17708299 Financial Analysis of DG Khan Cement Factory Ratio Analysis

8/8/2019 17708299 Financial Analysis of DG Khan Cement Factory Ratio Analysis

1/54

Financial Analysis of DG Khan Cement Company Ltd.

Page 1

PrefaceAs the world is growing rapidly, the businesses are also moving tobecome the huge one. And by that result, more and more people want tobecome a master in these businesses. The main purpose in the financefield is to know how the financial analysis is done. We all know thatfinance is the blood of any business and without it no business can run.Financial analysis of a company is very difficult and the most important

task and by doing this I am able to know the whole financial position andfinancial structure of the company.Simply by looking at how much cash a company has does not provideenough information. The financial statements need to be analyzed tomeasure a companys performance and to compare it with other firms inthe same industry. The resulting information is intended to be useful toowners, potential investors, creditors, analysts, and others as theanalysis evaluates the past performance, future potential and financialposition of the firm.This report is an analysis of financial statements of D.G. Khan CementCompany Ltd.This report has been prepared with an objective to developanalytical skills required to interpret the information (explicit as well as

implicit) provided by the financial statements and to measure thecompanys performance during the past few years. The financialstatements are analyzed using traditional evaluation techniques such ashorizontal analysis, vertical analysis and trend analysis. Ratios are animportant tool in analyzing the financial statements & the companysprofitability, solvency & liquidity. Sincere attempts have been made tomake this report error free but if any errors and omissions are found thenI apologize for that.

BASIT ALI


2/54


Page 2

Acknowledgement

In the name of Allah, the most beneficent and merciful who gave usstrength and knowledge to complete this report. This report is a part ofour course Financial Statement Analysis. This has proved to be a greatexperience. I would like to express our gratitude to our Finance teacher

Mr. Ghulam Abbas who gave us this opportunity to fulfill this report. Wewould also like to thank our colleagues who participated in a focus groupsession. They gave us many helpful comments which helped us a lot inpreparing our report.


3/54


Table of Contents........................................................................................................................................2

Table of Contents ..................................................................................................................3

Introduction ...........................................................................................................................5Mission Statement.............................................................................................................5Vision Statement...............................................................................................................5D.G. Khan Cement Company Limited ...............................................................................5

NISHAT GROUP ...........................................................................................................5D.G. Khan Cement Company ........................................................................................6Acquisition of DGKCC by Nishat Group .........................................................................6Capacity Addition ...........................................................................................................6Expansion -Khairpur Project..........................................................................................6Power Generation ..........................................................................................................7Environmental Management..........................................................................................7BOARD OF DIRECTORS ..............................................................................................7

Why cement sector for our project.....................................................................................7INDUSTRY REVIEW ..........................................................................................................10Overview of income statement............................................................................................11Overview of Balance sheet.................................................................................................11Liquidity Position with Graphical Presentation .....................................................................12

Liquidity Position .............................................................................................................12Activity Ratios ..................................................................................................................13Operating Cycle ...............................................................................................................13Debt Ratios .....................................................................................................................14

Profitability - Financial Year 2002 to Financial Year 2008 ...........................................16Assets Utilization .............................................................................................................17Return on Investment......................................................................................................18

Return on total equity ...................................................................................................18Investment Ratios ............................................................................................................19Investment Ratios ............................................................................................................21

Multivariate Model...............................................................................................................24DuPont Analysis .................................................................................................................25SWOT ANALYSIS ...............................................................................................................26Strengths ............................................................................................................................26

Weaknesses ....................................................................................................................29Threats ............................................................................................................................30Opportunities ...................................................................................................................32International Trend ..........................................................................................................36FUTURE OUTLOOK .......................................................................................................36

Annexure ............................................................................................................................38Summarized Income Statement......................................................................................38Summarized Balance Sheet............................................................................................42Horizontal Analysis of Income Statements ......................................................................43Vertical Analysis of Income Statements ..........................................................................43Horizontal Analysis of Balance Sheet..............................................................................44Vertical analysis of balance sheet...................................................................................45Liquidity Ratios ................................................................................................................48Long Term Debt Paying Ability ........................................................................................50

Page 3


4/54


Profitability Ratios ............................................................................................................51...................................................................................................................................51

Assets Utilization ............................................................................................................51Investment Ratios ............................................................................................................53

Page 4


5/54


Introduction

Mission StatementTo provide quality products to customers and explore new markets to promote/expandsales of the Company through good governance and foster a sound and dynamic team, soas to achieve optimum prices of products of the Company for sustainable and equitablegrowth and prosperity of the Company.

Vision Statement

To transform the Company into modern and dynamic cement manufacturing company withqualified professionals and fully equipped to play a meaningful role on sustainable basis inthe economy of Pakistan.

D.G. Khan Cement Company Limited

NISHAT GROUPNishat Group is one of the leading and most diversified business groups in South East Asia.With assets over PRs.300 billion, it ranks amongst the top five business houses ofPakistan. The group has strong presence in three most important business sectors of theregion namely Textiles, Cement and Financial Services. In addition, the Group has also

interest in Insurance, Power Generation, Paper products and Aviation. It also has thedistinction of being one of the largest players in each sector. The Group is considered atpar with multinationals operating locally in terms of its quality of products & services andmanagement skills.

Mian Mohammad Mansha, the chairman of Nishat Group continues the spirit ofentrepreneurship and has led the Group successfully to make it the premier business groupof the region. The group has become a multidimensional corporation and has played animportant role in the industrial development of the country. In recognition of his unparallel

Page 5


6/54


contribution, the Government of Pakistan has also conferred him with Sitara-e-Imtiaz, oneof the most prestigious civil awards of the country.

D.G. Khan Cement CompanyD.G. Khan Cement Company Limited (DGKCC), a unit of Nishat group, is the largestcement-manufacturing unit in Pakistan with a production capacity of 5,500 tons clinker perday. It has a countrywide distribution network and its products are preferred on projects ofnational 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 ofPakistan Limited (SCCP) in 1978. DGKCC started its commercial production in April 1986with 2000 tons per day (TPD) clinker based on dry process technology. Plant & Machinerywas supplied by UBE Industries of Japan.

Acquisition of DGKCC by Nishat GroupNishat Group acquired DGKCC in 1992 under the privatization initiative of the government.Starting from the privatization, the focus of the management has been on increasingcapacity as well as utilization level of the plant. The company undertook the optimization byraising the capacity immediately after the privatization by 200tpd to 2200tpd in 1993.

Capacity AdditionTo meet the increasing demand and to capitalize on its geographic location, themanagement further expanded the capacity by adding another production line with acapacity of 3,300 tons per day in year 1998. Design of the new plant is based on latest dryprocess technology, energy efficient and environmental protection from particulate pollution

according to the international standards. The plant and machinery was supplied by M/s F.L.Smidth of Denmark. As a result, DGKCC emerged as the largest cement production plant inPakistan with annual production capacity of 1,650,000 M tons of clinker (1,732,000 M.TonsCement) constituting about 10% share of the total cement production capacity of thecountry. The optimization plan is still underway to increase the total capacity of the twounits to 6700 TPD by mid of 2005 from 5500 TPD at present.

Expansion -Khairpur ProjectFurthermore, the Group is also setting up a new cement production line of 6,700 TPDclinker near Kalar Kahar, Distt. Chakwal, the single largest production line in the country.First of its kind in cement industry of Pakistan, the new plant will have two strings of pre-heater towers, the advantage of twin strings lies in the operational flexibility wherebyproduction may be adjusted according to market conditions. The project will be equippedwith two vertical cement grinding mills. The cement grinding mills are first vertical Mills inPakistan. The new plant would not only increase the capacity but would also provideproximity to the untapped market of Northern Punjab and NWFP besides making it moreconvenient to export to Afghanistan from northern borders.

Page 6


7/54


Power GenerationFor continuous and smooth operations of the plant uninterrupted power supply is verycrucial. The company has its own power generation plant along with WAPDA supply. Theinstalled generation capacity is 23.84 MW.

Environmental ManagementDG Khan Cement Co. Ltd., production processes are environment friendly and comply withthe World Banks environmental standards. It has been certified for EnvironmentManagement System ISO 14001 by Quality Assurance Services, Australia. The companywas also certified for ISO-9002 (Quality Management System) in 1998. By achieving thislandmark, DG Khan Cement became the first and only cement factory in Pakistan certifiedfor both ISO 9002 & ISO 14001...

BOARD OF DIRECTORS

Mrs. Naz Mansha Chairperson/Director

Mian Raza Mansha Chief Executive/Director

Saqib Elahi Director

Khalid Qadeer Qureshi Director

Mohammad Azam Director

Zaka ud din Director

Inayat Ullah Niazi Director & Chief Financial Officer

Why cement sector for our projectAt the time of independence in 1947, only one or two units were producing grey cement inthe country. During the decade of 1948-58, the number of cement units increased to six.During the Ayub era the economy started to grow and the construction activities underwenta boom. To meet the growing demand of cement new units were set up. During the decadeof 1958-68, the number of cement units increased from 6 to 9. During the following periodof Zulfiqar Ali Bhutto all the industrial units, including cement industry, were nationalized,therefore, no new unit was set up during 1971-77. During the period of General Zia-ul-Haq,1977-88, denationalization of industrial units boosted the investments. Housing and

construction industries picked up and the demand for cement increased. Thus, the numberof cement units increased from 9 to 23 and finally 24.The cement industry in Pakistan has become a long way since independence when countryhad less than half a million tones per annum production capacity. By now it has exceeded10 million tones per annum as a result of establishment of new manufacturing facilities andexpansion by existing units. Privatization and effective price decontrol in 1991-92 heraldeda new era in which the industry has reached a level where surplus production after meetinglocal demand is expected in 1997.

Page 7


8/54


The cement industry is needed a highly important segment of industrial sector that plays apivotal role in the socio-economic development. Through the cement industry in Pakistanhas witnessed its lows and high in recent past, it has recovered during the last couple ofyears and is buoyant once again.

There are total number of units are 23, from which 4 units are in the public sector while the

remaining 19 units are owned by the private sector. Two of the four units in the publicsector had to close down their operations due to stiff competition and heavy cost ofproduction. The cement plants are located in every province of Pakistan.

The province-wise distribution of cement plant is as under.

Providence Units Capacity (Million Tons)

Punjab 8 7.488Sindh 8 3.851NWFP 6 4.945Baluchistan 1 0.758Total 23 17.040

Three additional cement plants with installed capacity of over 2.1 million tons are in the finalstage of completion despite the available excess capacity in this sector. The following tableshows installation of new cement factories and expansion of the existing facilities during thecurrent decade.

Page 8


9/54


The industry is divided into two broad regions, the northern region and the southern region.The northern region has over 87 percent share in total cement dispatches while the unitsbased in the southern region contributes 13 percent to the annual cement sales.

Name of company New/ Expansion Year of

Commission

New Capacity

Created(Tons)

Northern Region

Askari Cement Expansion 1964 945,000

Askari cement New 1996 630,000

Bestway cement New 1988 1,039,500

D.G Khan cement Expansion 1988 1,039,500

Fauji cement New 1997 945,000

Lucky cement New 1996 1,260,000

Maple Leaf cement Expansion 1998 1,039,500

Pioneer cement New 1994 630,000

Sub-Total 7,528,500Southern Region

Essa cement Expansion 1988 315,000

Total 7,843,500

Page 9


10/54


INDUSTRY REVIEWThe cement industry of Pakistan again set a new record and sold 30.112M tons during FY2008 against 24.222M tons last year, with a growth of over 24%. During the period underreport the capacity utilization of the industry was 81% against 79% last year. The slightincrease in capacity utilization is due to the fact that during the year industry added another

6.5M tons of new capacity.Pakistani Cement industry fully tapped the export prospects of cement and managed toexport hefty 6.610M tons against 2.797M tons last year. The cement manufacturers fullypoised to explore new export markets. Contrary to past, now the cement is being exportednot only to regional neighboring countries, rather Pakistani cement is finding its place inSouth East Asian countries, Russia and in African countries as well.Clouds of recession are hovering over the economy of Pakistan and having achievedconsecutive growth of over 6% in real GDP during last four years, economic growth sloweddown to 5.8% in FY 2008 against 6.8% recorded last year. Demand of cement is directlyrelated with prevailing economic conditions. During FY 2008 cement sales in the countryremained bleak due to uncertainty in political and economic front coupled with fading lawand order situation. Total sales in the country were 22.395M tons against 21.034M tons last

year, witnessing an increase of only over 6%. Dilemma of price war among the cementmanufacturers to find out the market share has badly affected the financial health of the

cement sector. In addition, all time high oil and coal prices coupled with expandinginflationary trend in the country hit badly the cost of production. Going forward, monetarytightening stance of the State Bank of Pakistan to curb inflation in the country posedadditional burden in the form of increased lending rates.

Page 10


11/54


Overview of income statement

Overview of Income statement 2008 2007 2006 2005 2004

Sales 12,445,996 6,419,625 7,955,665 5,279,560 3,882,756

Cost of sales -10,530,723 -4,387,640

-3,992,822

-3,330,769

-2,497,262

Gross profit 1,915,273 2,031,985 3,962,843 1,948,791 1,385,494

Administrative expenses -111,658 -104,169 -121,953 -76,480 -68,645

Selling and distribution expenses -561,465 -65,122 -34,352 -60,905 -38,560

Other operating expenses -581,913 (139,721 -191,850 -93,786 -61,735

Other operating income 847,344 479,420 294,114 707,692 128,462

Profit from operations 1,507,581 2,202,393 3,908,802 2,425,312 1,345,016

Finance cost -1,749,837 -467,759 -450,696 -304,041 -224,601

Share of loss of associated companies -8,674 -14,163 -9,573

Profit\ Loss before tax -250,930 1,720,471 3,448,533 2,121,271 1,120,415

Taxation 197,700 -98,000

-

1,030,078 -439,193 -325,922Profit\ Loss for the year -53,230 1,622,471 2,418,455 1,682,078 794,493

Basic earnings per share Rupees -0.21 6.43 10.37 9.12 4.31

Diluted earnings per share 6.43 9.14 7.82 3.78

Overview of Balance sheet

Overview of Balance sheet 2008 2007 2006 2005 2004

Capital and Reserve30528440 33923185 19268200 9317998 631705

Non-current Liabilities 10250352 10430917 9020740 5642649 302057

Current Liabilities 12899306 7390229 6015436 3055858 237698

Assets

Non-current Assets 33835927 32529377 24394481 13819736 883347

Current Assets 19842171 19214954 9909895 4196769 288114

Page 11


12/54


Liquidity Position with GraphicalPresentation

Liquidity Position

Liquidity Position 2008 2007 2006 2005 2004

Current Ratio 1.54 2.60 1.65 1.37 1.21Acid Test Ratio 1.22 2.33 1.44 0.96 0.64Cash Ratio 1.18 2.31 1.43 0.94 0.62

0

0.5

1

1.5

2

2.5

3

2008 2007 2006 2005 2004

current ratio

acid test ratio

cash ratio

The liquidity position of DGKC deteriorated during the first nine months of FY'09. This wasdue to a 40% decrease in current assets and a 14% increase in current liabilities if the

company. The current liabilities of the company increased due to 14% rise in tradepayables, 61% increase in accrued markup and around 7% increase in short termborrowing by the company.On the other hand, current assets of the company declined due to decrease in investmentsfrom Rs 15 billion at the end of FY08 to Rs 7 billion at the end of March FY09. Also thecash and bank balance of the company decreased by 22%. Thus, decrease in currentassets and a corresponding increase in current liabilities resulted in a less favorableliquidity position as compared to that in FY08.DGKC's liquidity stance had been strengthening since FY04 and in FY07 its liquidityposition was the most favorable. The increase in current assets had brought about thischange. There was a 98% increase in short term investments. Furthermore, the cash andbank balances had also risen considerably.

In FY08 the current assets of the company declined slightly but a 63% rise in currentliabilities caused a decrease in the liquidity of the company. Investments constitute nearly79% of the company's total current assets and they declined by 11% in FY08. Theinvestments decreased further from Rs 15 billion at year-end FY08 to Rs 10.9 billion by endof 1Q09.

Page 12


13/54


Activity Ratios

Activity Ratios 2008 2007 2006 2005 2004

Days Sales inReceivables 13.57 days 8.20 days 3.40 days 5.27 days 4.95 days

AccountReceivablesTurnover

41.02 times58.78times

105.79 times 81.94 times73.78times

AccountReceivablesTurnover in Days

8.89 days 6.20 days 3.45 days 4.45 days 4.94 days

ActivityRatio

InventoTurnovedays

InventoTurnove

Days Sain Inven

Operating Cycle

ActivityRatio

2008 2007 2006 2005 2004

OperatingCycle

36.55days 27.89 days 18.41 days 26.34 days 48.58 days

Page 13

0

20

40

60

80

100

120

2008 2007 2006 2005 2004

days sales in

receivables

A/R turnover

A/R turnover in days


14/54


0

10

20

30

40

50

60

2008 2007 2006 2005 2004

operating cycle

Debt Ratios

Debt Ratios 2008 2007 2006 2005 2004

Debt to Tangiblenet worth

77 52 78 93 85

Debt To EquityRatio

76 53 78 93 85

Debt Ratio 43 34 44 48 46

0

50

100

150

200

250

2008 2007 2006 2005 2004

debt to tangible networth

debt/equity ratio

debt ratio

The debt management ratios of DGKC showed a positive trend during FY07. The debt toasset and equity ratios as well as the long-term debt ratio all receded during the period andthis reflected a reduction in the company's dependence on debt financing. However, duringFY08 the debt ratios of the company rose because the total debt increased in FY08 mainlydue to a 63% increase in the current liabilities which form 55% of the total debt.

Long term debt however decreased. The long term debt to equity increased because of a

Page 14


15/54


decline in the equity base due to fall in reserves. The TIE ratio continued to fall in FY08against a positive trend that prevailed before FY07. The reason is substantial rise in financecharges due to high interest rates in the economy.Also the operating income in FY08 decreased, thus reducing the extent to which operatingincome can decline before the firm is rendered unable to meet its interest costs. Due to thelosses that DGKC experienced in FY08 and the decrease in profitability during July-March

FY09, its Earning per Share (EPS) and Price to Earning (P/E) Ratio have been negative.During July-May 2009 the share price averaged around Rs 31.1.This shows that the dismal profits of the company have started reflecting in the low investorconfidence and falling share price. The average share price of DGKC had hovered aroundRs 100/share except during the fourth quarter of FY08 when share price fell well below theaverage. The management did not recommend any dividend for FY08 due to the dismalprofitability situation in the period.

Profitability Ratios

Profitability Ratios 2008 2007 2006 2005 2004

Gross Profit Margin 15 32 49 37 36

Operating Profit Margin 12 34 49 46 35

Net Profit Margin 7.84 25 31 31 20

0

20

40

60

80

100

120

140

2008 2007 2006 2005 2004

gross profit margin

operating income

magin

net profit margin

After experiencing declining profitability during FY08, the cement sector came back stronglyto post a growth of 167% in earnings during first quarter (July-September) of fiscal year

2009. The cement sector posted profit after taxation of Rs 1.3 billion in first quarter of FY09as compared to Rs 500 million in the corresponding period of a year earlier.This growth was mainly due to higher local retention prices and depreciation of the rupeeagainst the dollar that resulted in an increase of rupee-based export sales. The net sales ofthe cement sector in the period July-March FY09 was 58% higher than the net salesgenerated during the corresponding period of FY08. It is believed that the profits of cementcompanies increased due to an arrangement among them to keep prices high in the localmarket.

Page 15


16/54


However, higher sales revenue could not be translated into an increase in profits during theperiod. Increased costs of sales, operating expenses and finance expenses caused theprofitability of DGKC to remain low during July-March FY09. The cost of sales of thecompany increased by 30% during the period and resulted in a gross profit of Rs 3,733million.The furnace oil/coal costs for the period July-March FY09 was Rs 5,258.6 million as

compared to Rs 3,095.7 million during the corresponding period of FY08. The electricityand gas costs were lower, however, the cost of raw material and packing materialconsumed increased by 12%. The administration expenses increased by 31% while theselling & distribution expenses increased drastically by 456% (from Rs 246 million in July-March FY08 to Rs 1,370 million in July-March FY09).Selling expenses may have increased due to higher transportation costs involved withexports and higher fuel costs. Also, the finance costs increased substantially by 77% asinterest rates rose owing to tight monetary policy and liquidity crunch in the market.These rising costs greatly hampered the profitability of the company and resulted in a profitafter taxation of Rs 321 million in the period July-March FY09, which is 34% lower than theprofit (Rs 487 million) during July-March FY08. Therefore, the earning per share (EPS) ofthe company declined from Rs 1.92 in July-March FY08 to Rs 1.27.

Profitability - Financial Year 2002 to Financial Year2008

The profitability ratios of the company have shown a declining trend since after FY05. Thegross profit margin increased in FY06 only to fall in FY07 and FY08. The profit margin ofthe company has decreased continuously along with return on assets (ROA) and return onequity (ROE).The profit after taxation had declined by 33% in FY07 due to lower net retention pricescaused by a supply overhang in the overall industry. Also the problem of rising input costshad begun in FY07. This rise in cost of production and raw material have continued into

FY08 and further aggravated, causing the declining trend of the profitability of DGKC.Despite a strong growth in cement dispatches, the cement sector experienced decliningprofitability during FY08. The profitability of the sector fell by 73.6% to Rs 562 million tillMarch 2008 from Rs 2,133 million in the corresponding period of FY07. Although the salesvolume of the cement companies increased, the net sales revenue did not increase to anequal extent due to decrease in net retention prices in the sector.Over the years all cement manufacturers undertook huge capacity expansion plans. Thiscreated a situation of excess supply in the market. Companies resorted to price warsleading to a fall in prices and reduced the profit margins for the companies. The averagecement price during the period July-March FY08 was Rs 128.3 per bag as compared to Rs133.6 per bag in the same period in FY07.Similar was the case with DGKCC. Increased production facilitated higher sales volume

which in turn translated into almost doubling of sales revenue in FY08. The company hadearned the highest sales revenue of Rs 12.445 billion in FY08. However, despite this, thegross profit of DGKC in FY08 (amounting to Rs 1.9 billion) was around 6% lower than thegross profit posted in FY07 (Rs 2.0 billion).The reason for lower gross profit was a 140% increase in the cost of sales during the fiscalyear. Major input costs increased and dampened the profitability of DGKC and resulted in aloss after taxation of Rs 53.230 million in FY08 against a profit after taxation of Rs 1.622billion in FY07. The cement manufacturers in the industry were faced with rising fuel andpower costs during FY08.

Page 16


17/54


The cost of production for the cement companies went up due to rise in the prices ofimported coal. The cement companies in Pakistan have shifted from oil to coal or gasduring the past few years. Coal is now used as a basic fuel by all cement manufacturers.Pakistan has huge reserves of coal, but cement companies are compelled to import it, aslocal coal has high sulphur content.Crude oil prices shot up during FY08 and had its impact on prices of coal and natural gas.

The rise in the costs of international coal prices has been one of the biggest reasons behindthe dampening of gross margins of cement companies during FY08. There was a nearly50% rise in the coal prices in FY08Along with the hike in the international coal prices, the depreciation of the rupee against thedollar also added to the cost of importing coal. Finance charges rose due to higher interestrates, long term finances, short term borrowing and inclusion of workers' profit participationfund in FY08.

Assets Utilization

Asset Utilization 2008 2007 2006 2005 2004

Sales to Fixed Assets 54 43 108 80 62Return on OperatingAssets

24 33 10 13 11

Operating Assetturnover

20 9.6 20 28 33

Return on Assets 18.5 3.8 23 11 6.60

0

50

100

150

200

250

2008 2007 2006 2005 2004

sales to fixed assets

return on operating assetsoperating assets turnover

return on assets

total asset turnover

The performance of DGKC in terms of asset management was weak during FY07. During

the year, the inventory turnover (days) of the company more than doubled compared toFY06 when the management of inventory seemed most efficient (evident from the lowestinventory turnover in days). This could be traced back to lower sales revenue for the period,coupled with a higher stock of inventory.

At the same time, the average time taken by the company to recover cash from sales alsoincreased. The increase in inventory turnover in days and Days sales outstanding (DSO)prolonged the operating cycle of the company in FY07.

Page 17


18/54


However, in FY08 the asset management of DGKC improved as the inventory turnover rateincreased because the company earned sales revenue more in proportion to the increase ininventory. Thus the days to convert inventory into sales became less (from approx. 100days in FY07 to 79 days in FY08).

Although the days to convert sales into cash (DSO) increased slightly, the substantialdecrease in ITO (days) led to the shortening of the operating cycle in FY08. The days salesoutstanding was higher because the trade debt increased substantially (by 153%) duringFY08 as against sales.Besides this the sales to equity and total asset turnover of the company which had adeclining trend till FY07 increased in FY08. The sales to equity ratio had been decreasingbecause of an increase in the paid up capital. But the trend was reversed in FY08 becausethe paid up capital remained same while the reserves fell, causing a decrease in the equitybase of the company.

Also higher growth in sales increased the sales/equity ratio. Total asset turnover also

improved because the management of the company's assets was effective in generatinghigher sales revenue. The company's performance in the area has improved as full-scaleproduction from the newly inaugurated Khairpur plant has augmented the sales.

Return on Investment

Return on total equity

ReturnRatios

2008 2007 2006 2005 2004

Return onInvestment

2.92 5.34 12.58 15.47 10.07

Return onTotal Equity

0.30 0.37 17 22 13

Page 18


19/54


20/54


0%

20%

40%

60%

80%

100%

2008 2007 2006 2005 2004

Price earning ratio

Earning per

common shares

Degree of financial

leverage

A leverage ratio summarizing the affect a particular amount of financial leverage has on acompany's earnings per share (EPS). Financial leverage involves using fixed costs tofinance the firm, and will include higher expenses before interest and taxes (EBIT). Thehigher the degree of financial leverage, the more volatile EPS will be, all other thingsremaining the same. Most likely, the firm under evaluation will be trying to optimize EPS,and this ratio can be used to help determine the most appropriate level of financial leverageto use to achieve that goal.The companys ratio ha increased dramatically in the year 2008 by 15 times. So there isquite a margin for company to get leveraged.The portion of a company's profit allocated to each outstanding share of commonstock. Earnings per share serve as an indicator of a company's profitability.Earnings per share are generally considered to be the single most important variable indetermining a share's price. It is also a major component used to calculate the price-to-

earnings valuation ratio. The EPS of company is fluctuating but in current year it hasdecreed drastically which is not a good sign for share holders. An important aspect of EPSthat's often ignored is the capital that is required to generate the earnings (net income) inthe calculation. Two companies could generate the same EPS number, but one could doso with less equity (investment) - that company would be more efficient at using its capitalto generate income and, all other things being equal would be a "better" company.Investors also need to be aware of earnings manipulation that will affect the quality of theearnings number. It is important not to rely on any one financial measure, but to use it inconjunction with statement analysis and other measures.A valuation ratio of a company's current share price compared to its per-share earnings isPrice Earning ratio. In general, a high P/E suggests that investors are expecting higherearnings growth in the future compared to companies with a lower P/E. However, the P/E

ratio doesn't tell us the whole story by itself. It's usually more useful to compare the P/Eratios of one company to other companies in the same industry, to the market in general oragainst the company's own historical P/E. It would not be useful for investors using the P/Eratio as a basis for their investment to compare the P/E of a technology company (high P/E)to a utility company (low P/E) as each industry has much different growth prospects.

The P/E is sometimes referred to as the "multiple", because it shows how much investorsare willing to pay per dollar of earnings. It is important that investors note an

Page 20


21/54


important problem that arises with the P/E measure, and to avoid basing a decision on thismeasure alone. The denominator (earnings) is based on an accounting measure ofearnings that is susceptible to forms of manipulation, making the quality of the P/E only asgood as the quality of the underlying earnings number.

Investment Ratios Dividend payout ratio

Dividend yield ratio

Book value per share

Investmentratios 2008 2007 2006 2005 2004

Dividend payout

ratio 19.83 23.62 48.31 28.37 27.74

Dividend yield ratio7.68 4.90 14.23 7.17 3.38

Book value pershare 18.74 20.87 16.62 7.80 5.29

0

10

20

30

40

50

60

2008 2007 2006 2005 2004

Dividend payout ratio

Dividend yield ratio

Book value per share

Indicates the proportion of earnings that are used to pay dividends to shareholders.A reduction in dividends paid is looked poorly upon by investors, and the stock price usuallydepreciates as investors seek other dividend paying stocks

.A stable dividend payout ratio indicates a solid dividend policy by the company's board ofdirectors. The situation of DG Khan Cement Co. Ltd. Shows increment in 2006 but fromthere is consistent decrement in this ratio by more than two times so company is trying tobuild there retained earnings instead of giving dividend.During bull markets the stock price is more likely to trade significantly higher than bookvalue, and in a bear market the two values may be close to equal.The dividend yield or thedividend-price ratio on a company stock is the company's annual dividend payments

Page 21


22/54


divided by its market cap, or the dividend per share divided by the price per share. It isoften expressed as a percentage. There is quite fluctuations in this ratio which shows thereis lack of stability in the company policy towards this section.Now if we look at the book value per share, as we know that somewhat similar tothe earnings per share, but it relates the stockholder's equity to the number of sharesoutstanding, giving the shares a raw value. Comparing the market value to the book value

can indicate whether or not the stock in overvalued or undervalued. During bull markets thestock price is more likely to trade significantly higher than book value, and in a bear marketthe two values may be close to equal.

Page 22


23/54


Univariate Model

1. Cash flow/Total debt

2. Net Income/Total Assets (Return on Assets)

3. Total debt/Total Assets (debt ratio)

Page 23

Year Calculation in (Rupees 000) Values

2008 (641970)/23149658 -2.773%2007 475661/17821146 2.672006 4190452/15036176 27.8692005 2484759/8698507 28.572004 945521/8698507 10.8


2008 25685/53678098 0.047%

2007 1622471/51744331 3.13

2006 2418455/34304376 7.052005 1682078/18016505 9.34

2004 794493/11714619 6.78


2008 23149658/53678098 43.13%2007 17821146/51744331 34.44

2006 15036176/34304376 43.832005 8698507/18016505 48.28

2004 5397564/11714619 46.07s


24/54


Multivariate ModelX1= Working Capital/Total Assets

Year Calculation in (Rupees 000) X1

2008 6942865/53678098 12.934%2007 11824725/51744331 22.852006 3894459/34304376 11.352005 1140911/18016505 6.33

2004 504154/11714619 4.30

X2=Retained Earning/Total Assets


2008 30202533/53678098 56.27%

2007 33923185/51744331 65.562006 19259849/34304376 56.1442005 9317998/18016505 51.722004 6317055/11714619 53.9

X3=EBIT/Total assets


2008 1513505/53678098 2.82%2007 2202393/5174 4.262006 3908802/34304376 21.692005 2425312/18016505 13.46

2004 1345016/11714619 11.48

X4= Market value of equity/Book value of total debt


2008 253541157*30.97/23149658 339.19%2007 253541157*30.97/17821146 440.602006 184393569*30.97/1503176 379.792005 184393569*30.97/8698507 656.51

2004 167630518*30.97/5397564 961.82s

X5=Sales/Total Assets

Page 24


25/54


DuPont Analysis1. Dupont Return on Assets=Net profit margin*Total assets turnover

Year Calculation in (Rupees,000)Dupont Return on

Assets

2008 7.84*0.24 1.882007 0.25*0.15 3.752006 0.31*0.74 22.942005 0.31*0.35 10.85

2004 0.20*0.33 6.60s

DuPont return on Assets has a decreasing trend. In 2008 net profit of co decrease due tohigh cost of goods sold. Co does not utilize its assets properly in 2008. In 2007 trend of thisratio is good. But in last 3 years it also has increasing trend.

2. DuPont returns on Operating Assets

Year Calculation in (Rupees,000)Dupont Return onoperating Assets

2008

200720062005

2004

DuPont return on Operating Assets decrease in 2008 as compare to 2007. Co utilizes itsoperating assets in 2007 as compare to 2008. Co invests in more long term investments. Itis necessary for the co to change its policy.

Page 25


2008 12464347/53678098 23.22%2007 6419625/51744331 124.792006 7955665/34304376 23.19

2005 5279560/18016505 29.302004 3882756/11714619 33.14


26/54


SWOT ANALYSISStrengths

1. Availability of Raw Material.

2. Imported Machinery and plants in most of companies, which provide betterquality to over all process.

3. During fiscal year 2007-08, country exports stood at 7.712 million tones ($435million) and Pakistan has already established its position as an exporter ofcement and clinker in the region, Sources said the industry projectionssuggested that the cement industry exports would reach to $735 million by theend of 2008-09 and it would touch $1.043 billion by the end of 2009-10.

4. Availability of foreign investment and loans has also played an important role in

softening the demand for bank credit. The moderation in fixed investment

demand in cement, construction and textile is more of a reflection of the fact that

these industries had already expanded their capacities in recent years and

floatation of debt instruments (e.g., chemical, cement, real estate and ship yard)

in the domestic market cement, real estate and ship yard) in the domestic

market

5. The compressive strength is a very important factor of cement. The Portland

cement achieves its maximum strength in 28 days. The Pakistan standard PSS

232-1883 (R) & British Standard BS 12: 1978 provides for 28 days strength of

5000Psi and 5950Psi respectively for mortar cubes.

6. Cement industries in Pakistan are currently operating at their maximum capacity

due to the boom in commercial and industrial construction within Pakistan.

7. Effect of GDP

Following effects of GDP will govern the growth of cement industry in

Pakistan

1. Higher GDP growth has positive impact on cement demand

2. Cement demand growth rate was double the GDP growth rate in lastthree years

3. GDP growth is expected to continue to have same positive impact ondemand growth

8. Housing demand to grow:

Following indications have showed a considerable demand of cement inPakistan:

Housing projects consume roughly 40% of cement demand

Currently 0.3mn houses are built annually against demand of 0.5mn

Low interest rates, post 9/11 remittances inflow, and real estate boom havehelped housing sector growth

Easy mortgage availability and announcement of low cost housing schemes willdetermine housing sector growth in the long-run.

Page 26


27/54


9. Governments development spending shall continue to rise due to:

Government development expenditures count for one third of totalcement consumption

Increase in development expenditures has helped cement demand togrow at very high rates

Increase in PSDP- as announced in Medium Term DevelopmentFramework 2005-10 will help cement demand to grow in the country

Infrastructure development in a region triggers private developmentprojects having even positive impact on cement demand

10.Pakistan cement industry is one the largest exporter in Asia, major markets are

of Afghanistan and Iraq will be after peace. Its increased GDP by exports,

providing cements in Large Dams Project and earthquake rehabilitations

projects.

11.Laboratory testing facilities meeting all American and European standards and

Vertical cement grinding mills.

12. Cement industry called major Performance Blue Chip in current economic

survey 2007-08 because during the first three quarters of the fiscal year 2007-

08, the combined paid-up capital of ten big companies was Rs. 91 billion, which

constituted 13.17 percent of the total listed capital at KSE in which Fauji

Fertilizer, DG Khan Cement, Lucky Cement played major role.

Page 27


28/54


13. Today, we find a relatively better scenario as compare to past. Most of the

cement plants, that used to operate on furnace oil, have now been converted

into coal system, which has substantially reduced cost of production.

14. The most modern selection of production equipment possible in every major

department of the plant.

15. Cement export to India through railway

Most of the cement export to India is through railway. In order to facilitatecement export to India, the railways has doubled its cement capacity andincrease its frequency of trains to India from Pakistan. This step hasbeen taken by Pakistan Railways in order to increase cement export toIndia. Which is regarded as a highly profitable market?

16. Use of Coal

Coal is found in all the four provinces of Pakistan. The country has huge

coal resources, about 185 billion tones, out of which 3.3 billion tones are

in proven/measured category and about 11 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 was Rs8, 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 sulphur

washing plant from European country than Pakistan cement industry is

able to utilize local coal to meet its energy requirement

17. 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. Which will increase the cement

production?

18. Good Domestic and Foreign Market

The export may reach to $ 500 million increase during 2008. Data for the

first quarter of FY08 shows 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.

19. Good Government Policies

Page 28


29/54


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

20. 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.

Weaknesses1. The stage of industrial development, in most of the segments, is still at a very low

level of technology and the existing industrial base is very narrow and consists ofvery basic industries such as cement, sugar, textile, cigarette, edible oil, fertilizer,soda ash, caustic soda, PVC etc.

2. Since cement is a specialized product, requiring sophisticated infrastructure andproduction location. So, most of the cement industries in Pakistan are locatednear/within mountainous regions that are rich in clay, iron and mineral capacity.Structure of Cement industry in Pakistan is as such that there is not muchsubstitutability to buyers. Which shows that the Cross elasticity of demand isnegligible.

3. The customer has no choice at all to switch between two brands of cement due tocartel of all of the cement manufacturers in Pakistan.

4. The freight charges are a massive 20% of the retail prices. The plants located veryclose to each other and tapping the same market will have to expand their marketswhich will increase their freight expenses. Dandot, Pioneer, Maple Leaf andGaribwal are all located within a radius of 100 kilometers and are selling bulk of theirproduction in the same areas and will thus face serious competition from each other.

5. Consumers face a tough decision with regards to prefer which brand over whichbecause of the similar pricing of cement industry. The formation of cartel by thecement manufacturers have exploited local consumers a lot and this has led to theconcentrated degree of oligopoly, where the firms are acting as a single unit toperform their monopoly. Their combined market power is simply a diluted version ofthe dominance that a single firm with a monopoly market share can exert.

6. 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 35 km. 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

Page 29


30/54


charged by trucks and also by foreign shipping companies for the haulage of

cement from Pakistan to India. This increase in freight charges effect our

exports due to which our exports is declining

7. Logistic Problem

Some 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 is not 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.

8. 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 companieshave 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 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.

9. Idle capacity of various players:

The biggest problem of cement industry is the idle capacity of various

players. As many cement players are not operating at there full capacity.

Threats1. Unanticipated increase in interest rates or less than expected demand growth might

create severe crises for the sector couple of years forward

2. Lack of demand or depressed demand in future will prove to be lethal for the sector

that has just started to recover from the miseries of 90s. Lack of demand forced

Page 30


31/54


cement units to operate at very low capacity utilization in nineties. There was a

fierce competition among cement manufacturers.

3. A price war was witnessed which ended up with no conqueror. Similar

apprehensions exist for the future when there will be plenty of excess capacity. Any

hurdle in the growth of cement demand may force the sector into the price war. Yet,

we expect cement manufacturers to act prudent and learn lesson from the history.

Any mistake, similar to the one made in the last decade, will again coerce the sector

into the era where all are losers with no winner.

4. Main component of the cost is fuel. Pakistan's cement industry has converted theirplants to coal considering it to be the cheapest fuel, but its price in internationalmarkets has gone up by more than 300 per cent in the last one year, which directlyrelate increasing the cost of production.

5. The demand of cement falls heavily during rainy weather in the country, whichdirectly affects the running cost of a unit. It is only the rising levels of cementexports, which are sustaining the industry.

6. Instead of appreciating the marketing skills of cement entrepreneurs to explore newmarkets for cement, the industry is being pressurized constantly without realizingthat any reduction in cement exports from Pakistan will not only deprive the countryof foreign exchange ($2 billion this year), but will also result in losses to the industry.

7. The burden of increased input costs has to be borne by the consumers. It is only thegovernment, which can provide relief to the consumers by cutting down orabolishing the central excise duty.

8. Problems of oversupply situation:

Following problems might arise with the oversupply situation in cement industry:

Lower capacity utilization will reduce benefits of economies of scale.

High leverage will also adversely affect profitability of new plants.

New plants will gain market share at the cost of older players, which arenot undergoing expansion. Large idle capacity is will create panic inplayers and this may result in price wars in the coming years.

9. IMF Package in Future can cause to decrease GDP and economical development inPakistan. Which will also be cause to stop development of infrastructure? So it willhave huge effect on cement industry also.

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

Presently, India faces an acute cement shortage in its Southern states of

Tamilnado and Madras and in north Punjab. However, reports indicated thatthe Indian industry is also working on a fast track to expand their

capacity in these regions to off-set the shortfall Major capacities

of 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.

11. High energy prices

Page 31


32/54


Recently 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 sulphur. 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. High finance and

depreciation cost as Pakistan cement industry is expanding its capacity toget the proper advantage of strong demand of cement in different countries.

The total industry installed capacity is expected to reach 49.1 million tons per

annum by FY10 and because of higher expansion finance and depreciation

cost is also going to rise by the FY10.

12. Decrease profitability due to competition in cement industry

The sharp decline in cement prices has been witnessed due to domestic

competition among producers has dampened the profitability of the industry.

This increase in competition among the players has further decreased the

prices of cement in the local market. The cement manufacturers decreasethe prices of there products in order to get high market as compared to its

competitor.

13. High level of taxation

Presently, the cement industry of Pakistan is heavily burdened due to levy of

Federal Excise Duty @ Rs. 750 per ton and General Sales Tax @ 15% on

duty paid value. In addition to Federal Excise Duty and General Sales Tax,

cement industry is also paying the provincial levies (Royalty and Excise

Duty) on acquiring of raw material for production of cement i.e. lime stone

and shall clay.

Opportunities

1. The local cement industry faces high upfront fuel costs. In order to facilitate their

conversion to coal, which is widely available in the country, the government has

given incentives for imported plant and equipment for coal firing units.

2. The demand of Pakistani cement is expected to continue to grow at the rate of 20

per cent for about four years to come. It may then follow traditional growth rate of

seven per cent per year. Announcement of major dams will dramatically increase

this demand.

3. Deregulation after accession of Pakistan to WTO is expected to open the window of

competition from cheaper markets. There may be no tariff after this deregulation on

import of cement allowing its entry into Pakistan from cheaper market at lower rate.

Cement from cheaper markets may also block Pakistans export of cement to its

neighboring countries. Global market has vigorously taken up the advantage of

economy of scales and multinational giants now control more than 40 per cent of

Page 32


33/54


world production (China not included). The recent acquisition of Chakwal Cement by

an Egyptian giant, Orascom may be a beginning of such an entry in Pakistan by

multinationals. New avenues for export of cement are opening up for the indigenous

industry as Sri Lanka has recently shown interest to import 30,000 tons cement from

Pakistan every month. If the industry is able for avail the opportunity offered, it may

secure a significant share of Sri Lanka market by supplying 360,000 tons of cementannually.

4. 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 in PSDP- 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 cementdemand.

5. Construction of large dams

Page 33


34/54


Construction 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 otherdams 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.

6. Improved access to regional market

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. 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 exportopportunities 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 fromPakistan to Wagah border. Due to boom in the construction industry, India

needs cement in bulk to meet its growing needs.

7. Demand of Pakistani cement by Russia

Page 34


35/54


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.

8. Earthquake in China

In 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.

9. High prices of cement in the international market

Cement 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.

10. Increase in demand of cement due to the up coming sports event

South 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.

Recommendations

We would like to conclude this report by ranking overall sector as Neutral. We remainneutral on the sector because on hand expansion is the need of hour. Due to expectedgrowth in demand, current capacity appears inadequate. On the other hand, expansionplans set up by the various players of cement sector to grab demand expansion mightcause sector to overflow. Along with risk of being oversupplied, unanticipated increase ininterest rates or less than expected demand growth might create severe crises for thesector couple of years forward. Weighing risks and rewards, we remain NEUTRAL on thesector.To break-up cement manufacturers cartel the Competition Commission of Pakistan raidedoffices of Association of Cement Manufacturers of Pakistan and confiscated official record.The association condemned this action and said it is against business norms. Theyaccused Commission for blaming cement manufacturers for making a cartel for the last 10

years but could not able to prove it. The capital structure of cement companies maychange, as most of the expansions during last two to three years have been debt financedand companies are expected to retire these debts rapidly during next three to five years.Moreover, the slow down in economy may occur due to political uncertainty, which mightresult in reducing cement demand in future.However, in case of construction of hydro-powered dams, there will be a sudden jump inthe local sales of those companies located near these dams.

Page 35


36/54


Consolidation is needed for industry stability because of following observations.1. Cartels are unstable by their nature.2. Industry needs one or two dominant players for long-term sustainability inprices and profits3. Top four players command 35% of market share in the industry that will beincreased to 46% in FY08.

4. World norm is that top four players have more than 60% market share5. Consolidation process will be needed to increase market share of larger playersrather than going for capacity expansions6. We may see acquisitions in the industry as the industry goes throughovercapacity cycle.

International TrendAlthough international energy prices have declined recently, any beneficial impact onmargins has largely been negated by substantial depreciation of Pak Rupee. PACRA,therefore, believes that the performance of cement companies could weaken furtherimpacting their financial profile. Pakistan's cement industry is poised to face a tough

challenge as the regional markets, mainly China and India, are likely to emerge ascompetitors in the export market, following a slowdown in their domestic economiesand enhanced production capacity.

FUTURE OUTLOOKIn the budget FY09 the central excise duty on cement was increased to Rs 900 per ton fromcurrent Rs 750 per ton. On each bag the CED increased by Rs 7.50 per bag (from Rs 37.5per bag to Rs 45 per bag). This increase was not expected to impact the profits of thecement sector because this increment in CED was expected to be passed on to theconsumers. However, the rise in the GST by 1% was anticipated to cause an increase inthe local cement prices and dampen the demand for cement.

Local cement dispatches are expected to remain depressed due to slow down in economyled construction activity in the country and also due to inflation. The government hadallocated Rs 550 billion for PSDP in the budget FY09, however owing to budgetary deficit;the government later cut the PSDP expenditure.Cement consumption is correlated to the GDP growth and as the economic condition nowstands, we can predict a slowdown in the GDP growth of the country. Thus the per capitacement consumption will also fall during FY09. Exports have so far shown a strong growthand supported the total cement dispatches. Cement manufacturers have been focusing onthe international markets to achieve growth in sales

Pakistan has been exporting to Afghanistan. Regional shortage of cement had presented afavorable opportunity for our cement manufacturers. Cement demand in Afghanistan is

expected to be 1.5m-2.0m tons per annum for the next few years. Cement manufacturershave growing opportunities in Middle East and African countries. New export markets likeRussia and European countries have been identified.

Growth in export sales may boost the margins of the industry and reduce the negativeimpact of rising costs on its profitability. However, the effects of global recession havestarted to impact international demand for cement. Indian market, which was a window ofopportunity for Pakistani cement manufacturers, has been closed as India banned import ofcement from Pakistan due to escalating tensions between the two countries.

Page 36


37/54


Expenses are expected to increase for cement manufacturers. This will negatively impactthe gross margins of the cement sector. During the past, our cement manufacturers shiftedproduction from oil to coal or gas. Pakistan has huge reserves of coal but manufacturersneed to import coal because the local coal has high sulphur content.

The coal prices in the international market have fallen during the 3rd quarter of FY09 andwill result in lower cost of production in the future. However, the full positive effect of lowercoal prices may not be achieved because of the depreciation of Pakistani rupee which willneutralize the impact of decreasing international coal prices. Also the government hasraised the power tariff by nearly 50% with variable rates for peak and off peak hours.

The gas prices have also risen. This will increase the cement manufacturers' cost ofproduction and impact their profitability in FY09. The recent cut of 100 basis points in thediscount rate by the SBP is expected to lead to further expansionary monetary policy.Interest rates may go down and result in lower financial costs of debt for the company.

DGKC seems to be all set to tap new markets for cement exports. The company's largest

Vertical Cement Grinding Mill at D.G. Khan Site has started operations. After the start ofgrinding mill additional quantities of cement will be available. Increased production will helpDGKC to aggressively export to new markets and generate higher sales. Also, it will helpDGKC in energy saving and reducing maintenance cost.

DGKC is trying to cut down on costs that have significantly and adversely impacted itsprofits in FY08. To reduce electricity cost, DGKC has started a project of power generationfrom waste heat at DGK site. The project is expected to generate substantially cheapelectricity of about 10.4MW without using any fuel. This would help to cut down the cost ofproduction.

DGKC has also decided to use municipal solid waste as fuel for heating purposes. Thus,

negotiations with equipment suppliers are underway and expected to be finalized soon.Also, DGKC is in contact with different city governments to enter into agreements foracquiring solid waste.

This project will be beneficial, as it would bring down the company's costs of production,help resolve the environmental issues related with disposal of solid waste and mostimportant, it would save huge foreign exchange spent on importing fossil fuels.

Page 37


38/54


Annexure

Summarized Income Statement

Summarized IncomeStatement

2008Rs.In000

2007Rs.In000

2006Rs.in000

2005Rs.In000

2004Rs.In 000

Sales NetLocal SalesExport SalesLess.Excise DutySpecial Excised DutySales taxCommission to stockiestSales Net

-.Cost of SalesRaw and Packing materialusedSalaries and WagesElectricity and GasFurnace oilStores and Spares usedRepair and maintenanceInsuranceDeprecation on propertyplant and EquipmentDeprecation on assetssubjects to finance lease

RoyaltyExcise DutyVehicle RunningPostage Telephone ,TelegramPrinting and StationeryLegal and ProfessionalChargesEstate DevelopmentRent, Rates and taxesFreight ChargesOther Expenses

Opening W.I.PTransfer from Trail run

Closing W.I.PCost of Goods ManufacturedOpening stock of finishedgoodsTransfer from Trail runClosing Stock of finishedgoods

-)Own consumption

147324452741111

272904699556

192985825074912464347

1368488480352

1644759459748676420498530

439041354192

3331

83731

2596215541538934801499963969825753207910534013142686

-(118292)10558407

107804

(118863)(11059)19302105280461936301

8887306511826

1679829

1159214140464

6419625

580717293929605335

190256738315922913

21840469367

13108

45349

15373715917849454996227411333969449438722916198950462(142686)4456994

5058

39300(69728)(25370)4398443876402031985

10348119607817

1509449

1349755141067

7955665

46408023085447062521146673881131823320542341940

13203

43678

168846980177414928844678387956807651415583750205

-(161989)404405319468

-(5058)144106564139928223962843

6730756641351

1141756

87792472867

5279560

3742871859143229791493514357762999723642330100

11311

31652

1045057241831158154839303091413948963177348210983-

(50205)333812638616

-(19468)191482650533307691948791

5392393305191

990124

76649758207

3882756

3305351619192179111123716338970963742235317155

6923

30284

59095881137412765073179615045736742261411388603

-(210983)249173344145

-(38616)5529

-24972621385494

Page 38


39/54


CapitalizedCost of Goods SoldGross Profit-) Administrative ExpensesSalaries WagesElectricity

Repair and MaintainanceInsuranceDeprecation on propertyplant and EquipmentDeprecation on assetssubjects to finance leaseVehicle RunningPostage Telephone ,TelegramPrinting and StationeryLegal and ProfessionalChargesTraveling and conveyanceRent, Rates and taxesEntertainment

School expensesFees and subscriptionOther ExpensesAuditors RemunerationTotal Administrative

ExpensesSelling and DistributionExpenseSalaries WagesElectricityRepair and MaintenanceInsuranceDeprecation on property

plant and EquipmentDeprecation on leasedpropertyVehicle RunningPostage Telephone ,TelegramPrinting and StationeryRent, Rates and taxesTraveling and conveyanceEntertainmentAdvertisement and SalesPromotionFreight Charges-localFreight and Handling

Charges-ExportOther ExpensesTotal Selling and DistributionExpensesOther Operating ExpensesWorkers profit participationfundBook Value of Asset writtenoffDonation

5715029851620168511956

126

354534412210352267831761136900419823424

-110745

354318752994971342

-194012351553

343837202963395

14135492219

2595562970

-

97345000

-580953

-

-

595687

489582678132412779027

1571

5353273818973369610426992780849129662937

-104169

297276708842351132

-160313611094

231214061892643

5019637

217965122

93145

-1105035112414-

-

139721

409502684121031477261

1213

406660934983639410377256132776975345817304

-121953

23997443225172324

-1225855891

127215612941569

23-

150134352

182006

-9844

---

-

191850

310562566124330999742

4945

2678310319131365241087279561771855192673576480

174743451211397895

-814855913

98110453981919

31239-

241960905

83058

-4530

---

6198

93786

2734231251461199212425

1382

17523841125624712448439766594493736070468645

1461638340306900

88765944643

49514323582213

13572-

180538560

60829

----

206-

61735

Page 39


40/54


Worker welfare fundExchange lossLoss on Disposal of PropertyPlant and EquipmentLoss on Sale and Lease backtransactions

Total Other OperatingExpensesOther Operating IncomeIncome from Financial AssetsIncome on Bank DepositsInterest on Loan toEmployeesGain on derecognizing ofinvestmentDividend Income From-Related Parties-Others

Total Income from financialAssets

Income from non financialassetsRental IncomeProfit on sales of propertyplant and assetsScrap SalesMark up on loansProvisions and unclaimedbalances returned backExchange gainOthersTotal other operating incomeProfit from operations

Finance CostLong term finances- Long term loans- Preferred dividend- Non participatory

redeemable capital- Finance under markup- Provident fund-Short term borrowings-Finance leaseworkers profit participationfundLoss on derivative financial

instrumentsLoss on Foreign currencyforwardGuarantee commissionBank chargesTotal finance CostExcess of Acquire Interest inthe net assets of acquireShare of loss of Associatedcompany

727128

-

820303143821301

15924488

1039469731858

--

8466061513505

1040737--

--

499413584522

205308

-

416515569(1766298)86194

(8674)

(175273)

108214(309167)

(5)-

1659182

-

465656118467615

16344490

41701208303

--

4794202202393

32318328281-

--

103324656498-

-

18134496468173

-

(14163)

1720471

33000312435

-(247435)

363181-

265763120266427

28473567

760945622116

6986-

2941143908802

30502735351-

--

7377212543101

-

17229

16794994450696

(9573)

3448533

405001027000

(32422)(5000)

582276543173

15228426696341

20023207

29112002729

-5007076922425312

1862673294265535351

42655-

-1243983

-

7804

14056860304041

-

2121271

40000464000

193(65000)

535290

-

3446085730121015

1980-

38271351289

--

1284621345016

141701200493535112341

37

-986090

-

--

8714235224601

-

-

1120415

28700297000

10222(10000)

Page 40


41/54


42/54


Summarized Balance SheetSummarized Balance Sheet 2008 2007 2006 2005 2004

Equity and LiabilitiesCapital and Reserves

Authorized Capital-950000000@ ordinary share10-50000000@ preferenceshare10

Issued subscribed and paid upcapitalShare deposit moneyReservesUn-appropriated profitTotal capital and ReserveNon Current LiabilitiesLong term financeLiabilities against subject tofinance leaseLong term depositsRetirement and other benefitsDeferred TaxationTotal Non-Current liabilitiesCurrent LiabilitiesTrade and other payablesAccrued markupShort term borrowingCurrent portion of non-currentliabilitiesDerivative foreign currencyforward options

Provision for taxationTotal Current liabilitiesTotal LiabilitiesAssetsNon-Current AssetsProperty plant and equipmentAssets subject to finance leaseCapital work in progressInvestmentsLong term loans, advances anddepositsTotal Non-Current AssetsCurrent Assets

Stores spares and loose toolsStock in tradeTrade debtsInvestmentsAdvances, deposits,prepayments and otherReceivablesCash and bank balanceTotal Current AssetsTotal

9500000500000100000002535412

-276347223239930528440

8871051393

7389054018125100010250352

145007439161081943302828202

-

35090

1289930653678098

24224273683924883076592332524176

33835927

2323883

130032546344615082605427832

2440801984217153678098

9500000500000100000002535412

-29630084175768933923185

86864471141

7946739862162400010430917

102727434261239429722042281

-

35090

739022951744331

2211755113337619070638174474196913

32529377

1496291

29514014424516933790229315

1161731921495451744331

250000050000030000001843937

835115085354233055819268200

737246828886

338142657215590009020740

140686934075726136951619025

-

35090

601543634304376

7521723295058117596774482213335810

24394481

836049

226286741658543763152465

77167990989534304376

250000050000030000001843937

-71965682774939317998

4899225131985

28674457655370005642649

1154426960620

-599674

306048

35090

305585818016505

663723731726239831752610634271428

13819736

1035081

100994762382769134121486

93836419676918016505

2500000500003000001676306

-

43890882516616317055

273057383487

30365381501380003020575

4939681360677

-487254

-

35090237698911714619

61280831665831126108138768125021

8833476

938847

298538526221386816120329

83991288114311714619

Page 42


43/54


Horizontal Analysis of Income Statements

2008 2007 2006 2005 2004Net sales 321.01 % 165.34 % 204.89 % 135.97 100 %Cost of sale (421.58) (175.7) (159.89) (133.38) 100Gross profit 139.75 146.66 286.02 140.66 100administrativeexpense

(61.33) (151.75) (177.66) (111.41) 100

selling &dist.expenses

(145.98) (168.88) (89.09) (157.95) 100

other operatingexpense

(964.90) (226.32) (310.76) (151.29) -100

other Operatingincome

659.03 373.20 228.95 550.89 100

profit from operation 112.53 163.74 290.61 180.32 100finance cost (786.41) (208.26) (200.66) (1345.25) 100share of loss ofassociated company

- - - - 100

income before taxes 15.64 153.56 307.79 189.33 100Provision for taxation (61.66) (30.06) (316.05) (134.75) 100Net profit 3.23 204.21 304.40 211.72 100

Horizontal analysis of income statement shows that net sales of the Co has increasingtrend. But on the other hand Cost of goods sold jump quickly. This is not a good trend. Costof goods sold of the Co increases due to expensive raw materials. Gross profit of the codecreases from last years due to high cost of goods sold. Administrative and selling

expense of the Co has decreasing trend. Other operating expenses of the Company areincreasing quickly. Company is also increasing trend in other operating income. Profit fromoperations also decreases. Co also has high finance cost from last years. Income beforetaxes has decreasing trend due to high cost of goods sold and finance cost. Net profit of theCompany is Very small as compare to last years.

Vertical Analysis of IncomeStatements

2008 2007 2006 2005 2004Net sales 100% 100% 100% 100% 100 %

Cost of sale (84.46%) (68.35%) (50.18%) (63.09%) (64.32%)Gross profit 15.35 31.64 49.81 36.91 35.68

administrative expense (0.88) (1.62) (1.53) (1.45) (1.77)selling &dist. expenses (4.52) (1.01) (0.43) (1.15) (0.99)

other operating expense (4.78) (2.17) (2.41) (1.78) (1.59)

Page 43


44/54


other Operatingincome

6.79 7.47

Documents

17708299 Financial Analysis of DG Khan Cement Factory Ratio Analysis