to pre slump position of 4.91% in FY07. Though, the company earned profits instead of loss in this year, on the other hand the capital employed of DGKCL also increased as a result of increased number of shares and long term finances, so the ROCE was lower as compared to LCL.

Return on capital employed and assets

% 0 ( 2007 2008 2009 -2

-6 Year

Return on assets During FY09 return on assets was 1.22% which was better than the last year in which company had losses. Though the return on assets was much lower, yet it can be accepted as a positive sign as DGKCL reduced those assets especially investments which were not yielding the cash flows for the company. This reduction along with the better profits through exports brought its return on assets to 1.22% from the negative value in FY08. During FY07 the return was 3.13% attributed to higher profits in that year after that it deteriorated. DGKCL’s ratio was quite lower than LCL’s ratio during FY09. 14

3.3.3 Liquidity analysis

DGKCL DGKCL DGKCL LCL FY09 FY08 FY07 FY09 Current ratio 0.8:1 1.6:1 2.6:1 0.86:1 Quick ratio 0.6:1 1.4:1 2.4:1 0.35:1

Current ratio DGKCL's current ratio is alarmingly low at 0.8:1 in FY09 but the overall trend in the big companies of the sector shows that it is satisfactory. No company has in the cement sector has reported a current ratio of more than 1 during FY09. This trend can be explained by the looking at the overall behavior of the economy where by all the big companies try to finance their operating funds requirements by taking short term loans from the banks against the risk of falling equity markets of the country. DGKCL has also done the same during FY09. Due to gradual increase in the interest rates (one of the steps taken by the Government for monetary contraction) the accrued interest due on the company has increased by 45%.

Moreover due to the increasing debt leverage used by the company, the current portion of long term debt has increased by almost 80% further increasing the current liabilities. Also fair value loss on investment in the associated companies reduced the overall current assets by 30%. All these factors were responsible for the low current ratio of 0.8:1 but still as compared to LCL which is a real competitor of the company the ratios are same as its current ratio is also 0.8:1.

During FY08 the company’s current ratio was reduced to 1.6:1 from 2.6:1 in FY07. The current assets remained approximately same as last year but the ratio decreased on account of an increase in current liabilities. Short term borrowings relating to import finance facilities increased by 232% during the year. The short term running finance also increased by 64%.

Current and quick ratio

3 2.6 2.5 2.4 2 s e 1.6 u l 1.5 1.4 a v 1 0.8 0.5 0.6 0 2007 2008 2009 Year

Quick ratio 15

The quick ratio of the company exactly followed the same trend as demonstrated by the above graph. Even though a quick ratio of 0.6:1 is not unsafe, the trend of the ratio is rather alarming. This falling trend should not continue in future as it is taking the company towards a dangerous zone. The proportion of stores and spares and stock has increased from 9.3% in FY07 to 28.9% in FY09, mainly because DGKCL aims to avoid any stock-out which may result in loss of Goodwill. Otherwise the points discussed above apply to the discussion of quick ratio as well.

3.3.4 Efficiency analysis

DGKCL DGKCL DGKCL LCL FY09 FY08 FY07 FY09 Debtors collection period (Days) 10 11 8 17 Inventory turnover period (Days) 77 15 25 26 Payables payment period (Days) 12 18 57 20

Debtor collection period The amounts of time in which the receivables are almost constant as compared to the last year though trade receivables increased by 40% to Rs.513million to Rs.366million. Normally sales in the cement industry are generally on cash basis and there are a very small number of sales on the credit basis. During FY08 debtor days increased to 11days compared to 8days in FY07. It was also a reasonable increase and did not pose any threat to the company. The debtor collection period of LCL is greater than DGKCL at 17days that indicates that DGKCL offers less credit to its distributors.

Inventory turnover period The company's inventory turnover rate has decreased slightly from 3.83times last year to 3.23times in FY09. The recent increasing exports of the company have limited the inventory conversion cycle to 77days compared to 15days in FY08 as a result of increase in inventory by 40%. The reason for this increase in inventory is to cope with increase in sales of DGKCL and to avoid stock outs. The boosting sales of the company also helped in this regard. The inventory days decreased in FY08 to only 15days compared to 25days in FY07, even though the total inventory increased by 51.2% from Rs.295million to Rs.445million.

Payables payment period Payables payment period of the DGKCL is continuously reducing from FY07 to FY09 from 57days to 18days and lastly 12days which is a good sign and reason of this decline is the drop in trade creditors as DGKCL wants to please its suppliers by making early payments to them for the good reputation. The payment period of LCL is 20days as it took additional one week to settle the payments in comparison with its competitor.

3.3.5 Debt and capital structure

DGKCL DGKCL DGKCL LCL FY09 FY08 FY07 FY09 Long term debt : Equity 17:83 27:73 24:76 15:85 Inertest Cover (X) 1.29 0.86 4.72 5.83

Debt equity ratio Due to the increasing trend of the cost of finance being evident in the economy DGKCL took a bold decision to shift to short term borrowings rather than long term loans from the banks. The cross country analysis reveals that this policy was adopted by almost all of the companies in the cement sector. These loans were repaid by either taking the short term loans which resulted in the 14.83% increase in the current liabilities in FY09 or by issuing more amounts of right shares which were increased by 20% thus indicated from the decrease in long term debt to equity ratio of the company. This decline in the ration was not too great as expected because there was a decrease in general reserves on account of Fair value loss on investment of 36.94%.

During FY08 the ratio increased to 27:73. The reason for this is a 13% decrease in equity base due to accumulated losses. The debt of the company has increased further by 3.5%. DGKCL retired some of its older loans and took up new finance worth Rs.2,000million during FY08. The ratio of LCL is still lower than DGKCL at 15:85 as the equity of the company increased by the issuance of shares during FY09.

Interest cover The interest cover has increased to 1.29times despite the fact that the finance cost of the company was increased by 45% but was overshadowed by a tremendous 124.48% increase in the profit from operations of the company during FY09. During FY08 the interest cover fell to 0.86times from 4.72times in FY07 as a result of drastic fall in profitability along with 273.9% increase in finance costs of the company due to higher amount of short term debts. The interest cover during FY08 showed that the company’s profits are not enough to profits to settle the interest payments, which eroded accumulated profits. However, the ratio of LCL showed that the company can easily pay the finance costs out of the profits earned as its interest cover was 5.83times in FY09. 17

3.3.6 Investor analysis

DGKCL DGKCL DGKCL LCL FY09 FY08 FY07 FY09 Earnings per share (Rupees) 1.06 (0.21) 6.43 14.21 Share price (Rupees) 31.19 67.14 116.50 58.53 Price/Earning ratio (Times) 15.91 - 18.1 4.12 Dividend per share (Rupees) - - 1.50 4.0 Dividend yield (%) - - 1.30 6.83

Earnings per share The earnings per share of the DGKCL were back in the positives due to huge increase of 342% in the net income during FY09. By the back up of strong growth in profits the earning was Rs.1.06. The company also issued new shares to reduce the reliance on long term financing and increased its equity base to support the ongoing and future projects for cost reduction. During FY08 the situation was as poor there were no profits rather the company had losses so it gave the negative figure of Rs.0.21, this had dropped from Rs6,43 EPS in FY07.

EPS and P/E ratio

20 18 16 14 12 10 Values 8 6 4 2 0 -2 2007 2008 2009 Year

Price to earnings ratio The price to earnings ratio was increased and was positive 15.91times being incalculable in FY08 as a result of losses but the average price of the DGKCL stock fell from Rs.116.50 in FY07 to Rs.31.19 per share in FY09. So price to earning ratio is Rs.15.91 during FY09. Severe under pricing of all the companies related to cement sector was due to the overall poor situation of the capital markets. The share price of LCL is lower than DGKCL in the stock market during FY09 demonstrating higher confidence of investors in DGKCL.

Dividends The company has not announced any dividends keeping in view the profitability and liquidity position in both the years FY09 and FY08. However, it provided Rs.1.50 dividend per share in FY07. The competitor of DGKCL announced a high dividend of 18

Rs.4.00 per share during FY09, with a dividend yield of 6.83% attributed to higher margins and to assure its shareholders for better performance. 19

3.4 FIVE FORCES ANALYSIS

Threat of new entrants The threat of new entrants in the cement industry is low because there are more than twenty five companies listed at stock exchange which are already engaged with this business and have developed a strong brand loyalty and well-established distribution networks. The cement industry has benefited a lot by shifting towards dry process, installation of electrostatic precipitators and pre-heaters, automation of processes and installation of online analyzer which has resulted in environmentally better and energy- efficient industries and a high capital is required to enter in the same situation. All the companies are currently enjoying economies of scale and further added the new capacities to tap different markets.

Threat of substitute products There is no other substitute of cement.

Bargaining power of buyers Bargaining power of customers is very low in this industry because the price results out of demand and they are helpless to exert pressure on the cement manufacturers.

Bargaining power of suppliers Limestone, clay/shale and gypsum are used as raw materials in the production of cement. The raw material for cement manufacturing is available in abundance in Pakistan, so bargaining power of suppliers is low. Also, the company has the option to use coal or gas as a fuel, depending on the price of each alternative.

Rivalry among existing firms All existing companies in this industry are working on expansion projects and trying to get more market share. Many of the companies are equally balanced. There is oligopoly in cement sector in Pakistan; therefore, the rivalry is moderately high. With respect to DGKCL which has maintained its well-built position as a second largest cement manufacturer in the industry with huge capacity and high demand of its cement in the global market so its rivalry with existing firms is just moderate. 20

3.5 SWOT ANALYSIS

Strengths  The company has its own power generation plant along with WAPDA supply.  DGKCL production processes are environment friendly and comply with the World Bank’s environmental standards.  It has been certified for ISO-9002 (Quality Management System) in 1998. By achieving this landmark, DGKCL became the first and only cement factory in Pakistan certified for both ISO 9002 & ISO 14001. (www.dgcement.com)  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.  The major break through in the sales came from positive response of the world market to the products of DGKCL.  Cost efficient projects to enhance efficiency.  DGKCL has been concerned about the recent hike in electricity prices and is looking for operational upgrades to reduce its energy and maintenance costs. For this purpose it has initiated two significant projects. Out of which cement grinding mill has already started commercial production. The facility with a capacity of 5,000tons per day is currently considered to be the world’s largest vertical cement grinding mill. (Questionnaire)  Brand loyalty and customer satisfaction on company’s products.

Weaknesses  Insider management system of DGKCL may lead to build up of inefficient functions.  The company restricted its supply in northern region and less access to the southern side though demand is also there.

Opportunities  Funding of mega projects by FoDP forum, tripling of non-military aid by US aimed to improve infrastructure and health & education to create additional cement demand.  DGKCL has the opportunity to acquire Dewan Cement Company. (Salman Abduhoo, 2009)  The break up of price coordination in the local industry and economic slow down around the world have led to depressed prices both at international and local level, however it has provided an opportunity to the big players to enhance their market share.  FY10 budget contained specific measures to support housing development including construction of 9,469 housing units for industrial workers and allocation of residential plots to working journalists.  The tax credit limit on interest paid on loans for construction of a new house or acquisition has been increased to Rs.0.75million to Rs.0.50million previously which is also likely to bode well for cement demand. (State bank of Pakistan, 2009)  Uplift in local cement demand is expected from reconstruction activities in also war affected areas upon completion of the military offensive.  Exports of cement from the country are on the rise. 21

Threats  Higher prices of coal, electricity and gas  Price war currently a cartel like price arrangement exists in the local market with 50kg cement bag being sold in the region of Rs.330-350. Demand and supply dynamics do not justify such high price levels. Hence any break in the price cartel will lead to substantial decline in prices which will in turn hurt margins of the company. (Syed Atif Zafar, 2009)  Housing sector is the main demand driver for cement and Pakistan is facing substantial shortfall in the housing sector.  Sharp devaluation of Pakistani Rupee. (SBP Annual Report 2008-2009)  Severe power crises and security situation of the state. (Wajeeh Sani, 2010)  The weakening buying powers of the customers because of inflation. 22

3.6 CONCLUSION AND RECOMMENDATIONS The performance of the cement sector remained lackluster during FY09 as in the previous year. DGKCL a unit of Nishat group is the largest cement-manufacturing unit in Pakistan with a production capacity of 5,500 tons clinker per day.

The sales revenue of the company increased during FY09 attributable to huge increase in export of cement to other countries and receives better prices than domestic market. The production was less than the previous year so ultimately the sales volume also reduced. The demand of cement in the local market has plunged due to various factors explained above. A drastic increase in sales had seen in FY08 compared to the last year as a result of huge augmentation in local and export sales. This growth was almost 1/3rd attributable to increase in cement prices while 2/3rd was due to the increased sales volume as demand of cement was quite high both in the local and international market during FY08.

The gross margin improved in FY09 and at the same level as in FY07 though it decreased in FY08 due to higher costs of fuel specifically coal as the prices of coal were extremely high in the international market ultimately deteriorated the margin in that year. The net margin of DGKCL also increased in FY09 backed up by the higher profits compared to the last year’s negative figure. Return on capital employed and return on assets also showed positive results in FY09 and recovered the worse condition of the last year.

The liquidity position of the company is continuously deterioration from FY07 and the current ratio turned down over the years. This is due to the company’s policy to finance its operating activities through short term loans and ease long term financing. The asset management of DGKCL is quite sensible except the high inventory turnover period during FY09.

The company is less dependent on long term loans over the years and finances its projects through equity as 6% increase in plant and equipment was also done by issuance of new shares.

Still the finance costs are high so interest cover is low but improved compared to FY08 in which company hardly paid its interest costs out of the profit from its operations.

Investor’s ratios are also improved during FY09 in comparison with the last year but needs to be improved further as the competitor company is a better option with respect to the investment. The earning per share of DGKCL is not so impressive but at least the company came out of the worse situation of loss during FY09. The company had to recover from a negative profit after tax due to a huge amount of debt leverage in the balance sheet.

DGKCL has a quite number of strengths that maintains its second position in the overall cement industry of the country. Although the internal weaknesses and environmental threats should be controlled sensibly. There are many opportunities available that make the company even a better player. 23

The threat of new entrants is low due to enormous capital investment requirements and vast infrastructure. No substitute of cement is present. The threat of suppliers is low due to the nature of raw material in the industry. The company has a large amount of customers due to increased demand so their bargaining power is also low. However DGKCL faced a moderate level of threat by its competitors.

Recommendations The company should try to find new global markets as there is huge demand of Pakistani cement. Slow handling of cement export at various ports is, a serious impediment, so bulk handling facilities at different ports of the country should be constructed so as to facilitate fast and economic handling of cement, clinker and coal. India is facing acute shortage of cement and has potential market for Pakistani cement. Efforts should be made to get permit from the Government to allow export of cement through land route to India which will not only increase cement sector profitability but also earn a sizable amount of foreign exchange for the country. DGKCL should also watch its liquidity position carefully which has been deteriorating in the past years. 24

APPENDIX A

BIBLIOGRAPHY AND REFERENCING

 J Fred Weston & Eugene F Brigham. (1979) Managerial Finance. British Edition-Holt, Rinehart and Winston Ltd.  John E. Mckinley, Robert L. Johnson, Gerald R. Downey, Jr., Charles S. Zimmerman, Michael D. Bloom. (1984) Analyzing Financial Statements. 2nd Edition, American Bankers Association.  Peter Stimpson. (2002) Business Studies. UK, Cambridge University Press.  FTC (2008) Financial Reporting (Paper F 7), London: Kaplan Publishing .  BPP (2009) Corporate Reporting (Paper P 2), London: BPP Publishing.  Dave Hall, Rob Jones, Carlo Raffo. (1999) Business Studies. 2nd Edition, Causeway Press Limited.  Anon. (n.d.), ‘Sources of information’, [Online] http://www.blurtit.com/q944399.html  Steven M. Bragg, Consultant Ernst & Young (28th November, 2006) Business ratios and formulas. 2nd edition.  Anon. (n.d.), ‘Limitations and problems of financial ratios’, [Online] http://wiki.answers.com/Q/What_are_the_potential_problems_and_limitations_of_financ ial_ratio_analysis  Michael E. Porter (1985) ‘Competitive Strategy: Techniques for analyzing industries and competitors’. Pg No.2.  Anon. (n.d.), ‘Limitations of Porter’s five forces ’, [Online] http://www.echeat.com/essay.php?t=27147  Anon. (n.d.), ‘SWOT analysis’, [Online] http://www.businessballs.com/swotanalysisfreetemplate.htm  Anon. (n.d.), ‘Limitations of SWOT’, [Online] http://www.netmba.com/strategy/swot  Aisha Kirmani. (2009) ‘Pakistan cement sector review: Industry update’. IGI Finex Securities Limited July.  Business Recorder (2nd November, 2009) ‘Business news: company news’. Business Recorder, Karachi.  All Pakistan Cement Manufacturers Association (2009) [Online] http://www.apcma.com/pages/data.html  Daily Times (April 05, 2006) ‘Trade news: DGKCL profile’ Daily Times. Lahore: Wednesday,.  Business Recorder (13th January, 2010) ‘Company news: Brief recordings’. Business Recorder, Karachi.  Iftikhar Baig, (October 17th 2009) ‘Cement sector owes record performance to exports’. The News International. Karachi.  Business Day (3rd September, 2009) ‘Business Stories’ Business Day. Karachi: Thursday  The Dawn (29th December, 2008) ‘Business news: Drastic increase in fuel costs’. Lahore: The Dawn.  Anon. (n.d.), ‘DGKCL’s Certifications’, [Online] 25

http://www.dgcement.com/article.php?nCatId=113  Salman Abduhoo (April 02nd,, 2009) ‘DGKCL may acquire Dewan Cement Company’. The Nation, Lahore.  State Bank of Pakistan (2009) [Online] http://www.sbp.org.pk/ecodata/index2.asp  Syed Atif Zafar (July 2009) ‘Analyst report: Company update’. JS Global Capital Limited.  State Bank of Pakistan, Annual Report (2008-2009) ‘The state of Pakistan’s economy’. Federal Bureau of Statistics.  Wajeeh Sani (15th March, 2010) ‘Daily News Updates’ Geo News, Lahore.  Annual Audited Financial Statements of Dera Ghazi Khan Cement Limited for FY2009, 2008, 2007.  Annual Audited Financial Statements of Lucky Cement Limited for FY2009.  http://www.luckycement.com/html/companyprofile/founder.html  Search Engine www.google .com.pk  Search Engine www.yahoo.com.pk  Carter McNamara. (1997) ‘ Field Guide to Leadership and Supervision’, Authenticity Consulting, LLC.  Anon. (n.d.), ‘Research Questions’, [Online] http://www.theresearchassistant.com/tutorial/2-1.asp  Anon. (n.d.), ‘Interpersonal Skills’, [Online] http://en.wikipedia.org/wiki/Interpersonal_skills  Anon. (n.d.), ‘Active Listening’, [Online] http://www.careacademy.org  Anon. (n.d.), ‘Shannon-Weaver Model’, [Online] http://www.cultsock.ndirect.co.uk 26

APPENDIX B

SAMPLE QUESTIONNAIRE AND ITS RESPONSE

Can you please provide a Group information and business profile of DGKCL? DGKCL is a producer and seller of ordinary portland and sulphate-resistant cement. The company is a unit of Nishat group which is a leading and diversified business group with a strong presence in the three most important sectors of Pakistan: textiles, cement and financial services. . In 1992, DGKCL was acquired by Nishat Group under the privatization program of the government. Since its privatization, DGKCL has undergone intensive capacity expansion. The group also has considerable stake in insurance, power generation, paper products and aviation sectors. DGKCL is listed on the stock exchanges of Karachi, Lahore and Islamabad. DGKCL was established in 1978 under the management control of State Cement Corporation of Pakistan Limited (SCCP). The company started its commercial production on April 1986 with 2000tons per day clinker based on dry process technology.

What are the ongoing projects of the company? The world’s largest vertical cement grinding mill at DG Khan Site started commercial operation in March 2009. After some initial problems the mill is working satisfactorily and will substantially save the energy and maintenance costs. New project of power generation from waste heat emanate from cement plants at DG Khan Site is full swing. The erection work of the state of the art equipment and machinery is in progress. The project is expected to start power generation in the next year.

How was the performance of company during FY08 with respect to its sales and production? During FY08, the company produced 4,142,764 metric tons of clinker and 4,227,767 metric tons of cement. Both clinker and cement production increased in FY08, relative to the production figures of FY07. The capacity utilization of the cement sector increased to 81% in FY08 as against 79% in FY07. However, DGKCL outperformed the sector in production and achieved a capacity utilization of over 103% in FY08. DGKCL has two plants at Dera Ghazi Khan and a new state-of-the-art greenfield cement plant at Khairpur, which was started in 2004 and began commercial production in June 2007.

How are the new plant’s performance and its contribution? The plant has a capacity of 2.1mtpa. Commencement of production at the new plant and effective operations led to 70% and 66% increase in the volume of clinker and cement production respectively. The company has its own power generation plant along with WAPDA supply. A duel-fuel power generation plant at its Khairpur cement plant also started commercial operations successfully. 27

Define liquidity risk and explain company’s approach to manage that risk? Liquidity risk is the risk that company will not be able to meet its financial obligations as they fall due. The company’s approach to managing liquidity is to ensure , as far as possible, that it will always have sufficient liquidity to meet its liabilities, when due, under both normal and stressed conditions. For this purpose the company has sufficient running finance facilities available from various commercial banks to meet its liquidity requirements. Further the company’s position is closely monitored through budgets, cash flow projections and comparison with actual results.

Please provide the quantitative data for last four years?

FY06 FY07 FY08 FY09 Net sales (Rs Million) 7,955 6,419 12,445 18,038 Gross Profit (Rs Million) 3,962 2,031 1,915 5,679 28

APPENDIX C RATIO SHEET

DGKCL DGKCL DGKCL LCL FY09 FY08 FY07 FY09 SALES Turnover (Rupees in million) 18,038 12,446 6,420 26,330 Turnover growth (%) 44.94 93.86s (19.30) 55.27 Gross profit (Rupees in million) 5,679 1,915 2,032 9,811 PROFITABILITY Gross profit margin (%) 31.98 15.38 31.65 37.26 Operating profit margin (%) 18.75 12.11 3.30 27.41 Pre tax profit/(Loss) (Rupees in million) 776 (250) 1,730 5,177 Net profit margin (%) 4.30 (2.00) 26.94 19.67 Return on capital employed (%) 2.08 (3.71) 4.91 16.68 LIQUIDITY Current ratio 0.8:1 1.6:1 2.6:1 0.8:1 Quick ratio 0.6:1 1.4:1 2.4:1 0.3:1 EFFICIENCY Debtors collection period (Days) 10 11 8 17 Inventory turnover period (Days) 77 15 25 26 Payables payment period (Days) 12 18 57 20 DEBT AND CAPITAL Long term debt : Equity 17:83 27:73 24:76 15:85 Inertest Cover (X) 1.29 0.86 4.72 5.83 INVESTOR Earnings per share (Rupees) 1.06 (0.21) 6.43 14.21 Share price (Rupees) 31.19 67.14 116.50 58.53 Price/Earning ratio (Times) 15.91 - 18.1 4.12 Dividend per share (Rupees) - - 1.50 4.0 Dividend yield (%) - - 1.30 6.83 29

APPENDIX D

BALANCE SHEET AND INCOME STATEMENT Balance Sheet 2009 2008 2007 EQUITY AND LIABILITIES Capital and Reserves Authorized capital 950,000,000 (2007: 950,000,000) ordinary shares of Rs 10 each 9,500,000 9,500,000 9,500,000 50,000,000 (2007: 50,000,000) preference shares of Rs 10 each 500,000 500,000 500,000

10,000,000 10,000,000 10,000,000

Issued, subscribed and paid up capital 3,042,494 2,535,412 2,535,412

Reserves 17,401,220 27,595,698 29,630,084

Accumulated (loss) / profit 474,728 (50,853) 1,757,689

20,918,442 30,080,257 33,923,185 NON CURRENT LIABILITIES 4,375,83 Long term finances 7 8,411,051 8,686,447

Liabilities against assets subject to finance lease - - 1,141 73,76 Long term deposits 5 73,890 79,467 78,62 Retirement and other benefits 2 54,018 39,862 1,441,57 Deferred taxation 6 1,319,000 1,624,000

5,969,800 9,857,959 10,430,917 CURRENT LIABILITIES 1,435,42 Trade and other payables 0 1,370,336 1,027,274 531,77 Accrued markup 2 364,664 342,612 9,068,57 Short term borrowing – secured 5 7,597,020 3,942,972 4,763,94 Current portion of non - current liabilities 2 2,687,608 2,042,281 35,09 Provision for taxation 0 35,090 35,090

15,834,799 12,054,718 7,390,229

42,723,041 51,992,934 51,744,331 31

ASSETS NON CURRENT ASSETS 24,345,79 Property, plant and equipment 3 22,977,894 22,117,551

Assets subject to finance lease - 5,135 133,376 1,750,20 Capital work in progress 8 2,488,307 1,907,063 3,172,50 Investments 8 6,795,961 8,174,474 166,94 Long term loans, advances and deposits 0 523,046 196,913

29,435,449 32,790,343 32,529,377 CURRENT ASSETS 2,935,88 Stores, spares and loose tools 0 2,299,250 1,496,291 899,83 Stock-in-trade 6 445,856 295,140 513,96 Trade debts 6 366,173 144,245 7,785,96 Investments 8 15,082,582 16,933,790 908,10 Advances, deposits, prepayments and other receivables 0 782,358 229,315 243,84 Cash and bank balances 2 226,372 116,173

13,287,592 19,202,591 19,214,954

42,723,041 51,992,934 51,744,331 32

Profit and Loss Account

2009 2008 2007

12,445,99 6,419,62 Sales net 18,038,209 6 5 (10,530,723 (4,387,640 Cost of sales (12,358,479) ) ) 5,679,73 1,915,27 2,031,98 Gross profit 0 3 5

(111,658 (104,169 Administrative expenses (141,852) ) )

(561,465 (65,122 Selling and distribution expenses (1,871,517) ) )

(581,913 (139,721 Other operating expenses (795,854) ) )

847,34 479,42 Other operating income 770,137 4 0

Impairment of investment (257,386) - -

1,507,58 2,202,39 Profit from operation 3,383,258 1 3

(1,749,837 (467,759 Finance cost (2,606,358) ) )

Share of loss of associated (8,674 (14,163 companies - ) )

(Loss) / profit before tax 776,900 (250,930) 1,720,471

197,70 (98,000 Taxation (251,319) 0 )

525,58 (53,230 1,622,47 (Loss) / profit for the year 1 ) 1 33

Formulae sheet: Profit and Loss Account

2009 2008 2007

Sales net 18038209 12445996 6419625 Cost of sales -12358479 -10530723 -4387640 Gross profit =SUM(B7:B8) =SUM(D7:D8) =SUM(F7:F8)

Administrative expenses -141852 -111658 -104169

Selling and distribution expenses -1871517 -561465 -65122

Other operating expenses -795854 -581913 -139721

Other operating income 770137 847344 479420

Impairment of investment -257386 0 0

Profit from operation 3383258 1507581 2202393

Finance cost -2606358 -1749837 -467759

Share of loss of associated companies 0 -8674 -14163

(Loss) / profit before tax =SUM(B21:B25) =SUM(D21:D25) =SUM(F21:F25)

Taxation -251319 197700 -98000

(Loss) / profit for the year =SUM(B27:B30) =SUM(D27:D30) =SUM(F27:F30) 34

APPENDIX E

Return on capital employed and assets 6 5 4 3 2

) 1 % ( 0 -1 2007 2008 2009 -2 -3 -4 -5 Year 35

APPENDIX F

Current and quick ratio 3 2.6 2.5 2.4 2 s e 1.6 u 1.5 l 1.4 a v 1 0.8 0.5 0.6

0 2007 2008 2009 Year 36

APPENDIX G

EPS and P/E ratio

20 18 16 14 12 10 Values 8 6 4 2 0 -2 2007 2008 2009 Year