Term Paper on

Capital Structure Analysis of Cement Industry in Bangladesh

Submitted To Prof. Mahmood Osman Imam, MBA, Ph.D., FCMA Course: F 602, Corporate Finance

Submitted By Name Gerald Oliver Guda Howladar Asaduzzaman Mehedi Gafuri Mahmud-Ur-Rashid Mushfiqur Rahman Khan ID No. 14012 15015 15025 15064 16021

Evening MBA Department of Finance Faculty of Business Studies University of Dhaka

Date of Submission: August 1, 2010

Table of Contents
Introduction Cement Industry in Capital Market Brief Overview of the Selected Companies Findings from Annual Report Analysis Comparison of Balance Sheet & Income Statement Items Share Holding Patterns Cross Table Analysis of Ratios Checklist of Capital Structure Appendix 3 4 6 10 12 13 14 16

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Introduction
Industry Overview of Cement Industry of Bangladesh The development of cement industry in Bangladesh dates back to the early-fifties but its growth in real sense started only about decade or so. Bangladesh has been experiencing an upsurge in the use of cement in recent years. Increase in demand for cement has soared mainly due to the property sector boom and infrastructure development concentrated in the Dhaka Metropolitan area and other major urban areas of the country. The infrastructural development at grass root level has led to an increased demand for cement at an average rate of 8% per annum during the past decade. Existing Industry Structure In terms of cement production, Bangladesh ranks about 40th in the world. Cement manufacturing is a highly fragmented business in Bangladesh. During the 1990s, many small cement companies entered the market as soon as the government started encouraging local production with favorable tariff differential. Currently 123 companies are listed as cement manufacturers in the country. Of them 63 have actual production capacity while about 30 do not have any production at all. The current installed capacity is 22.0 MMT. However, because of supply constraints for power and clinkers, the actual capacity is about 17.0 MMT. Bangladesh is one of the few sizable producers of cement that does not have its own supply of limestone and cannot produce clinkers domestically. There is a strong taxsupport for local cement manufacturers in Bangladesh. They receive a significant import tax advantage over finished cement (about 15% for raw-materials versus 100% for finished cement). This tariff differential helps most to operate profitably. A change in the tariff structure is not anticipated in the near future. Market for Cement Industry Construction takes up an important role in the economy (about 10% of the GDP). Annual demand for cement in the country is about 10.0 MMT. Understandably the market has a capacity overhang. There is a small market for export of cement, mainly to the small northeastern states of India. However, the size of the export is quite small (about 200 KMT a year). There are four categories of cement consumers in the country. The largest with about 60% of the consumption are the individual homebuilders. This is also the most price sensitive segment. Real estate developers, especially in the countrys urban area constitute about 8% of the market. Construction contractors constitute another 3% of the market. Lastly, various government projects take up about 30% of the total cement construction. Lower Demand in 2007-08 Demand for cement was particularly weak in 2007-08 for several reasons. First, the anti-corruption drive of the military-backed caretaker government subdued expenditure of undeclared funds. Most of these funds usually go to the construction sector. Second, a rapid climb of raw materials and shipping costs in the global market escalated the price in the local market for cement and other construction materials, further squeezing consumers out of the market. Third, government spending in construction under the annual development programs (ADP), which constitutes a large part of the cement market, was particularly slow in these years. Consequently, many of the smaller and some major cement manufacturers operated at less that 50% capacity and incurred large losses during these years.

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Future Prospect The industry realized about 20% sales growth in 2009, mostly because of the latent demand from last years. On a secular basis, ongoing demand growth is expected to be about 8%, The outlook for the cement industry seems positive for a number of reasons. First, the government seems to be on a war footing to increase both the amount and the efficiency of spending in social and physical infrastructure under the Annual Development Programs (ADP). Second, the private sector is also energized because of certain tax advantages for undeclared funds if they are invested in real estate. Third, a number of large infrastructure construction projects (such as the Padma Bridge) are on the horizon. Both the government and the private sector are soliciting funds for such projects. If implemented, these projects would significantly improve demand for construction materials. Market Share The largest 10 cement manufacturers hold about 70% of the market share. While Heidelberg, Holcim and Lafarge are the leaders among multinational cement manufacturers; Shah, Akij and MI are the leading domestic manufacturers. Shah cement is the market leader with close to 12% of the market share, closely followed by Heidelberg with about 10% of the market share.

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Cement Industry in Capital Market

Cement industry consist of 2.41% of market capitalization and 2.34% of turnover of DSE on June 2010. Sectoral P/E is 24.60. At present there are 7 companies under Cement industry listed in Dhaka Stock Exchange. These are as follows: Aramit Cement Limited Confidence Cement Limited Heidelberg Cement Bangladesh Limited Lafarge Surma Cement Limited Meghna Cement Limited Niloy Cement Limited Padma Cement Limited

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Brief Overview of the Selected Companies

This paper requires us to analyze Capital Structure and Dividend policy of Public listed companies that are belonging to Cement Industry of Bangladesh. We have selected 3 companies; Heidelberg Cement Bangladesh Limited Confidence Cement Limited Meghna Cement Limited Lafarge Surma Cemnet Limited Aramit Cement Limited

Heidelberg Cement Bangladesh (HCB) is a concern of Heidelberg Cement group of Germany. In more than 50 countries across the world, the name of Heidelberg Cement stands for competency and quality in construction. It started its business in 1873 in Germany. In 2000 they acquired 51% shares of Chittagong Cement Factory and entered management in 2001. Current production capacity is 1,620,000 M.T. per annum. It has two operational wing; Manufacturing of grey cement and Import & Trading of white cement.

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Aramit Cement Limited was incorporated on 19th August 1995 as a public company limited by shares and was established with technical collaboration of a Chinese company for producing ordinary Portland Cement Form the very beginning of its commercial production that started on 10th November 1999, the company has been maintaining the quality of the product for which it has won the confidence of the customers and also attained the high status international ISO 9002. Companys product carrying brand name Camel has already become highly popular among the consumers. Existing capacity of the plant is 700 metric tons per day. This is going to be enhanced by 1000 metric tons per day production capacity through setting up of another expansion unit. Since starting of commercial production, prime raw material clinker is being imported from Indonesia, Thailand, Malaysia and India. Moreover the company is exporting cement to India, which is increasing day by day.

Confidence Cement Limited (CCL) is the first private sector cement manufacturing company in Bangladesh established in early 90's with having 4,80,000 M/T annual production capacity at Chittagong, 16 K.M away from Chittagong port, besides Dhaka Chittagong highway. CCL is the first ISO-9002 certified cement manufacturing in Bangladesh. It has a unique management system in quality Assurance, Marketing, Sales, and Procurements. It manufactures ordinary Portland cement. The company aims to be the number one cement manufacturing company in Bangladesh, through continuous development and by producing high & consistent quality cement to meet all customers requirement at all time. To achieve these objectives CCL uses modern machineries, calibrated testing equipment's, computerized packing & raw materials mixing devices in its production process.

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Lafarge Surma Cement Ltd. is a majority owned subsidiary of Lafarge Group of France. The Lafarge Group is a global market leader in construction materials. With Euro 5.4 Billion in revenue, it is one of the largest manufacturers of cement by shipped volume. Lafarge is the largest producer of cement and among the top three producers of aggregates, concrete and gypsum in the world. Lafarge operates in 79 countries and employs 84,000 people. Lafarge is traded on the Paris Stock Exchange and has a market cap of Euro 13.7 Billion. Through a wholly owned subsidiary, Surma Holding, Lafarge owns majority (59%) shares of LSCL. The other institutional shareholders are IFC, ADB, Sinha Fashions and Islam Cement. LSCL was incorporated in Bangladesh in 1997. The production facilities are located in Chattak in the Sunamganj district in Northeast Bangladesh bordering the Indian state of Meghalaya. The production facilities consist of a dry process cement plant with a 1.5 million metric ton (MMT) capacity and a clinker production line of about 1.2MMT capacity. LSCL also operates two subsidiaries in the Indian state of Meghalaya. Among these two, partially owned (75%) Lum Mawshun (LMMPL) holds the mining rights with two local partners, and wholly-owned Lafarge Umiam Mining (LUMPL) carries out the mining operations.

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The Meghna Cement Mills Limited (MCML) was the first undertaking Bashundhara Group in the manufacturing sector. This enterprise produces world-class cement and, as a testimony to this, stands the fact that the concern has been awarded the ISO-9001 certification for sustained quality control effort. The Company markets its cement under the registered trademark of King brand.

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Findings from Annual Report Analysis

Findings from the Financial Statement analysis of the above mentioned five Cement Companies. Heidelberg Cement Bangladesh Limited (Tk. In million)
Year Total Assets Debt Equity Debt Ratio D/E Ratio EBIT Interest Exp Interest Coverage Ratio

2009 2008 2007 2006 2005

6,029 5,870 5,152 4,138 4,346

150 963 851 822 921

3,972 3,308 2,856 2,321 2,321

2.49% 16.41% 16.52% 19.86% 21.19%

3.78% 29.11% 29.80% 35.42% 39.68%

1,404 894 903 697 284

27 86 96 79 71

52.00 10.40 9.41 8.82 4.00

Hidelbergs assets has grown steadily, In 2009 the debt has become lower, it has paid huge interest expense in 2008 & 2007. Due to lower debt both the debt ratio and debt/equity ratio has dropped significantly. Interest coverage ratio is also increasing. Aramit Cement Limited (Tk. In million)
Year Total Assets Debt Equity Debt Ratio D/E Ratio EBIT Interest Exp Interest Coverage Ratio

2009 2008 2007 2006 2005

717 653 515 462 427

218 357 265 152 131

66 22 20 12 5

30.40% 54.67% 51.46% 32.90% 30.68%

330.30% 1622.73% 1325.00% 1266.67% 2620.00%

103 12 (2) (1) (11)

56 18 25 19 14

1.84 0.67 -0.08 -0.05 -0.79

Aramit has a very high debt to equity ratio because of its lower equity, as it carried losses in its retained earnings so its lowered the equity. Interest coverage ratio is also very low Lafarge Surma Cement Limited (Tk. In million)
Year Total Assets Debt Equity Debt Ratio D/E Ratio EBIT Interest Exp Interest Coverage Ratio

2009 2008 2007 2006 2005

17,291 17,829 17,729 17,116 14,787

8,222 9,504 10,995 11,121 9,051

4,430 3,427 3,253 4,808 4,871

47.55% 53.31% 62.02% 64.97% 61.21%

185.60% 277.33% 338.00% 231.30% 185.81%

2,332 1,707 (239) (521) (481)

870 1224 1138 163 2

2.68 1.39 -0.21 -3.20 -240.50

Laferge surma has the highest assets base Debt ratio and D/E ratio is decreasing steadily, which shows that it is increased depending on equity rather than debt.

Confidence Cement Limited

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(Tk. In million)
Year Total Assets Debt Equity Debt Ratio D/E Ratio EBIT Interest Exp Interest Coverage Ratio

2009 2008 2007 2006 2005

2,324 1,124 1,099 1,004 1,052

296 418 259 248 365

1,870 628 685 661 629

12.74% 37.19% 23.57% 24.70% 34.70%

15.83% 66.56% 37.81% 37.52% 58.03%

184 (13) 95 76 38

8 26 19 17 21

23.00 -0.50 5.00 4.47 1.81

Confidence has maintained low debt in the last 5 years. Its interest coverage ratio is also increasing. Meghna Cement Limited (Tk. In million)
Year Total Assets Debt Equity Debt Ratio D/E Ratio EBIT Interest Exp Interest Coverage Ratio

2009 2008 2007 2006 2005

3,315 2,915 2,871 3,258 2,564

743 936 619 241 193

673 574 619 475 398

22.41% 32.11% 21.56% 7.40% 7.53%

110.40% 163.07% 100.00% 50.74% 48.49%

276 133 278 236 201

87 101 99 120 118

3.17 1.32 2.81 1.97 1.70

Meghna cement has a low interest coverage ratio, its debt ratio is relatively lower than D/E ratio because it has huge assets base but a lower equity level.

Comparison of Balance Sheet & Income Statement Items

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Sales 2009 Hidelberg Aramit Confidence Lafarge Surma Meghna 7,207.00 843.00 1,214.00 7,543.00 4,705.00 2008 6,369.00 762.00 1,229.00 6,211.00 3,267.00 2007 5,621.00 597.00 1,102.00 2,399.00 2,824.00 2006 5,004.00 561.00 950.00 153.00 3,367.00 (Tk. In million) 2005 3,654.00 457.00 685.00 2,954.00

Hidelberg has a constant growth rate in terms of sales, but Lafarge has crossed it in terms of sales volume in 2009. Aramit has the least sales among five. Total Assets 2009 Hidelberg Aramit Confidence Lafarge Surma Meghna 6,029.00 717.00 2,324.00 17,291.00 3,315.00 2008 5,870.00 653.00 1,124.00 17,829.00 2,915.00 2007 5,152.00 515.00 1,099.00 17,729.00 2,871.00 2006 4,138.00 462.00 1,004.00 17,116.00 3,258.00 (Tk. In million) 2005 4,346.00 427.00 1,052.00 14,787.00 2,564.00

Lafarge has the highest assets base among the companies. Whereas Aramit has the least amount of assets in its disposal. Equity 2009 Hidelberg Aramit Confidence Lafarge Surma Meghna 3,972.00 66.00 1,870.00 4,430.00 673.00 2008 3,308.00 22.00 628.00 3,427.00 574.00 2007 2,856.00 20.00 685.00 3,253.00 619.00 2006 2,321.00 12.00 661.00 4,808.00 475.00 (Tk. In million) 2005 2,321.00 5.00 629.00 4,871.00 398.00

Equity base of Hidelberg and Lafarge is significantly higher than other three companies. Aramit has the lowet equity due to its negative retained earnings. Net Profit After Tax 2009 Hidelberg Aramit Confidence Lafarge Surma Meghna 850.00 60.00 143.00 995.00 131.00 2008 592.00 2.00 (28.00) 176.00 23.00 2007 621.00 14.00 52.00 (1,096.00) 106.00 2006 521.00 6.00 41.00 (808.00) 56.00 (Tk. In million) 2005 139.00 (26.00) 20.00 (483.00) 74.00

In case of net profit after tax Lafarge has the highest growth rate, whereas hidelberg has a consistent growth rate. Aramit has the least NPAT among the companies.

Share Holding Patterns

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Director (%)
Hiledbarg Aramit Confidence Lafarge Surma Meghna 61.55 42.86 24.44 58.87 52

Govt. (%)
0 0 0 0 0

Institutions (%)
18.16 29.51 28.1 5.77 20

Foreign (%)
0 0 0 14.97 0

Public (%)
20.29 27.63 47.46 20.39 28

Cross Table Analysis of Ratios

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Return on Equity (ROE) = Net Income/Common Equity 2009 ROE Hiledberg Aramit Confidence Lafarge Surma Meghna 21.40% 90.91% 7.65% 22.46% 19.47% 2008 17.90% 9.09% -4.46% 5.14% 4.01% 2007 21.74% 70.00% 7.59% -33.69% 17.12% 2006 22.45% 50.00% 6.20% -16.81% 11.79% 2005 5.99% -520.00% 3.18% -9.92% 18.59%

Current Ratio= Current Assets/Current Liabilities 2009 Current Ratio Hiledberg Aramit Confidence Lafarge Surma Meghna 2.03 0.68 1.42 1.93 1.29 2008 1.27 0.59 1.02 0.32 1.43 2007 1.08 0.47 1.30 0.26 1.10 2006 0.80 0.44 1.27 0.53 1.24 2005 0.88 0.43 1.15 1.99 0.64

Debt-Equity Ratio = Total Debt/Total Assets 2009 Debt Ratio Hiledberg Aramit Confidence Lafarge Surma Meghna 2.49% 30.40% 12.74% 47.55% 22.41% 2008 16.41% 54.67% 37.19% 53.31% 32.11% 2007 16.52% 51.46% 23.57% 62.02% 21.56% 2006 19.86% 32.90% 24.70% 64.97% 7.40% 2005 21.19% 30.68% 34.70% 61.21% 7.53%

Debt-Equity Ratio = Total Debt/Total Equity 2009 D/E Ratio Hiledberg Aramit Confidence Lafarge Surma Meghna 3.78% 330.30% 15.83% 185.60% 110.40% 2008 29.11% 1622.73% 66.56% 277.33% 163.07% 2007 29.80% 1325.00% 37.81% 338.00% 100.00% 2006 35.42% 1266.67% 37.52% 231.30% 50.74% 2005 39.68% 2620.00% 58.03% 185.81% 48.49%

Interest Coverage Ratio = EBIT/Interest Expense 2009 Interest Coverage Ratio Hiledberg Aramit Confidence Lafarge Surma Meghna 52.00 1.84 23.00 2.68 3.17 2008 10.40 0.67 (0.50) 1.39 1.32 2007 9.41 (0.08) 5.00 (0.21) 2.81 2006 8.82 (0.05) 4.47 (3.20) 1.97 2005 4.00 (0.79) 1.81 (240.50) 1.70

Net Profit Margin = Net Profit After Tax/Sales

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2009 Net Profit Margin Hiledberg Aramit Confidence Lafarge Surma Meghna 11.79% 7.12% 11.78% 13.19% 2.78%

2008 9.30% 0.26% -2.28% 2.83% 0.70%

2007 11.05% 2.35% 4.72% -45.69% 3.75%

2006 10.41% 1.07% 4.32% -528.10% 1.66%

2005 3.80% -5.69% 2.92% N/A 2.51%

Checklist of Capital Structure

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To analyze the optimum debt-equity ratio of the companies, we used the checklist of Capital structure and compare the ratio for five (5) Cement Companies: Heidelberg, Meghna ,Padma , Aramit and Confidence Cement Limited. Capital Structure has pronounced industry patterns; Utilities, transportation companies, and mature, capital intensive manufacturing firms are characterized by high debt-equity ratio; while service firms, mining companies, and most rapidly growing or technology based manufacturing companies employ little or no long term financing. The Cement industry is characterized by high debt financing. Considering the three companies, we see that all five companies have more or less high debt-equity ratio., except hidelberg for 2009 which has very low d/e ratio due to repayment of debt. Comparing to debt-equity ratio, we see that the ratio is highest for Aramit but Profitability is highest for Heidelberg. Taxes clearly influence capital structures, but not alone decisive; Increase in corporate tax rates are associated with increased debt usage by corporations- at least in those countries where interest is a tax-deductible expense. Both across industries and across countries, the larger the perceived costs of bankruptcy and financial distress, the debt will be used. Ownership structure clearly seems to influence capital structure; Comparing the ownership structure of the five companies we see that Confidence has lowest sponsors shareholding whereas hidelberg has the highest % of shareholding and only one company has foreign shareholdings, i.e. Lafarge Surma.

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Appendix
(Tk. In million)

Hidelberg
Fixed Assets 2,649 2,851 2,650 2,209 2,146 Current Assets 3,380 3,019 2,502 1,929 2,200 Total Assets 6,029 5,870 5,152 4,138 4,346 Debt Ratio 2.49% 16.41% 16.52% 19.86% 21.19% Interest Exp 27 86 96 79 71 Interest Coverage Ratio 52.00 10.40 9.41 8.82 4.00 Current Liabilities 1661 2380 2310 2415 2500 Current Ratio 2.03 1.27 1.08 0.80 0.88 Total Asset Turnover 1.20 1.09 1.09 1.21 0.84 Net Profit After Tax 850 592 621 521 139 Net Profit Margin 11.79% 9.30% 11.05% 10.41% 3.80%

Year 2009 2008 2007 2006 2005

Debt 150 963 851 822 921

Equity 3,972 3,308 2,856 2,321 2,321

D/E Ratio 3.78% 29.11% 29.80% 35.42% 39.68%

EBIT 1,404 894 903 697 284

Sales 7,207 6,369 5,621 5,004 3,654

ROE 21.40% 17.90% 21.74% 22.45% 5.99%

Aramit
Fixed Assets 349 347 315 312 309 Current Assets 368 306 200 150 118 Total Assets 717 653 515 462 427 Debt Ratio 30.40% 54.67% 51.46% 32.90% 30.68% Interest Exp 56 18 25 19 14 Interest Coverage Ratio 1.84 0.67 -0.08 -0.05 -0.79 Current Liabilities 540 518 422 343 274 Current Ratio 0.68 0.59 0.47 0.44 0.43 Total Asset Turnover 1.18 1.17 1.16 1.21 1.07 Net Profit After Tax 60 2 14 6 (26) Net Profit Margin 7.12% 0.26% 2.35% 1.07% -5.69%

Year 2009 2008 2007 2006 2005

Debt 218 357 265 152 131

Equity 66 22 20 12 5

D/E Ratio 330.30% 1622.73% 1325.00% 1266.67% 2620.00%

EBIT 103 12 (2) (1) (11)

Sales 843 762 597 561 457

ROE 90.91% 9.09% 70.00% 50.00% -520.00%

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Confidence
Fixed Assets 1,678 590 564 580 570 Current Assets 646 534 535 424 482 Total Assets 2,324 1,124 1,099 1,004 1,052 Debt Ratio 12.74% 37.19% 23.57% 24.70% 34.70% Interest Exp 8 26 19 17 21 Interest Coverage Ratio 23.00 -0.50 5.00 4.47 1.81 Current Liabilities 455 525 413 333 419 Current Ratio 1.42 1.02 1.30 1.27 1.15 Total Asset Turnover 0.52 1.09 1.00 0.95 0.65 Net Profit After Tax 143 (28) 52 41 20 Net Profit Margin 11.78% -2.28% 4.72% 4.32% 2.92%

Year 2009 2008 2007 2006 2005

Debt 296 418 259 248 365

Equity 1,870 628 685 661 629

D/E Ratio 15.83% 66.56% 37.81% 37.52% 58.03%

EBIT 184 (13) 95 76 38

Sales 1,214 1,229 1,102 950 685

ROE 7.65% -4.46% 7.59% 6.20% 3.18%

Lafarge Surma
Fixed Assets 2,393 15,260 16,065 15,395 13,100 Current Assets 14,898 2,569 1,664 1,721 1,687 Total Assets 17,291 17,829 17,729 17,116 14,787 Debt Ratio 47.55% 53.31% 62.02% 64.97% 61.21% Interest Exp 870 1224 1138 163 2 Interest Coverage Ratio 2.68 1.39 -0.21 -3.20 -240.50 Current Liabilities 7724 7966 6363 3233 846 Current Ratio 1.93 0.32 0.26 0.53 1.99 Total Asset Turnover 0.44 0.35 0.14 0.01 0.00 Net Profit After Tax 995 176 (1,096) (808) (483) Net Profit Margin 13.19% 2.83% 45.69% 528.10 % N/A

Year 2009 2008 2007 2006 2005

Debt 8,222 9,504 10,995 11,121 9,051

Equity 4,430 3,427 3,253 4,808 4,871

D/E Ratio 185.60% 277.33% 338.00% 231.30% 185.81%

EBIT 2,332 1,707 (239) (521) (481)

Sales 7,543 6,211 2,399 153 -

ROE 22.46% 5.14% -33.69% -16.81% -9.92%

Meghna Cement
Fixed Assets 1,143 1,222 1,307 1,318 1,384 Current Assets 2,172 1,693 1,564 1,940 1,180 Total Assets 3,315 2,915 2,871 3,258 2,564 Debt Ratio 22.41% 32.11% 21.56% 7.40% 7.53% Interest Exp 87 101 99 120 118 Interest Coverage Ratio 3.17 1.32 2.81 1.97 1.70 Current Liabilities 1678 1184 1419 1569 1837 Current Ratio 1.29 1.43 1.10 1.24 0.64 Total Asset Turnover 1.42 1.12 0.98 1.03 1.15 Net Profit After Tax 131 23 106 56 74 Net Profit Margin 2.78% 0.70% 3.75% 1.66% 2.51%

Year 2009 2008 2007 2006 2005

Debt 743 936 619 241 193

Equity 673 574 619 475 398

D/E Ratio 110.40% 163.07% 100.00% 50.74% 48.49%

EBIT 276 133 278 236 201

Sales 4,705 3,267 2,824 3,367 2,954

ROE 19.47% 4.01% 17.12% 11.79% 18.59%

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