OXFORD BROOKS UNIVERSITY

Research and Analysis Project

Analysis of financial statements over a three year period ending June 2009, 2008 and 2007 of

ATTOCK CEMENT PAKISTAN Ltd.

A project for BSc. (Hons.) in applied accounting

Name:
ACCA Reg. no. May 2010 Word count: 6,496
No. 1 1.1 1.2 1.3 2 2.1 2.2 Contents Introduction Reasons for choosing the topic and company Project objectives and research questions Overall Research approach Information Gathering Sources of information (Primary and secondary) Description of methods used to collect information 1 Page No. 3. 3. 4. 5. 5.

2.3 2.4 2.5 3 3.1 3.2 3.3 3.4 3.5

Limitations of information gathered Ethical issues during information gathering Accounting/business tech. used and their limitations Analysis Over view of the economy Company history Company products Cement industry Ratio analysis and competitor analysis Sales analysis and profitability analysis Liquidity and working capital analysis Capital and debt structure analysis Valuation ratios Porters five forces analysis SWOT analysis Conclusion and suggestions APPENDICES Referencing and bibliography Questionnaire Ratios Graphs Financial statements

6. 7. 8.

9. 9. 9. 10.

3.6 3.7 4 A B C D E

18. 19. 20. 23. 25. 27. 28. 29.

1. INTRODUCTION
1.1 Reasons for choosing the topic and company
One of the reasons for choosing this topic was that as an accountancy student I always studied the analysis of a company using ratio analysis and other business tools but obviously that has very little scope. Performing analysis of an actual company is a very challenging and it also involves analyzing the environment too that is full of learning and that gives a wider scope. Another reason for choosing the analysis of a companys financial statement was the ease of availability of annual accounts. Thats because companies today do not want to share their internal information with outsiders and are reluctant to share the documents that was important for other topics. I foresee my future in the field of business analyst and performing the analysis of a real entity was obviously my interest

and gave me real insight of the work of this field that how things happen practically. One of the very strong reasons of choosing the topic was that is related to my studies. Reason for choosing the cement industry was that this industry is one of the biggest contributors to the economy of Pakistan. One of the reasons for choosing ATTOCK CEMENT PAKISTAN LIMITED (ACPL) was due to the up to date and readily available information of this company through several sources.

1.2 Project objectives and research questions

The project objective consists of the benefits that an organization/person expects to achieve as a result of spending time and exerting effort to complete a project. (www.mariosalexandrou.com) The basic objective of the project is to analysis the financial statements of ACPL and to analyze its business performance, subdivided into: Analyzing the financial position and performance of the company I need to do the following: Sales analysis will be done to analysis the sales of the company its trend towards increase or decrease and the reason for this. Profitability ratios measure how well a company is performing by analyzing how profit was earned relative to sales, total assets and net worth. (www.kbr.dnb.com) Evaluation of ACPL short-term liquidity to assess the position of company to pay off its short-term obligations on time. (Heitger, Matulich, 1987) Long-term solvency and capital structure will be analyzed by calculating the gearing ratio which indicates the companys financial structure and debt capital ratio. Investors ratios will be used to give an examination of the company from the point of view of investors.

 SWOT analysis of the company will be done to analyze the strengths, weaknesses in the company and opportunities and threats that company faces in the environment in which it operates. P3 Business analysis BPP 2008 Porters five forces analysis will be done to analyze the competitive environment and the strength of the competition in the cement sector of Pakistan. Conclusion will be devised on the bases of my analysis done and some recommendations will be given if there is any room for improvement.

Research questions
To have a clear structure and objectives of the project in my mind I devised the following questions: What information will be required initially and during the project to start and assist me in the project? What will be the sources of information that I have to find out and get sufficient information about the company and sector? What are the methods to gather the information? What will be the areas I have to focus in the financial statements to get my work properly done? What will be the IT skills required to perform and present my work properly? What will be the communication skills required when meeting my mentor and other people in the process of information gathering? How can I establish the strategic position of the company? What will be the level of learning in performing all the work? Will it help me in the future? (Johnson, 2005) How the conclusion will be designed from the work done?

1.3 Overall research approach

It is very important to perform a task properly to plan all the work before it is started. As a saying goes that if you fail to plan you plan to fail. So the research approach I adopted helped me a lot to minimize the wastage of time and energy. Firstly I did some background research about the project and got the information about the options on which I can prepare my project. For this first of all I arranged a meeting with my mentor who helped me a

lot in deciding me the topic. After selecting the topic I figured out the industry and the company I will use in my project. Then I started working on the sources of information from which I can get reliable information about the cement sector and ACPL. I used many sources including internet, newspapers, magazines, accounting books, ACCA syllabus books, library and of course annual accounts of the company. I also interviewed personnel of ACPL and asked many questions to them that helped to increase my knowledge. Then I selected the tools that I used during analysis. They include both financial and non-financial. I used ratio analysis for the financial analysis and SWOT and Porters five forces as non-financial tools. I gathered information about a competitor so that the analysis can be comparable. Meanwhile I was in the contact with my mentor through a series of meetings who helped me in the issues that arose during the process. He guided me, referred me different books for referencing and also helped me plan my work.

2. INFORMATION GATHERING
2.1 Sources of information - Primary and secondary
Primary sources of information allow the learner to access original and unedited information. A primary source requires the learner to interact with the source and extract information. Secondary sources are edited primary sources, second-hand versions. They represent someone else's thinking. (www.graphic.org) Primary sources that I used were interviews, questionnaires and visits that I made to the office of ACPL. First of all I arranged a meeting with the managers of accounts and marketing department. Meeting the company personnel was very informative experience and the information I got helped me in performing my work. First of all I identified the informed persons of the company and asked them to fill the questionnaire. Questionnaire included many questions about the company and its production. Then I interviewed the persons I was supposed to meet. They firstly provided me the annual accounts for the year ended June, 2009. While interviewing I got solved many problems that I was facing in understanding the annual accounts. Then I met manager marketing department that helped me understand the companys strategy and also the cement sector of Pakistan. The information helped me in performing SWOT and Porters five forces analysis. Secondary sources of information that I used were as follows: Internet is the main source of information now days in all fields, and that helped me a lot throughout my work. The sites I used to visit were www.google.com and www.wikipedia.org. The web site of ACPL and Karachi Stock Exchange were also very useful which are as follows: www.attockcement.com. I used to study business magazines to be up to date with the changing business environment. Annual reports of the company over a three year period along with the competitors report were really helpful in acquiring financial data of company. Analyst reports were used to gain the industry and ACPL related information. The newspapers business sections were also one of the sources of my information inputs. The ACCA syllabus books and the ACCAs magazine student accountant was also a part of my study. I had to search the 6

archive to refer the back issues of student accountant magazine. Other business and accountancy related books were also used for this purpose.

2.2 Description of methods used to collect information

I used different methods to gather the information as some of them are discussed earlier but the main from which I got a lot of help were as follows: Interviews Books and newspapers and other literary sources Internet

2.3 Limitations of information gathering

There were some limitations that I faced while collecting the information for my project. One of main issues was the meeting with the required person. The issue of non-availability of the personnel wasted a lot of my time. Another issue was that while interviewing, company managers were very reluctant to provide the information. At times the personnel used to window dress the companys positions so I was very conscious about sorting out true picture of company. Permission of senior manager to fill the questionnaires was also an issue. Internet was the main source of my information but I had loads of information that I had to sort out carefully because many times information was not up-to-date and reliability of data was an issue too.

2.4 Ethical issues during information gathering

Ethical issues arose while interviewing the company personnel. As mentioned above, they were reluctant to share the sensitive and confidential information without the consent of the senior managers. So I met their seniors and told the purpose of the information i.e. to use it only for research work. My convincing argument to managers was that as I am a student of a ACCA which is a professional body who is bound by a strong codes of ethics which are objectivity, integrity, confidentiality, professional behavior and professional competence and due care. Then he agreed to provide me the information at some extent.

2.5 Accounting/Business techniques used and their limitations

I basically used three types of tools to analyze the companys financial position and its performance that are ratio analysis, SWOT analysis and Porters five force analysis.

Ratio analysis
A tool used by individuals to conduct a quantitative analysis of information in a companys financial statements. Ratios are calculated for current year numbers and are then compared to previous years, other companies, the industry or even the economy to judge the performance of the company. Ratio analysis is predominantly used bye proponents of fundamental analysis. (www.investopedia.com)

Limitations of ratios
Most ratios by them selves are not highly meaningful. They should be viewed as indicators, with several of them combined to paint a picture of the firms situation. (www.netmba.com) Ratios dont capture significant off-balance sheet items (www.financialmodelingguide.com) The difference of accounting policies used different companies can distort the inter company comparison. Ratios are not definitive measure and must be used carefully. They can just provide clues about position of the company. Ratios don't always tell about changes that are coming - looking at historical data does not predict the future. (www.collegecram.com) Many large firms operate different divisions in different industries. For these companies it is difficult to find a meaningful set of industry-average ratios. (www.investopedia.com)

Porters five forces analysis

Porters five forces is framework of the industry analysis and business strategy development developed by M.E. Porter. It uses concepts developing industrial organization economies to derive five forces which determine the competitive intensity and therefore attractiveness of market. (Michael E. Porter, 1980)

Limitation of Porters five forces analysis

One of the main limitations of the model is that it assumes the market as a static market which is not practically possible because the industrial and general environment is constantly changing.

In the economic sense, the model assumes a classic perfect market. The more an industry is regulated, the less meaningful insights the model can deliver. The model is best applicable for analysis of simple market structures. A comprehensive description and analysis of all five forces gets very difficult in complex industries with multiple interrelations, product groups, byproducts and segments. A too narrow focus on particular segments of such industries, however, bears the risk of missing important elements.(FTC, 2008)

SWOT analysis
SWOT analysis can be used to gauge the degree of fit between the organizations strategies and its environment, and to suggest ways in which the organization can profit from strengths and opportunities and shield itself against weaknesses and threats. (Adams, 2005)

Limitations of SWOT analysis

The same factor can also be a strength and weakness. The SWOT framework has a tendency to oversimplify the situation by classifying the firms environmental factor into categories in which they may not always fit. The assessment of strengths and weaknesses may be unreliable, being base on aspiration, biases sand hopes. (Henry, 2007)

3. ANALYSIS, RESULTS AND CONCLUSIONS

3.1 Overview of the economy
The year 2008-2009 was a difficult year for global economies as well as Pakistan. The worst-ever global financial crisis has had extremely serious repercussions for both developed and developing economies all over the Globe. This fall out created serious credit crunch through out the world as all the global financial markets are closely interlinked. In the emerging markets like Pakistan the financial melt down resulted in flight of capital and corresponding steep fall in the local currency against US$. Pakistans economy is not only affected due to this global meltdown but also due to the countrys active involvement in war on terror and therefore registered GDP growth of only 2%. (The Dawn, 2009)

3.2 Company history

ACPL project was conceived and the company was incorporated in 1981 the plant finally commenced commercial production on June 1, 1988. The project involved an initial outlay of Rs.1.5billion with foreign exchange components of around US$45 million. The factory is located in the province of Balochistan. ACPL is a part of Pharaon Group and is a Saudi-Pak joint project. Its major shareholder Pharaon commercial Investment Company limited holds 84.06% of total paid up share capital where as the general public holds a total of 15.94% shares. Pharaon Group has a diversified stakes in Pakistan mainly in oil and gas sectors. (Business Recorder, 2009)

3.3 Company products

ACPL is currently engaged in the production and sales of following three products with the registered brand name of Falcon Ordinary Portland cement (OPC) Sulfate resistant cement (SRC) Portland blast furnace slang cement (PBFSC) (www.attockcement.com)

3.4 Cement industry

Pakistan cement factories continue to make significant progress in cement exports. Now Pakistan is ranked 5th in the worlds cement

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exports after a huge increase of 47% in exports during FY09. (Daily Times, 2009) Pakistan cement sector ended FY09 with local sales witnessing a meager 2% growth at 30.8 million tons, the growth in overall cement sales mainly came from the record high cement exports during the year. Though traditionally Pakistan has seen impressive consumption growth of 7% in terms of CAGR (capacity growth rate) but the period commencing from FY02 through FY08 witnessed average growth of around 15%, which was un-precedent. However, in FY09 the local demand registered a negative growth of 14%, which was mainly attributable to political uncertainties coupled with global turmoil. (All Pakistan Cement Manufacturers Association, 2009) After six years of consecutive growth, the domestic cement market depicted a declining pattern in the wake of lukewarm construction activities amid economic slowdown, high interest rates, liquidity crunch and cut in infrastructure spending both in public and private sectors. (Muhammad Rehan Khan, 2009)

3.5 Ratio analysis

PROFITABILITY ANALYSIS ACPL FY07 PROFITABILITY ANALYSIS Net Turnover (Rs. million) Sales growth Gross profit margin Net profit before tax margin Return on Capital employed (ROCE) SALES ANALYSIS The net sales of ACPL in the absolute terms were augmented to Rs.8,501million during FY09 compared to Rs.5,001million in FY08. The increase was due to higher quantity sold and better retention during the year owing to higher selling prices of cement in the country but the demand was remain depressed in the local market. The sales volume of ACPL was increased by 25% in the year from 1,359,487tons in FY08 to 1,719,162tons during FY09 mainly due to successful commissioning of Line-2, and net retention was also augmented by 37%. The reason 11 4,560 31.29% 34.10% 26.16% 18.11% ACPL FY08 5,001 9.67% 22.27% 13.49% 10.00% ACPL FY09 8,510 70.16% 31.83% 23.37% 27.63% BWCL FY09 14,814 97.86% 32.19% 8.13% 4.95%

of increase in volume was as a result of exports to other countries that provided better retention as compared to the domestic market. The cement selling prices increased significantly in the domestic market as a result of cartelization between cement manufacturers during FY09. (Irfan Malik, 2008)
N ET SALES
9000 8000 7000 6000 MILLION 5000 4000 3000 2000 1000 0 2005 2006 2007 YEAR 2008 2009

The local currency rupee was highly depreciated against other major currencies that contributed substantially towards the rise in net retention as a consequence of exports. The domestic sales volume of ACPL reduced by 1% because of lower demand owing to less construction activities in the country. (Daily Times, 2009) On the other hand, the export sales of ACPL increased by 412% and it contributed 27% of total sales volume compared to 7% in FY08. The domestic sales percentage was 73% of total volume in comparison with 93% in FY08 that was a good sign as international prices are higher as compared to local cement prices. During FY08 the net turnover of ACPL elevated by 9.67% Rs.5,001million as compared to Rs.4,560million in FY07. The reason of increased revenue was attributable to higher quantity sold in the year by 11% as 1,359,487tons of cement was sold by the company compared to 1,228,793tons in FY07. The local cement market faced oversupply situation during FY08 as a result of expanded production capacity by all cement manufacturers, on the other hand demand was lower and the prices were almost stable for the whole year. ACPL was unable to explore new export markets to attain retention prices during FY08 due to lower than expected production from one of its plant as a result of technical problems. The export sales of the company contributed 7% of the total sales volume during FY08 as compared to 3% in FY07.

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BWCL also showed a remarkable growth in sales during FY09 even more than its rival company due to increased quantity sold and higher percentage growth was attributable to incredible increase in cement prices both at local and international level as BWCL also exports cement to other countries. GROSS PROFIT MARGIN During FY09 ACPLs gross profit ratio enhanced to 31.83% as compared to 22.27% in FY08. Owing to the huge demand of Pakistani cement in the international market especially in the countries which are in the process of rehabilitation like Iraq and Somalia, ACPL increased its export sales to those countries, consequently it earned higher margins. The production costs also increased enormously by 49.25%, it was primarily increased due to higher fuel consumed during production process which constitutes 60% of the total costs and further increased by 60.40% in FY09 as compared to the last year. Coal is the basic fuel used by ACPL for the production of cement, though the international prices of fuel declined in FY09 but the depreciation of local currency offset its effect as all the companies import coal from other countries that affected adversely on the total costs. Overall capacity utilization increased by 18% during FY09, and higher absorption of fixed overheads and higher selling prices contributed positively towards gross margin. The gross profit ratio of ACPL declined by 34.69% from 34.10% in FY07 to 22.27% during FY08. The main reason behind the drop in margin despite the growth in sales revenue was the higher cost of goods sold mainly as a result of increased fuel costs in the year that increased by 57.68% during FY08 compared to FY07, as the international prices of coal were on a peak. (Monem Farooqi, 2008) The cost of goods sold of ACPL increased by 29% including packing material and raw material costs which was raised by 18.30% and these two heads constituted 56% of the total costs. The gross margin of BWCL was more or less same in FY09 as compared to ACPL again due to higher selling prices despite escalating fuel and energy costs. NET MARGIN

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PROFIT BEFORE TAX

2009 2008 YEAR 2007 2006 2005 0 500 1000 1500 MILLION 2000 2500

The net margin of ACPL was 23.37% in FY09 as compared to 13.49% in FY08 showed an increase of 73.23%. The distribution expenses increased by 250% in FY09 owing to higher exports in the year that reached to Rs.311million as compared to Rs.78million in the last year, and the administration expenses were also enhanced by 36% as compared to FY08 due to inflationary affect. The administrative expenses enhanced due to increase in minimum wage rate ultimately boosted the salaries and wages during FY09. The improvement in margin was positively effected by higher growth in sales along with better gross margin in FY09. The finance charges for ACPL also declined by 33% in 2009 as compared to the last year due to reduced mark up on short-term loans and running finance. The net profit margin of ACPL deteriorated in FY08 by 51.56% to 13.49% from 26.16% in FY07. The primary reason of this fall was the higher interest charges that increased by 50% due to relatively higher interest rates prevailed during FY09 attributable to poor economic conditions in the country. The distribution costs of the company was also increased by 37% and main portion comprised of export expenses that formed 68% of total distribution costs and though slightly augmented by 5% as compared to FY07 as the export sales were quite low in FY08. In case of administrative expenses, a hike was only seen under the head of salaries and wages, as other remained almost constant throughout the year. The net margin of BWCL was lower than ACPL due to higher finance costs as a result of short-term borrowings to meet the working capital requirements in FY08. ROCE The better profitability during FY09 provided high returns as a result of total capital employed in the company that was increased to 27.63% compared to 10.00% in FY08. This remarkable improvement was as a

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result of higher profits earned during FY09, though the equity of the company also increased due to retained profits in the year. The ROCE showed a decline to 10.00% in FY08 as compared to a higher figure of 18.11% achieved in FY07 this was due to the deteriorating profitability owing to slow growth in sales and higher input costs that worsened the margins and consequently the returns dropped in the year. The ROCE of BWCL was also lesser than ACPL during FY09 primarily because BWCL issued shares during the year for cash which led to increase in equity. LIQUIDITY ANALYSIS ACPL FY07 LIQUIDITY ANALYSIS Current ratio Acid test ratio 1.26:1 0.65:1 ACPL FY08 1.51:1 0.45:1 ACPL FY09 2.43:1 1.36:1 BWCL FY09 0.64:1 0.26:1

CURRENT RATIO The liquidity ratio of ACPL is quite good at 2.43 even above than ideal level of 2:1. The reason behind such positive results was incredible increase in current assets by 86% during FY09 on account of huge short-term investments made by the company. ACPL had capitalized on high interest rates and have earned in short-term, getting both profits and liquidity. This was a good strategy of a company as currently money market is the safest investment with such high interest rates. ACPL invested Rs.100million in a certificate of investment that would offer 13.35% on maturity in FY09. Likewise ACPL also invested Rs.206 million in income funds, which allowed them to let their income grow along with receiving of periodic cash flows. The current liabilities also showed a nominal growth of 15% on account of increase in accrued liabilities compared to FY08.

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CU RRENT ASSETS
3000 2500 MILLION 2000 1500 1000 500 0 2005 2006 2007 YEAR 2008 2009 837 1285 575 1480 2762

The current ratio of ACPL was slightly improved to 1.51 in FY08 compared to 1.26 in FY07. During the year current assets of the company were increased by 15.17% from Rs.1,480million Rs.1,285million on account of stores, spare and loose tools and stockin-trade due to production work stoppage by one of the companys plants as mentioned above and ACPL was incapable to book export orders during the year. On the contrary, the current liabilities decreased by 4% attributed that improved the current ratio marginally. The current ratio of BWCL was much worsened than its rival company due to huge short-term borrowings. QUICK RATIO The quick ratio during FY09 was 1.36 which improved from 0.45 in FY08. The illiquid assets like stock-in-trade and stores, spares and loose tools comprised 43% of the total current assets near to its half, but the cash and bank balances along with the other short-term investments made the quick ratio constructive as compared to the last year. The quick ratio of the company declined in FY08 to 0.45 as compared to 0.65 in FY07 as a result of huge inventory maintained by the company in terms of raw material and work in process due to lower production by the company as a result of technical problems in one of its plant. This item is highly illiquid so impacted negatively on quick ratio of the company. Likewise, current ratio the quick ratio of BWCL was much lower than ACPL. WORKING CAPITAL RATIOS ACPL FY07 WORKING CAPITAL RATIOS 16 ACPL FY08 ACPL FY09 BWCL FY09

Debtor collection days Creditor payment days Inventory holding days DEBTOR COLLECTION DAYS

2days 24days 33days

3days 40days 38days

2days 18days 38days

14days 11days 26days

The debtor collection days of ACPL varying between 2days to 3days in all three years under review. The reason for such lower period is that ACPL operates on cash sales to distributors who sell to the wider community on retail basis. The small amount of debtors is due to a few days credit sales allowed to large and old customers. BWCL allowed longer credit limits to its customers so its collection period was 14days. CREDITOR PAYMENT DAYS The creditor payment days stood at 40days in FY08, which was increased from 24days in FY07 due to increase in creditors by 135%, and most of this increase was attributable to fuel and power suppliers. ACPL decreased its creditor days considerably in FY09 to 18days as compared to 40days in FY08. This was a deliberate step by the company to improve its goodwill in the eyes of its suppliers of imported coal. BWCL paid its creditors earlier than ACPL. INVENTORY HOLDING DAYS The inventory holding days of ACPL were constant for FY09 if compared with FY08 as the company is anticipated to receive more orders from the regional market due to increasing demand of cement, so they built up the strategy to produce in bulk for the timely delivery as country faced severe fuel and power shortages. Its inventory increased by 49.87% during FY09 compared to FY08. The inventory holding days of ACPL enhanced by 5days and reached to 38days during FY08 as compared to 33days in FY07. This increase was due to increase in inventory owing to lower export orders and unattractive demand in the domestic market. One of the reasons of higher inventory level was the lower production and hoarded raw materials at the year end. BWCL sell its inventory within 26days compared to ACPL. DEBT TO CAPITAL STRUCTURE ACPL FY07 ACPL FY08 ACPL FY09 BWCL FY09

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DEBT TO CAPITAL STRUCTURE Debt to capital ratio Interest cover DEBT-TO-CAPITAL RATIO

22:78 12.65tim es

18:82 5.41time s

11:89 58:42 17.71tim 1.52time es s

ACPL financed its activities through both equity and debts sources as depicted from its long-term debt-to-equity ratio. But the debt portion constituted a little amount in total capital of the company. The company retained much of its profits earned during FY09 that boosted its overall equity, though its share capital remained the same. The company acquired long-term loans for the capacity expansion project in FY06 and now repaying its debts over the years. So the disbursement of long-term loans and significant increase in equity during the period reduced its reliance on debt and the ratio decreased to 11:89 as compared to FY08. The long-term debt-to-equity ratio in FY08 also declined slightly from 22:78 to 18:82 this was also as a result of dual effect of increase in equity and decline in debt portion due to repayment of loans in the year. ACPL is one of the low leveraged companies in the cement industry of Pakistan ultimately retained low risk. BWCL was a high leveraged company due to acquisition of long-term loans for the capacity expansion in FY09. INTEREST COVER The interest cover of ACPL improved drastically to 17.71times in FY09 compared to 5.41times in FY08. This has been observed because of 23% drop in companys finance costs. The reason behind fall in financial charges was dearth of short-term borrowings that was taken by the company in last year. This was because of excess liquidity it had due to higher sales revenue. Similarly, in FY08 ACPL acquired short-term borrowings to fulfill the needs of working capital as its liquidity deteriorated in the year. Higher interest rates increased the borrowing cost for the company and its interest cover reduced to 5.41times in FY08 compared to 12.65times in FY07. The lower margins of the company during FY08 due to slow growth and higher costs also contributed in lowering the interest cover of the company during FY08. VALUATION ANALYSIS

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ACPL FY07 VALUATION ANALYSIS Earnings per share Dividend per share Share value Price to earnings Dividend yield EARNING PER SHARE Rs.11.04 Rs.4.50 Rs.118.2 5 10.71tim es 3.80%

ACPL FY08 Rs.6.03 Rs.1.50 Rs.69.25 11.48tim es 2.17%

ACPL FY09 Rs.20.69 Rs.3.25 Rs.70.36 3.40time s 4.61%

BWCL FY09 Rs.3.17 0 Rs.28.00 8.83time s 0

ACPL had a earning per share of Rs.20.69 during FY09 that improved from Rs.6.03 in FY08, the higher earnings against the equity invested was due to improved profitability of the company as the number of shares was constant and higher margins gave high net profits at the year end consequently build up earnings. The share capital remained stable in FY08 as compared to FY07 but the lower margins weakened the earning per share that reduced from Rs.11.04 to Rs.6.03. Earning per share of BWCL was quite lower than ACPL at Rs.3.17. DIVIDEND PER SHARE The dividend policy of the company was consistent with an increase in earning per share of ACPL as it declared Rs.3.25 dividend per share in FY09 on account of better profits earned compared to the last year. Though, it also retained much of its profits as ACPL is anticipating higher demand from regional markets so it would be used to finance further projects in the future. The dividend per share was Rs.4.50 in FY07 that reduced to Rs.1.50 in FY08 due to lower profitability owing to lower margins but just to satisfy the shareholders company provided the dividends when the local cement industry was in a difficult phase due to lower domestic demand with oversupply and lower prices resulted in poor liquidity position and losses incurred. BWCL had not provided any dividends in FY09. SHARE VALUE As a result of poor economic conditions in Pakistan during FY09, the stock market did not perform well witnesses the fall in share prices of 19

almost all sectors; similarly the market vale of ACPLs share was also constant despite the increase in earnings during FY09. However, during FY08 the share price fell drastically to Rs.69.25 from Rs.118.25 during FY07. The share price of BWCL was mush lesser than ACPL. PRICE TO EARNING RATIO The price earning ratio of the company has been very volatile with the changes in market value and does not depict a true picture regarding the investor confidence on the company. DIVIDEND YIELD Dividend yield of the company decreased in FY08 as compared to FY07 as ACPL announced lower dividends however the market price of shares also declined in the year. ACPL increased the amount of dividends in FY09 ultimately improved the dividend yield compared to the last year.
DISTRIBUTION OF TOTAL REVENUE

8% 7%

1%

Cost of sales Operating expenses

17%

Retained profit Corporate taxes

67%

Financial charges

3.6 Porters five forces model

THREAT OF SUBSTITUTE There is no substitute of cement so the threat remained low since past years. BARGAINING POWER OF SUPPLIERS Cement industry requires materials in an unrefined form. The basic component of cement is limestone which is extracted directly from ridges and exists in a colossal quantity in Pakistan. Thus the bargaining power of suppliers of limestone is low. In addition, the bargaining 20

power of the suppliers of power and fuel is low as they cannot exert too much pressure upon ACPL because it uses coal as an alternate resource of fuel. As coal is traded in an open market so its suppliers have a low bargaining power they have to sell according to international prices. BARGAINING POWER OF CUSTOMERS The strength of customers depends on survival factors and the number of customers. The cement industry of Pakistan is widely spread and has a large number of customers who buy in small quantities. However, commercial use of cement is increasing and the switching cost of customers is also low so their bargaining power goes up. Generally the price awareness of small customers is low and quality of cement cannot be measured, moreover, the cartelization between cement manufacturers further reduced the bargaining power. THREAT OF NEW ENTRANTS The barriers of entry in the cement industry are high because there are 27 listed companies at stock exchange that are already engaged and have developed a strong brand loyalty and well-established distribution networks. The cement industry has benefited a lot by shifting towards dry process, installation of electrostatic precipitators and pre-heaters, automation of processes and installation of online analyzer which has resulted in environmentally better and energy-efficient industry on the other hand high capital is required to enter in such situation. RIVALRY AMONGST COMPETITORS All the manufacturers have expanded their production capacities that created an over supply situation in the country and now every firm trying to get more market share in the presence of lower demand due to reduced construction activities. Many of the companies are equally balanced. There is oligopoly in cement sector in Pakistan. Therefore, the rivalry is very high. Now apart from the local competition many firms are competing for the regional market share and trying to explore new markets for better retention keeping in view their production capacity.

3.7 SWOT Analysis

STRENGHTS

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It is one of the most cost efficient companies in the industry. Cost efficiencies due to fuel-efficient plants and economies of scale are the major reasons for this trend. The company holds a strong position in the northern region, which caters to 80% of the total demand. The sound market reputation of the company
ACL claims pioneer status in bringing the pre-calcinations/pre-heating dry process technology to Pakistan

Decreasing level of debt every year Maximum returns to shareholders (www.kse.com.pk) ACPL has managed to develop brand loyalty among its customers Superior quality (Saad Hassan, 2010) Management quality remains its core strength

WEAKNESSES ACPL has faced some hindrances in the export of cement as its transportation and loading facility is not too good. The cost of manufacturing is too much dependant on energy costs; consists more than 60% of fuel and power.

OPPORTUNITIES With the newly installed capacity, the company will be able to benefit from greater exports. A substantially higher Public Sector Development Programme (PSDP) allocation and development-oriented foreign assistance during 2009-10 will result in some improvement in the domestic demand of cement. (Ijaz Kakakhel, 2010) The State Bank has recently announced reduction in interest rates to stimulate growth in the industry. (Babar Farooq, 2010) ACPL would be a high beneficiary in case of construction of dams in the country as it produces Portland Blast Furnace Slag Cement which is specifically used in construction of dams. (Appendix-B) The company plans to takeover relatively weaker Al-Abbas cement; this will give an edge to ACPL (Wasi Mehdi, 2010) There is a hope for cement sector on the international front. Regional shortage of cement has presented a favorable opportunity for the cement manufacturers. (Global cement, 2009)

THREATS

22

Severe energy shortages (Hussain, 2010) The declining GDP and volatile economic situation may restrict the construction activities and may hit the demand for cement. (Jang, 2009) Though the Government has announced a very ambitious PSDP but because of poor law and order situation and the current financial constraints of the government, the spending may not be materialized to its fullest extent. (Arif Ahmad, 2009) Higher coal prices Depreciation of Pakistani Rupee against dollar

4. CONCLUSION AND SUGGESTIONS

THE COMPANY The company was incorporated in Pakistan on October 1981 as a public limited company and is listed on Karachi Stock Exchange. Its main business activity is manufacturing and sale of cement. THE INDUSTRY The marginal growth in cement industry during FY09 was achieved due to higher exports. The local demand registered negative growth of 14% due to less construction activities, however, the cement prices both at local and international level increased during the year. PROFITABILITY ANALYSIS Looking at the overall position of this company, it can be concluded that ACPLs sales grew in all three years. The company performed better in FY09 as compared to FY08 as its profitability position improved in terms of higher gross and net margin due to increased selling prices and quantity sold that were witnessed as a result of tremendous growth in sales revenue, but during FY08 the position was weakened as there was a surge in cement production capacity by all manufacturers that created the oversupply situation in the country. Prices were stable; ACPLs sales grew with slower pace due to increase in quantity sold during FY08. Despite the growing sales, the net profit went down drastically due to increased costs of production (overall increases in fuel costs and higher interest rates). BWCLs sales grew at a staggering rate as compared to its competitor, however, its gross margin was not materially different from that of ACPL. Net margin was lower than ACPL basically because of higher finance costs. ROCE is less because of issuance of shares.

23

LIQUIDITY ANALYSIS The minimum requirement of current ratio is at 2:1 but ACPLs ratio lingers above this requirement in FY09 due to huge short-term investments. The ratio was also stable in FY08 and FY07. The quick ratio fell in FY08 due to higher inventory level whereas it improved in FY09. Stock management has been managed in all years owing to the future demand of cement in an efficient way and as most of the sales are done on cash basis debtor days were also on a lower side. Creditor days seemed to be on the higher side in FY08 as a result of weakened profitability but again managed considerably during FY09. BWCL has lesser liquidity because of higher short-term borrowings. Activity ratios are not materially different from ACPL. DEBT-TO-CAPITAL STRUCTURE Expansions were done through equity and debt-finance in the past years. Although previous long-term loans are being repaid through internal cash flows, hence the company registered a lower debt-toequity ratio during the years under comparison. Interest cover was also so much improved in FY07 due to higher operating profits and declining finance costs. BWCL has higher gearing because of loans for its expansion. VALUATION ANALYSIS ACPLs earning per share, dividend per share improved in FY09 compared to the last as result of higher profits but the share price remained constant due to weakening market situation in the year. Dividend yield also improved in FY09 compared to last year. ACPLs performance was much impressive than its rival company BWCL during FY09. FIVE FORCES MODEL There is also no threat of substitutes and the bargaining power of suppliers and customers is also low. After analyzing factors it can be concluded that competitive rivalry for ACPL is high. Also, as strength of barriers to entry shows the threat of new entrants to the market is low. SWOT ANALYSIS ACPL is utilizing its strengths and opportunities, and also trying to mitigate the threats and weaknesses to make its position stronger. SUGGESTIONS 24

The company is performing well for the financial point of view. ACPLs distribution channels are also effective, but it should pay great attention towards the transportation and loading side for exporting cement and also take some steps to reduce its costs so that better margins can be achieved. The cement industry is in a dire need of government support in the development of local coal mines and thereby reduces the dependence on imported coal.

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APPENDIX A: BIBLIOGRAPHY

REFERENCING

AND

Anon. (n.d.) Project objectives, [Online] http://www.mariosalexandrou.com/definition/projectobjective.asp

Anon. (n.d.) Profitability ratios, [Online] http://kbr.dnb.com/help/Ratios/Profitability_Ratios.htm Lester E. Heitger, Serge Matulich. (1987) Managerial Accounting, 2nd Edition, McGraw Hill. BPP (2008) P3 Business analysis, ACCA syllabus UK: BPP publications. Shane Johnson (06 Jun 2005), How not to rap, Student Accountant, ACCA publications, UK Anon. (n.d.) Primary sources, [Online] http://www.graphic.org/resources.html Anon. (n.d.) Ratios, [Online] http://www.investopedia.com/terms/r/ratioanalysis.asp Anon. (n.d.) Limitations of ratios, [Online] http://www.netmba.com/finance/financial/ratios/ Anon. (n.d.) Limitations of ratios, [Online] http://www.financialmodelingguide.com/financial-ratios/financialratio-limitations Anon. (n.d.) Limitations of ratios, [Online] http://www.collegecram.com/study/help/weblog/ratio-analysis-concept-andlimitations Anon. (n.d.) Limitations of ratios, [Online] http://www.investopedia.com/exam-guide/cfa-level-1/financialratios/uses-limitations-ratios.asp Michael E. Porter (1980), How Competition Forces Shape Strategy, Harvard Business Review, SepOct 1980, USA FTC (2008) P3 Business analysis, ACCA syllabus UK: Kaplan publications. Adams, J. (2005), Analyze Your Company Using SWOTs, Supply House Times, Vol. 48 Issue 7, pg. 26-28. Anthony Henry. (2008) Understanding Strategic Management, pg. 120, Oxford University Press, New York, USA. The Dawn (2009) Business: Pakistans economic growth weak, The Dawn, Monday, 10th August, Karachi. Staff reporter (2009) Business news: brief recordings, Business Recorder, 09the June, Karachi. ACPL (2009) Company products, [online] http://www.attockcement.com/ 26

Daily Times (2009) Pakistan ranked 5th in cement exports, surpasses Germany, Daily Times, 01st August, Karachi. All Pakistan Cement Manufacturers Association (2009) Cement industry, [online] http://www.apcma.com/pages/data_monthly.html Muhammad Rehan Khan (2009) Analyst report: Cement industry of Pakistan, First Capital Equities Limited, 11th July Karachi. Irfan Malik. (2008) Cartel increases cement prices, The Nation, 22nd November, Lahore. Daily Times (2009) Local cement demand fell 13 percent in FY09, Daily Times, 11th July, 2009, Karachi. Monem Farooqi. (2008) Cement sector to face rising costs, slowdown in demand in FY09, The Nation, 10th July, Lahore. KSE (2009) Strengths, [online] http://www.kse.com.pk/listingcompanies/docs/comp_annual_rep/2009 Saad Hassan (2010) Business news: Attock cement, The News International, 31st March, Karachi. Ijaz Kakakhel (10th Jan 2010) Business: Government projects Rs.300billion PSDP utilisation for FY 2009-10. Sunday Daily Times. Babar Farooq. (2010) Analyst report: Domestic cement demand will grow IGI Securities. Wasi Mehdi. (2010) Analyst report: ACPL eyeing Al Abbas, Invisor Securities, 31st March. Global cement (2009) High cement demand in Iraq and Afghanistan, Global Cement magazine for the month of March, 2009. Hussain Ahmed Siddiqui (May 03 2010) Business magazine Economic and Business Review. Karachi. Jang (2010) Trading news: stock market pressure and investment declined. The daily Jang Lahore. 21st April. Arif Ahmad (2009) Analyst report: PSDP in 2009-2010 budget, Guardian Securities Pvt Limited, 11th August, Lahore. Annual reports of Attock cement Pakistan Limited for the year ending June 2007, 2008 and 2009. Annual report of Bestway Cement Company Limited (Competitor Company) for the year ending June 2009. Andrew E. Schwartz (24th March, 2010) Ready set present, A.E. Schwartz & Associates of Boston [online] http://www.readysetpresent.com/products/articles/managingmee tings.htm Anon. (n.d.) Research questions, http://geography.uoregon.edu/amarcus/geog620/Readings/hando ut-researech.pdf

27

Anon. (17th August 2009) Interpersonal skills, [online] http://www.cba.uni.edu/buscomm/Interpersonal/interpers.html www.google.com.pk http://www.accaglobal.com/students/bsc/rap/

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APPENDIX B: QUESTIONNAIRE
1. 2. 3. 4. 5. Please provide a brief introduction of ACPL? Name the products of company it manufactures? What is the brand name of the company? What are the reasons of lower demand in the country? What are the future expectation regarding local cement demand? 6. What are the future plans of ACPL? 7. Please provide production and sales figures of ACPL (in Tons) for last five years?

RESPONSE 1. ACPL was incorporated in 1981 as a public limited company. It is listed on the Karachi Stock Exchange. The Attock Cement project was a Pak-Saudi venture. The project was completed and the plant started commercial production on 1st June 1988. It is a part of Pharaon Group as the Pharaon Commercial Investment Company Limited has a majority stake of 84.06% in ACPL. 2. ACPL introduced the pre-calcination/pre-heating dry process technology in Pakistan. ACPL manufactures three types of cement: Ordinary Portland Cement which is used in general construction; Sulphate Resistant Cement is suitable for construction in sea or near coastal areas and Portland Blast Furnace Slag Cement for massive constructions e.g. dams and canals. The company also produces specially formulated mixes of cement to meet the different customer requirements. 3. It markets its cement under the brand name of 'Falcon Cement.' The company focuses on meeting the Pakistan and international quality standards and in 2002 it achieved the ISO 9001: 2000 certification. A visible slowdown has been observed in the local demand. 4. The main reasons behind this slowdown were the poor law and order situation and political turmoil in the country. Another significant reason for this slowdown is increase in overall construction cost due to higher inflation and interest rates. 5. It is anticipated that the local demand would continue to remain under pressure because of higher interest rates and poor law and order situation currently prevailing in the country. The export

29

markets, in terms of prices, would remain sensitive because of stiff competition from regional capacities. Given cement status as commodity in the regional countries, it can be assumed that any struggle for market share will have to be conducted in term of prices. 6. The key strategic factor is to sustain the business growth and to explore more and more new markets for our products. The geographic location of our country is ideal for export in the region and with the availability of surplus capacity we have potential for earning sizeable foreign exchange. We have seen a tremendous export growth that has recognized Pakistan as potential cement exporting country. With the availability of infrastructure facilities at port the country has the potential to export 15million tons of cement and clinker. 7. 2009 Cement production 1,712,6 (Tons) 65 Cement sales (Tons) 1,719,1 62 2008 1,364,5 11 1,359,4 87 2007 2006 1,234,878 842,296 1,228,793 843,137 2005 728,487 730,704

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APPENDIX C: RATIOS
ACPL FY07 PROFITABILITY ANALYSIS Net Turnover (Rs. million) Sales growth Gross profit margin Net profit before tax margin Return On Capital employed/ROCE LIQUIDITY ANALYSIS Current ratio Acid test ratio WORKING CAPITAL RATIOS Debtor collection days Creditor payment days Inventory holding days DEBT TO CAPITAL STRUCTURE Debt to capital ratio Interest cover VALUATION ANALYSIS Earnings per share Dividend per share Share value Price to earnings Dividend yield 4,560 31.29% 34.10% 26.16% 18.11% ACPL FY08 5,001 9.67% 22.27% 13.49% 10.00% ACPL FY09 8,510 70.16% 31.83% 23.37% 27.63% BWCL FY09 14,814 97.86% 32.19% 8.13% 4.95%

1.26:1 0.65:1 2days 24days 33days

1.51:1 0.45:1 3days 40days 38days

2.43:1 1.36:1 2days 18days 38days

0.64:1 0.26:1 14days 11days 26days

22:78 12.65time s Rs.11.04 Rs.4.50 Rs.118.25 10.71time s 3.80%

18:82 5.41times

11:89 17.71time s Rs.20.69 Rs.3.25 Rs.70.36 3.40times 4.61%

58:42 1.52times

Rs.6.03 Rs.1.50 Rs.69.25 11.48time s 2.17%

Rs.3.17 0 Rs.28.00 8.83time s 0

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APPENDIX D GRAPHS
DISTRIBUTION OF TOTAL REVENUE
8% 7% 1%

Cost of sales Operating expenses

17%

Retained profit Corporate taxes

67%

Financial charges

NET SALES
9000 8000 7000 MILLION 6000 5000 4000 3000 2000 1000 0 2005 2006 2007 YEAR 2008 2009

PROFIT BEFORE TAX

2009 2008 YEAR 2007 2006 2005 0 500 1000 1500 MILLION 2000 2500

CURRENT ASSETS
3000 2500 MILLION 2000 1500 1000 500 0 2005 2006 2007 YEAR 2008 2009 837 1285 575 1480 2762

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APPENDIX E: FINANCIAL STATEMENTS

Balance Sheet As at June 30,
2009 Share Capital and Reserves Authorized capital 125,000,000 ordinary shares of Rs 10 each 2008 2007 (Rupees '000') 1,250 ,000 1,25 0,000

1,25 0,000

Issued subscribed and paid up capital Unappropriated profit Hedging reserve

721 ,629 4,04 3,176 13 ,062 4,77 7,867

721 ,629 2,784 ,754 25 ,196 3,531 ,579

721 ,629 2,67 4,462 (47) 3,39 6,044

NON-CURRENT LIABILITIES Liabilities against assets subject to finance leases Long term murabaha Deferred taxation

422 ,500 636 ,870 1,05 9,370

622 ,500 736 ,449 1,358 ,949

109 822 ,500 554 ,213 1,37 6,822

CURRENT LIABILITIES 856 ,330 8 ,914 70 ,320 200 ,000 1,13 5,564 6,97 2,801 767 ,579 12 ,731 819 ,785 14 ,413 1 ,076 177 ,500 1,01 2,774 5,78 5,640

Trade and other payables Accrued markup Current maturity of liabilities against assets Subject to finance leases Current maturity of long term murabaha

109 200 ,000 980 ,419 5,87 0,947

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NON CURRENT ASSETS Fixed assets Long term investment Long term loans and advances Long term deposits CURRENT ASSETS 599 ,605 613 ,934 46 ,485 26 ,208 12 ,362 7 ,676 26 ,988 557 ,265 871 ,826 2,76 2,349 6,97 2,801 622 ,758 409 ,498 49 ,799 21 ,213 10 ,351 2, 154 49 ,403 183 ,950 20 ,246 110 ,957 1,480 ,329 5,87 0,947 348 ,714 276 ,428 19 ,897 35 ,099 2 ,894 2 ,154 23 ,489 107 ,073 203 ,502 265 ,776 1,28 5,026 5,78 5,640 4,14 3,534 4 ,500 19 ,438 42 ,980 4,21 0,452 4,333 ,363 4, 500 9, 775 42 ,980 4,390 ,618 4,44 3,222 4 ,500 9 ,912 42 ,980 4,50 0,614

Stores, spares and loose tools Stock-in-trade Trade debts - considered good Loans and advances Short-term deposits and prepayments Interest accrued Other receivables Taxation Investments at fair value through profit or loss Cash and bank balances

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Profit and Loss Account For the year ended June 30,
2009 8,510, 5,801, Cost of sales Gross profit Distribution cost Administrative expenses Other operating expenses Other operating income Operating profit Finance cost Profit before taxation Taxation Profit after taxation 099 972 194 420 402 533 489 763 726 775 951 495, 1,492, 025 119, 1,988, 967 942 239, 435, 433 166, 2,108, 876 909 153, 674, 182, 147, 841 840 27, 828, 2,708, 437, 744 582 133, 54, 465 299 23, 2008 (Rupees '000') 5,001, 350 3,887, 147 1,114, 203 124, 360 701 110, 88, 2007 4,560, 402 3,005, 726 1,554, 676 83,

Net Sales

071

1,295, 449 072 102,

1,193, 377 944 396, 796,

Profit and Loss Account For the year ended June 30,
FORMULAE: 2009 2008 (Rupees '000') 2007

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Net Sales Cost of sales Gross profit Distribution cost Administrative expenses Other operating expenses Other operating income Operating profit Finance cost Profit before taxation Taxation Profit after taxation

8510071 5801099 =SUM(B8B10) 437194 182420 147402 166533 2108489 119763 1988726 495775 =SUM(B26B28)

5001350 3887147 =SUM(C8C10) 124744 133582 54841 27840 828876 153909 674967 239942 =SUM(C26C28)

4560402 3005726 =SUM(E8E10) 83360 110701 88465 23299 1295449 102072 1193377 396944 =SUM(E26E28)

36