OXFORD BROOKES UNIVERSITY

RESEARCH AND ANALYSIS REPORT

“AN EVALUATION OF THE BUSINESS AND

FINANCIAL PERFORMANCE OF D.G. KHAN CEMENT
COMPANY LIMITED (DGKCC) BETWEEN 1 JULY
2004 AND 30 JUNE 2007”

(Word count: 6,498)

Presented by:

KAMRAN KHALID
ACCA reg. # 1431751
September 2008
CONTENTS

Page No.

1. Research Objectives and Overall Research Approach 4

1.1 – Topic Chosen and the Selected Organisation 4

1.2 – Project Objectives 5

1.3 – Research Questions 5

1.4 – Research Approach 6

2. Information gathering and business/accounting techniques 7

2.1 – Information Gathering 7

2.1.1 – Sources of Information and Methods used to

Collect Information 7

2.1.2 – Limitations of Information Gathering 8

2.1.3 – Ethical Issues and their Resolution 9

2.2 – Business/Accounting Techniques 9

2.2.1 – Financial Ratio Analysis 9

2.2.2 – SWOT Analysis 11

2.2.3 – Porter’s Five Forces 11

3. Results, Analysis, Conclusions and Recommendations 12

3.1 – Business Description 12

3.2 – Cement 13

3.2.1 – The Cement Industry of Pakistan 13

3.3 – The Economy 14

3.4 – Ratio Analysis 15

3.4.1 – Sales Analysis 15

3.4.2 – Profitability Ratios 16

3.4.3 – Return-on-investment Ratios 19

 3.4.4 – Activity Ratios 20

3.4.5 – Liquidity Ratios 21

3.4.6 – Financial Leverage Ratios 22

3.4.7 – Valuation Ratios 24

3.5 – SWOT Analysis 26

3.6 – Porter’s Five Forces 27

3.7 – Conclusion 29

3.8 – Recommendations 31

List of References 32

Appendices

Appendix A – Financial Statement Extracts 34

Appendix B – Questionnaire and Response 36

 PROJECT OBJECTIVES AND
OVERALL RESEARCH APPROACH

1.1 – TOPIC CHOSEN AND THE SELECTED

ORGANSIATION
After careful consideration of my strengths and weaknesses and
discussions with my mentor I have selected the topic “The business and
financial performance of an organisation over a three year period” for my
Research & Analysis Project.

The focus of my research report is “D.G. Khan Cement Company Limited

(DGKCC)” which is currently the second largest cement manufacturing unit in
Pakistan.

This report evaluates the financial and business performance of DGKCC,

over a three year period (FY2005-FY2007), using various analytical tools. It
considers both financial and non-financial factors and also includes the impact
of other major internal and external events on the company’s performance.

The analytical techniques used are: the financial ratio analysis, SWOT
analysis and the Porter’s Five Forces analysis.

1.1.1 – REASONS FOR SELECTION

Following are the reasons for choosing this particular topic and organisation:
™ Ratio analysis has been an area of great interest to me since I studied it
for the first time in Certified Accounting Technician course. The other
two techniques: the SWOT analysis and Porter’s five forces are highly
important strategic management tools and carry huge weightage in the
professional level subjects of ACCA. Thinking of applying these theories
in the practical world motivated me to select this topic.
 ™ Cement industry stands in the second place in Pakistan’s economy, after
textile. Therefore, analysing the cement industry helps to gain a better
understanding of Pakistan’s economy.
™ I used to wonder why do not I see advertisements of cement products in
my country yet it is a basic commodity. This made me curious to know
more about the cement industry.
™ DGKCC has been the industry leader since 1990s but lost its top slot to
“Lucky Cement Limited (LCL)” during 2005. This arouse interest in me to
analyse the performance of DGKCC and find out the reasons of losing its
market share.
™ Selecting the second largest company allowed me to benchmark its
performance against the industry leader – LCL.

1.2 – PROJECT OBJECTIVES

™ To gain an understanding of the cement industry of the country.
™ To analyse the business and financial performance of DGKCC over a
period of 3 years (FY2005-FY2007) giving sufficient consideration to its
profitability, liquidity, asset management, financial leverage and equity
analysis.
™ To carry out the corporate appraisal (SWOT analysis) of DGKCC, thereby
identifying any profitable opportunities matching its strengths and
counter major weaknesses and threats.
™ To analyse the competitive intensity of the industry and the company’s
position using Porter’s five forces model.
™ To provide a quality report interpreting the business and financial
performance of DGKCC over the period under study.

1.3 – RESEARCH QUESTIONS

After selection of the topic and the target organisation I jotted down the
following research questions to further clarify my project objectives:
™ What research approach I should adopt to meet the set objectives?
™ What are the reliable sources of information? Are they easily accessible?
™ Can I rely on the secondary data?
 ™ Which areas do I need to concentrate if my research work exceeded the
prescribed words count?
™ What conclusions can be drawn from my analysis?
™ Are there any ethical issues resulting from my research project?
™ Do I need to refresh my technical skills reviewing my text books?
™ What IT skills do I need for the preparation of my research project?
™ What are the key elements I should present to my mentor?

1.4 – RESEARCH APPROACH

After setting the project objectives and stating my research questions I
adopted the following research approach:
™ I set a time outline for my project, taking into consideration the
collection of data, estimated time to be spent on my analysis, the next
two meetings with my mentor, the final deadline for my project
completion; and the anticipated hurdles.
™ As I entered the implementation stage of my project I started doing the
required actions to complete my research project within the specified
time, meeting my project objectives.
™ I followed a sequenced approach; first of all gathering data about the
company, then the industry, the economy and then started carrying out
most crucial part of my project – the analysis.
™ After drawing conclusions from my analysis I gave some time, almost
two days, to review my work and presented it to my mentor in the
second meeting.
™ My research work had exceeded the words constraints so I obtained my
mentor’s advice on to which areas I should put more weightage and
which areas can be shortened. Finally, I made the company’s
information brief and optimised the length other less important areas to
effectively meet my project objectives by putting more concentration on
my analysis work.
 INFORMATION GATHERING AND
BUSINESS/ACCOUNTING TECHNIQUES

2.1 – INFORMATION GATHERING

The first step involved in ensuring the accuracy of a research is the

verification of the validity and reliability of data used; and hence the source of
data carries great importance. Keeping in view the requirements of my selected
topic, I managed to gather data from reliable sources and before finalising my
RAP I had collected sufficient corroborative evidence from different sources to
confirm the validity of the data used for analysis.

2.1.1 – SOURCES OF INFORMATION AND METHODS

USED TO COLLECT INFORMATION

2.1.1.1 – PRIMARY DATA

Primary data is the original data derived from a new research study and
collected at source, as opposed to previously published material.
(dictionary.bnet.com)

To gain an insight of the cement industry and DGKCC I interviewed Mr.

Hafeez Ahmad, an assistant manager at the company’s registered office,
Lahore. Mr. Hafeez briefed me about the operations of the company and gave
me an insight to the cement industry. I gained an understanding of the
corporate structure of the company, as well as the major challenges faced by
the company and its future plans.

2.1.1.2 – SECONDARY DATA

Secondary data is the data that was collected previously and not for the
particular study at hand. (www.marketresearchterms.com)
 I visited the Lahore Stock Exchange to obtain the audited annual reports
of DGKCC for the periods FY2005, FY2006 and FY2007 plus the audited annual
report of LCL for the FY2007.

Then I started looking for reference books in the Punjab Public Library
to understand the global cement industry and read reports on the cement
industry of Pakistan. During my period of analysis, I always tried to find the
related news and articles, in the newspapers, about my country’s cement
industry and especially the updates and prospects of DGKCC. Web archives of
leading newspapers were of great help in collecting the past information about
the company as well as the cement industry.

ACCA publications such as the Student Accountant magazine along with

my BPP study course material helped me a lot in refreshing my technical skills
thereby conducting a quality analysis. I also consulted other books
specialising in the interpretation of financial and business performance of an
organisation.

The World Wide Web served to be one of the most cost-efficient sources
of information in carrying out this analysis and gathering corroborative
evidence to ensure the validity and reliability of information. As I have a
broadband internet facility at home, I did extensive search related to DGKCC
and the cement industry keeping in mind the project objectives. Whenever I
came across the information of my concern on the websites which were
previously unknown to me, I started finding their supporting evidence on
other websites to ensure the validity of information.

2.1.2 – LIMITATIONS OF INFORMATION

GATHERING
™ I remember I had to visit the Lahore Stock Exchange for three times to
get the audited annual reports. On my first visit, the record room had
been closed according to a new timetable. During my second visit, I
came to know that I need to get the annual reports photocopied as there
were only two sets left in the record room. Due to shortage of money I
 photocopied the financial statements sections only. Then finally, on my
third visit I had the whole set of annual reports.
™ Finding the right and precise information was one of the difficult and
time-consuming tasks in information gathering. I spent hours on
reading the newspapers, trade magazines, reference books and surfing
the internet to collect the most up-to-date and reliable information.

2.1.4 – ETHICAL ISSUES AND THEIR RESOLUTION

As anticipated, I came across an ethical issue while gathering primary
data. When I reached the company’s registered office and told them that I was
carrying out a research project on their company. Initially they were reluctant
to provide me with the desired information. Then I briefed them about my
project and convinced them that majority of my project was based on already
published information. However, when I ensured them about keeping
confidentiality of the provided information they were happy to direct me to an
assistant manager at the company’s office.

2.2 – BUSINESS/ACCOUTING TECHNIQUES

The business/accounting techniques used to support this analysis are as

follows:

2.2.1 – FINANCIAL RATIO ANALYSIS

Ratio analysis enables the evaluation of past performance, assessment of
current financial position and gives insights that are useful for projecting
future results. Financial ratios provide insights into:
™ the micro economic relationships within a company that help analyst to
project earning and free cash flows;
™ a company’s financial flexibility, or ability to obtain the cash required to
grow and meet its obligations; and
™ management’s ability
(CFA Level 1, 2008)
Financial ratios have been further sub-divided into following categories:

1. Profitability Ratios:
Profitability ratios measure how well a company is performing by
analyzing how profit was earned relative to sales, total assets and net worth.
(kbr.dnb.com)

2. Liquidity ratios:
Liquidity reflects the ability of a firm to meet its short-term obligations
using those assets that are most readily converted into cash. (Fabozzi &
Peterson, 2003)

3. Financial Leverage Ratios:

These ratios are used to calculate the financial leverage of a company to
get an idea of the company’s methods of financing or to measure its ability to
meet its financial obligations. (www.investopedia.com)

4. Turnover ratios:
The financial ratios that measure an asset’s activity or efficiency in
generating or turning-over cash are known as turnover ratios.
(www.businessdictionary.com)

5. Valuation Ratios:
A valuation ratio is a measure of how cheap or expensive a security (or
business) is, compared to some measure of profit or value. Valuation ratios
compare the cost of a security to the benefits of owing it. (moneyterms.co.uk)

2.2.1.1 – Limitations of Ratio Analysis:

™ Ratio analysis is based on accounting data which is subject to
manipulation by changes in accounting and management policies.
™ Ratio analysis does not tell us the entire story. There may be good
business reasons to support management’s decision to reduce or
increase liquidity or fixed assets in a different manner than the rest of
the industry. Having a single ratio out of line with an industry,
 therefore, does not necessarily mean there is a problem. (www.college-
cram.com)

2.2.2 – SWOT ANALYSIS

The SWOT analysis provides information that is helpful in matching the
firm’s resources and capabilities to the competitive environment in which it
operates. (www.quickmba.com)

SWOT analysis (corporate appraisal) is a critical assessment of the

strengths and weaknesses, opportunities and threats affecting an organisation
to establish its condition before the long-term plan is prepared. (BPP 2008,
ACCA Paper P5)

2.2.2.1 – Limitations of SWOT Analysis

™ The SWOT framework has a tendency to oversimplify the situation by
classifying the firm’s environmental factors into categories in which
they may not always fit.
™ The classification of some factors as strengths or weaknesses, or
opportunities or threats is somewhat arbitrary.
(jobfunctions.bnet.com)

2.2.3 – PORTER’S FIVE FORCES

Porter’s model outlines the primary forces that determine
competitiveness within an industry and illustrates how those forces are related
(www.1000ventures.com). The model provides a simple perspective for
assessing and analysing the competitive strength and position of a corporation
or business organisation. (Chapman, 1995-2005)

However, one of the major drawbacks of this model is that the model
assumes relatively static market structures. This is hardly the case in today’s
dynamic markets. (www.themanager.org)
 RESULTS, ANALYSIS,
CONCLUSIONS
& RECOMMENDTAIONS
D.G. KHAN CEMENT COMPANY LTD.

3.1 – BUSINESS DESCRIPTION

D.G. Khan Cement Company Limited (DGKCC), a unit of Nishat group, is

one of the largest cement manufacturing units in Pakistan. It has a
countrywide distribution network and its products are preferred on projects of
national repute both locally and internationally due to the unparallel and
consistent quality. It is listed on all the stock exchanges of Pakistan.
(www.dgcement.com)

3.1.1 - History
DGKCC was established under the management control of State Cement
Corporation of Pakistan Limited (SCCP) in 1978. Nishat Group acquired DGKCC
in 1992 under the privatization initiative of the government.
(www.dgcement.com)

3.1.2 - NISHAT GROUP

Nishat Group is one of the leading and most diversified business groups
in South East Asia. With assets over PKR 300 billion, it ranks amongst the top
five business houses of Pakistan. (www.pakistanaviators.com)

3.1.3 - Major Shareholders

Nishat Mills Ltd. is the major shareholder of DGKCC holding 79,614,700
ordinary shares which make up 31.40% of the total ordinary shares of DGKCC.
(DGKCC Annual Report, 2007)

3.1.4 - Products
Two different products are produced at DGKCC namely Ordinary
Portland Cement and Sulphate Resistant Cement. (www.dgcement.com)
3.1.5 - Operations
The operations involved are power generation, purchasing, mining, crushing,
grinding, burning, storing, packaging and marketing.
(www.accessmylibraray.com)

3.1.6 - Exports
Currently the company exports 10,000 to 12,000 tons of cement per
month to Afghanistan and is also eyeing the potential Indian market. “Our first
preference is naturally to capture the local market and then we will be more
interested in exports,” said Innayat Ullah Niazi, the chief financial officer of
DGKCC. (sg.biz.yahoo.com)

3.2 – CEMENT

Cement can be regarded as one of the basic materials required by

construction programmes for various infrastructures such as transport, water
and power supply, communications, water treatment and disposal as well as
housing and industrial plants. Temporary shortages of cement can, as a result,
frequently halt or disrupt construction programmes. (Pheng & Bee, 1993)

3.2.1 – THE CEMENT INDUSTRY OF PAKISTAN

The cement industry of Pakistan comprises 27 companies, of which 21
are listed on the stock exchange. The industry is divided into two regions,
Northern and Southern Zones. The Northern region caters to almost 70 per
cent of the total cement dispatches.

Between DGKCC and the other giant in the sector, the Lucky Cement
Company Ltd. (LCL), the race – even if quietly – has been to be the biggest.
DGKCC which had stood aloft as the largest player in the industry since 1990
lost its top slot to LCL in 2005, after the latter went into huge expansions.
(Dawn News, 2008)

Cement industries in Pakistan are currently operating at their maximum

capacity due to the boom in commercial and industrial construction within
Pakistan. Consumers face a tough decision with regards to prefer which brand
over which because of the similar pricing of the cement industry.

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.
(Industrial and Competitive Analysis, 2007)

3.3 – THE ECONOMY

Pakistan’s economy has shown 7.0 per cent growth in FY2007 for
another consecutive year as against the economic growth of 6.6 per cent in
FY2006. Now it has achieved a growth rate of almost 7.0 per cent per annum
during the last five years (FY2003 to FY2007). With this performance it has
achieved a status of one of the fastest growing economies of Asian region. The
growth momentum is due to dynamism in industry, agriculture and services,
and the emergence of a new investment cycle supported by growth in
investment demand. (www.lasbelachamber.com)
3.4 – RATIO ANALYSIS

3.4.1 – SALES ANALYSIS

DGKCC LCL
FY2005 FY2006 FY2007 FY2007
Sales volume
21.81% 15.80% 12.31% 111.29%
growth
Sales revenue
35.97% 50.69% (19.31%) 55.47%
increase/(decrease)

The performance of the production plants of DGKCC at D.G. Khan site,

during FY2006 and FY2007, was remarkable as it surpassed its rated
production capacity. Capacity utilization during the FY2005, FY2006 and
FY2007 was 94.97%, 112.10% and 113.40% respectively. The new plant at
Khairpur site also started its commercial production in the last quarter of the
FY2007 and after a few months it has reached its rated production capacity.

During the FY2007, the sales revenue of DGKCC declined by 19.31% as

compared to the FY2006 despite the surge in sales volume. This is because the
cement industry suffered an over-supply situation due to new capacities
coming on stream, consequently putting pressure on prices.

The sales revenue of the company for the FY2006 was very impressive
as compared to its previous year i.e. FY2005. During the FY2006 the company
generated a sales revenue of PKR 7,956 million, 50.69% more than the FY2005.
Both the volume growth and better selling prices contributed to this increase
in revenue.

During the second quarter of the FY2006 there occurred a catastrophic

disaster in the country – the earthquake on 8th October 2005, which wrecked
hundreds of thousands of houses, buildings and roads. The rehabilitation work
started thereafter suddenly increased the demand for construction material
including cement and the selling prices rose by exception. This resulted in
favourable sales price variance of PKR 1,842 million in the FY2006 allowing
DGKCC to enjoy huge profits.

The sales volume of LCL during the FY2007 increased by 111.29% owing
to more production capacity than DGKCC as a result capturing most of the
cement demand in the country. While studying its sales price variance, the
results are similar – it also suffered an adverse sales price variance during
FY2007.

3.4.2 – PROFITABILITY RATIOS

DGKCC LCL
FY2005 FY2006 FY2007 FY2007
Gross profit
36.91% 49.81% 31.65% 29.35%
margin
PBIT margin 45.94% 49.13% 34.31% 28.38%
Net profit margin 31.86% 30.40% 25.27% 20.34%

3.4.2.1 – Gross Profit Margins

During the FY2007, the gross profit (GP) margin of DGKCC was 31.65%
i.e. for each rupee of sales the company made a GP of 31.65 paisa. The GP
margin has declined as compared to the FY2006. Looking at sales and cost of
sales in depth it is revealed that the major factor which resulted this decline
was the fall in per unit selling prices.

As per the general economic trend, energy and fuel prices are steadily
rising in both international and local markets. Also the rising inflation is a
threat to cost of production. The fall in GP margin in the FY2007 could have
been much higher but due to the company’s decision of using gas for heating
the kiln it was prevented. As almost on average the energy expenses of DGKCC
comprise over 55.00% of the cost of sales, the in-time decision of replacing
coal with gas helped the company to save its profit margins by going further
down.
 DGKCC Profit Figures over the 3 year period

Gross Profit
4,000 PBIT
Net Profit
3,500

3,000

2,500
PKR million

2,000

1,500

1,000

500

0
FY2005 FY2006 FY2007

The GP margin during FY2006 was 49.81% which was a direct result of
increased selling prices and sales volume. However, the fuel & power expenses
made up 65% of the cost of sales. In the FY2005, the GP margin was 36.91%
which can also be depicted by growth in sales volume and favourable selling
prices.

Comparing the GP margin of DGKCC with LCL for the FY2007, DGKCC
still has a healthy GP margin i.e. 31.65% compared with 29.35%. While studying
the cost of sales of LCL, the difference can be explained in terms of high
proportion of fuel and power expenses comprising 65% of the cost of sales.
Due to a better alternative solution of energy, DGKCC was able to secure a
better GP margin than its industry competitor.

3.4.2.2 – Net Profit Margins

The net profit (NP) margins of DGKCC have shown a decline over the last
three years but compared with the net profit of LCL, it is still a healthy margin.
During the FY2007, although the company made lesser GP margin because of
lower selling prices, yet the NP was not affected with the same percentage.
This is because during FY2007 the company’s other operating income
increased by 42.93% compared with FY2006, with MCB Bank Limited being the
major contributor in dividend income i.e. PKR 420 million. Another factor
contributing to this was the good control over its expenses by DGKCC.

During the FY2006, the NP margin of DGKCC was 30.40% i.e. for each
rupee of sales the company’s NP was 30.40 paisas. While the GP margin in
FY2006 was the highest of all the periods under study it was expected that its
NP margin will also differ with the same percentage. But during FY2006 the
company made provisions for deferred taxation of PKR 1,027 million, which
eroded its NP margin. The reason of 121.34% high deferred tax in FY2006 as
compared to FY2005 was the Khaipur site expansion project of the company
inaugurated in the last quarter of FY2005.

The NP margin for the FY2005 was 31.86% which is not much less than
its GP margin i.e. 36.91%. This was the result of the fair value gain, included in
other operating income, of PKR 527 million on derecognition of investment in
shares of Umer Fabrics Limited upon its merger with Nishat Mills Limited and
Nishat (Chunian) Limited.
3.4.3 – RETURN-ON-INVESTMENT RATIOS
DGKCC LCL
FY2005 FY2006 FY2007 FY2007
Basic earning
13.46% 11.39% 4.26% 13.81%
power
Return-on-assets 9.34% 7.05% 3.14% 9.90%
ROCE 16.21% 13.82% 4.97% 18.34%
ROE 18.05% 12.55% 4.78% 27.23%

3.4.3.1 – Return-on-assets
The return-on-assets (ROA) is the ratio of net income to total assets. In
FY2007, the ROA of the company was 3.14% i.e. for every rupee invested in
assets the company earned 3.14 paisas. This ROA is 55.46% less than that of
FY2006. The main reason was the company revalued both its long-term and
short-term investments resulting cumulative revaluation surplus of PKR 14,986
million.

As already during 2007, the profits margins were lower because of the
fall in selling prices. This revaluation of assets resulted in decreased ROA. Had
the revaluation not been done the ROA would have been 4.4%.

The ROA for the FY2006 was 7.05% which was lower compared with that
of FY2005 i.e. 9.34%. During FY2006 as the Khairpur plant was under
construction, more investment was required in capital work-in-progress and
the company was not getting any return as the plant had not become
operating; plus a revaluation surplus of PKR 8,985 million arising on
investments resulted in lower ROA. Otherwise, as the earnings during the
FY2006 were the highest of the three years under study, the ROA would have
been higher as well.

3.4.3.2 – Return-on-equity
The return-on-equity (ROE) is the ratio of the net income shareholders
receive to their equity in the stock. The ROE for FY2007 was 4.78% which is
very less as compared to 12.55% of FY2006. The main reasons are lower profits
margins because of lower selling prices; increased revaluation surplus on
investments plus the right issue made during the year increased the equity.

Similarly the ROE of FY2006 was affected by the revaluation in

investments and the provision for deferred taxation hence resulting 12.55%
ROE. The ROE for FY2005 was good among all three periods stemming from
higher NP margin.

LCL enjoyed a very high ROE compared with DGKCC. As in FY2007 the
ROE of LCL was 27.23% which is very high as compared to 4.78% ROE of
DGKCC. This is because of a huge revaluation surplus of PKR 22,868 million
standing in the equity of DGKCC.

3.4.4 – ACTIVITY RATIOS

DGKCC LCL
FY2005 FY2006 FY2007 FY2007
Inventory turnover 11 days 21 days 25 days 28 days
Debtor’s turnover 5 days 3 days 8 days 14 days
Operating cycle 16 days 24 days 33 days 42 days
Total assets
0.29 0.23 0.12 0.49
turnover ratio
Fixed assets
0.48 0.41 0.27 0.62
turnover ratio

The inventory turnover days have increased during last three years
which is probably because of the increase in demand and the company
following high level stock policies. The debtor’s turnover days have also
increased and were highest in the FY2007; this depicts lenient credit policies
exercised by the company to boast its sales. Compared the operating cycle of
DGKCC with LCL, we come to know that DGKCC has a healthier operating cycle
and for FY2007 its average inventory was converted into cash in 33 days.

The total assets turnover ratio shows the productivity of the assets.
During the FY2007, the total assets turnover ratio was 0.12 i.e. for every rupee
invested in assets, the company generated 12 paisas of sales. The productivity
of DGKCC’s assets has decreased over the years. This is because of the upward
revaluation of assets and the company not getting returns from its new
expansion as the plant had not been become operating.

3.4.5 – LIQUIDITY RATIOS

DGKCC LCL
FY2005 FY2006 FY2007 FY2007
Current ratio 1.37 : 1 1.65 : 1 2.60 : 1 0.85 : 1
Quick ratio 1.34 : 1 1.61 : 1 2.56 : 1 0.74 : 1

3.4.5.1 – Current Ratio

The current ratio indicates the firm’s ability to meet or cover its current
liabilities using its current assets. The current ratio of DGKCC for the FY2007
was 2.60:1 i.e. the company has rupees 2.60 current assets to meets its 1 rupee
current liability.

DGKCC – Current Assets Vs Current Liabilities

Current Assets Current Liabilities

20,000,000

18,000,000

16,000,000

14,000,000

12,000,000

10,000,000

8,000,000

6,000,000

4,000,000

2,000,000

0
FY2005 FY2006 FY2007
 The current ratio of DGKCC has been continuously increasing during the
period under study. This is due to the increased fair value of short-term
investments during the FY2006 and FY2007. Other factors contributing to this
increase are more stores, spares and loose tools and improved cash and bank
balances. Moreover, the ideal current ratio is 2:1; DGKCC enjoys a much
healthier ratio which depicts its strong position in terms of liquidity.

3.4.5.2 – Quick Ratio

The quick ratio of DGKCC has also been on the rise since the FY2005.
Also the quick ratio is not much different from its corresponding current ratio
which reveals that DGKCC has less investment tied up in inventory – the least
liquid asset, which is a good sign. Since the ideal quick ratio is 1:1, the quick
ratios of DGKCC are going far above this. Measures should be taken to
optimize the investment in working capital so as to avoid any opportunity
losses.

The current ratio and the quick ratio of DGKCC, when compared with
the ideal figures and with those of LCL, are very strong and there are very rare
chances of company not meeting its obligations when they become due.

3.4.6 – FINANCIAL LEVERAGE RATIOS

DGKCC LCL
FY2005 FY2006 FY2007 FY2007
Debt-to-equity
37.67% 31.89% 24.03% 51.53%
ratio
Interest coverage
7.98 times 8.67 times 4.71 times 4.12 times
ratio

3.4.6.1 – Debt-to-equity Ratio

Debt-to-equity ratio, also known as gearing, tells us how the firm
finances its operations with debt relative to the book value of its shareholders’
equity.
 Debt-to-equity ratio of DGKCC has decreased over the last three years
which is a good sign. Although the debt has increased over this period but the
equity has also improved by exception. The increase in equity is because of
the exercised fair value of the investments during FY2006 and FY2007 and the
right issue made during FY2007.

Presently the company is low geared and its risk of solvency is also very
low whereas LCL is highly geared with debt-to-equity ratio of 51.53%. It shows
that LCL finances its operations more from debt as compared to DGKCC.

3.4.6.2 – Interest Coverage Ratio

The interest coverage ratio tells us how the firm can cover or meet the
interest payments associated with debts. The interest coverage ratio of DGKCC
for the FY2007 was 4.71 times which means that PBIT of DGKCC during this
year was 4.71 times of its interest charges. Although the finance cost of
FY2007 as compared with FY2006 has just increased by 3.88% but because of
the lower PBIT this year, the interest coverage ratio has almost become half
than the pervious year. Comparing this with the financial leverage of LCL it is
still a healthy ratio.

During the FY2006 the finance cost increased by 48.24% as compared to

FY2005. But because of higher earnings during FY2006 the interest coverage
ratio was 8.67 times of the PBIT becoming the highest of the period under
study.
3.4.7 – VALUATION RATIOS
DGKCC LCL
FY2005 FY2006 FY2007 FY2007
Market value per
80.40 107.95 91.28 100.71
share (PKR)
Dividend per share
1.50 1.50 1.50 1.25
(PKR)
Earnings per share
9.12 13.12 6.43 9.67
(PKR)
Price earning ratio 8.82 8.23 14.20 10.41
Dividend yield 1.87% 1.39% 1.64% 1.24%

The market value per share of DGKCC was highest at the year end
FY2006, thereafter, declining by 15.44% at the year end of FY2007. This is
because during FY2007 the company made lower profits; plus there was a
bonus issue and right issue during the year leading to an increased number of
shares.

EPS of FY2006 rose remarkably stemming from improved profitability

and higher realised prices. However, in the following year, it declined. Major
factors aforementioned were reduced selling prices per unit resulting lower
profits, and bonus and right shares issued during the year leading to increased
number of ordinary shares. The company has maintained its cash dividend per
share of PKR 1.50 during all the three years even the company was carrying
out its expansion project which involved huge expenditures. On the other
hand, LCL declared a smaller dividend of PKR 1.25 per share for the FY2007.

The price earning ratios of FY2005 and FY2006 have a nominal

difference as the market value per share and EPS increased by almost the same
percentage. However, in FY2007 it was highest which suggests that investors
are expecting higher earnings growth in the future compared to the overall
market, as investors are paying more for today’s earnings in anticipation of
future earnings growth.
 In Pakistan’s market where majority of the investors seek capital gains
on their shares i.e. growth investors, the high P/E ratio of FY2007 attracts
these investors to buy DGKCC shares, whereas LCL with 10.41 P/E ratio stands
second to it.

A stock’s dividend yield depends on the nature of a company’s

business, its posture in the marketplace (value or growth oriented), its
earnings and cash flow, and its dividend policy. The dividend yield of DGKCC
has been fluctuating with the market value per share of the company. Since,
growth investors are concerned with capturing capital gains; dividend yield
ratio is meaningless to them. However, it is a matter of historical record that
dividend-paying stocks have performed better than non-paying-dividend
stocks over the long term. (www.investopedia.com)
3.5 – SWOT ANALYSIS

STRENGTHS
™ DGKCC is the second largest cement producer in Pakistan with a
production capacity of 4.2 mtpa.
™ Unmatched preventive system resulting in remarkable capacity
utilisation during the last couple of years.
™ The company has European origin plant at Khairpur site which is a
competitive advantage over other companies as Western plants carry
lower long-term maintenance costs compared with the Chinese plants.
™ DGKCC production processes are environmental friendly and comply
with the World Bank’s environmental standards. It is the only cement
factory in Pakistan certified for both ISO 9002 & ISO 14001.
™ DGKCC has a diversified investment portfolio of group companies,
which envelops entities like MCB Bank, Nishat Mills and Adamjee
Insurance, providing sufficient cushion to its value against any volatility
in the cement sector, besides making hefty contributions to the income
of the company in the form of dividends. (www.fortunesecurities.com)
™ Confidence of European Investment Bank, Luxembourg, which approved
35 million euro as a seven-year term loan facility for DGKCC to facilitate
the expansion of its Khairpur cement plant. The loan carries a very
competitive rate compared with local lending rates. This is the first ever
finance facility extended by EIB to any private entity in the country.
™ During the FY2007 DGKCC replaced 60% of its coal with gas used for
heating the kiln which will result in energy cost savings in the future.
™ High quality cement commanding premium prices.

WEAKNESSES
™ Since DGKCC is confined to Northern region only, it has to suffer huge
transportation costs for development programmes in the Southern
region.
™ Its focus on the export market is very low.
OPPORTUNITIES
™ Huge potential for the export of cement and capturing new international
markets like India and Sri Lanka.
™ Construction of mega dams as well as other ongoing infrastructural
development by the government of Pakistan
™ Expansion or acquisition in the Southern region to strengthen its
position in that region

THREATS
™ Capacity additions by competitors can result in price wars and thereby
erode company’s profitability.
™ Delay in construction of major dam projects due to shortage of funds as
well as political obstacle will dent cement demand in the short run.
™ Ongoing tussle between the cement manufacturers and Monopoly
Control Authority (which is being given increased regulatory powers).
™ The threat of political unstability is true for all the industries.
™ Currently Pakistan is the major exporter of cement to Afghanistan and it
also aiming to export to Middle-East and India. However, it should be
noted that Iran is going to enter these markets soon.

Iran, one of the major producers of low-cost cement in the world,

is likely to capture the market in Afghanistan in the next two years.
Iranian cement industry is planning to undertake two giant projects in
India and Nigeria. (www.iran-daily.com)

3.6 – PORTER’S FIVE FORCES

Porter’s five forces model identifies the five forces that drive
competition within an industry. These five forces have been applied to the
cement industry of Pakistan as follows:

1. Threat of new entrants

The existing large companies are enjoying economies of scale which is a
competitive edge over the smaller players and new entrants. Cement is a
commodity business and sales volume mostly depends upon the distribution
reach of the company.

Since the industry requires a heavy investment to set up a project for

cement manufacturing, a wide distribution network; and looking at the
performance during FY2007 when new capacities resulted an over-supply
position and eroded profit margins, the risk of new entrants is very low.
However, the government may encourage imports from cheaper markets by
reducing excise duty if the local prices went exceptionally high.

2. Bargaining power of the buyers

Bargaining power of the buyers is very low because the price is derived
out of demand. Also there is similar pricing in the cement industry and lack of
unity among the buyers. Another reason of this low bargaining power is the
urgent need satisfaction. As even temporary shortages of cement can, as a
result, frequently halt or disrupt construction programmes, larger users
usually find it convenient to afford prevailing market prices to avoid any
losses resulting from disruption.

3. Bargaining power of the suppliers

Pakistan is fortunately rich in the deposits of limestone, clay and
gypsum, which constitute basic raw materials for manufacturing of cement.
(Jang News, 2004)

As the raw materials are easily available and there exist a large number
of suppliers as well, the prices of raw materials are very competitive. Whereas
the prices of coal, gas and oil fluctuate with the International market. Due to
both these factors, the bargaining power of suppliers is perceived to be low.

4. Threats from substitute products

At present, there are no known substitutes of cement and thus there is
no threat of substitute products.

Cement is a basic commodity required by construction programmes for

various infrastructures. Other building materials such as timber are only
suitable for low-rise buildings. On the other hand, although steel can be used
for medium to high-rise buildings, building regulations normally require
structural steel to be encased in concrete for fire protection purposes. This
increases the importance of cement and hence reduces the threat of its
substitutes. (Pheng & Bee, 1993)

5. Rivalry among competitors

Although the industry giants are enjoying economies of scale and
greater market share, the competition in the cement industry has become more
intense because of the capacity additions by a large number of companies.
The cement industry in the past has exploited the consumer by forming cartel
and increasing the rates arbitrarily. However, with excess supply coming
online, as evidenced by FY2007, the likelihood of violation of quotas and price
floors under marketing arrangement has increased, especially by weaker
players. This might lead to price wars and erode profit margins.

3.7 – CONCLUSIONS

Keeping in view my project objectives, I have drawn the following

conclusions from my analysis:

Sales Analysis:
Besides the positive trend in sales volume the sales revenue suffered a
decline in the FY2007 which can be traced back to lower retention prices. The
situation arose as the expanded capacities of various companies came online,
leading to an over-supply situation in the industry.

Performance Analysis:
DGKCC has been enjoying increasing GP margins in the years under
study with the exception of FY2007. The NP margin, on the other hand has
been going downhill since FY2005. The FY2006 was most favourable in terms
of increase in sales volume as well as higher prices. However, despite these
increments, the NP margin of the company declined. This was because of a
large amount of provisions for deferred taxation made in this year.
 The ROA and ROE of the company have followed a trend similar to the
profit margins but remained below that of the competitor’s averages. This
situation may improve in the coming years as the Khairpur plant has started
its commercial production.

Other than being cost efficient, DGKCC has an advantage due to its
equity investments, which act as a buffer in times of low prices. The
companies in the portfolio are stable, safe and profitable. MCB Bank Ltd. has
been the major contributor in the dividend income of DGKCC since FY2005.

The productivity of the assets has declined over the years. This is
because the company was not getting returns from its expansion project which
involved huge investments in assets. Another reason contributing to poor
productivity is the increased fair value of the company’s assets.

The liquidity position of the company has been strengthening since

FY2005, at the same time remaining above the industry average. This can be
depicted by the increased fair value of the company’s short-term investments.

The debt management ratio of DGKCC has shown a positive trend during
the last three years. This has been a result of increased revaluation surplus
plus retention of profits as well as issuance of new shares. On the other hand,
the interest coverage ratio of the company declined in the FY2007 owing to
lower profitability.

Equity Analysis:
In spite of huge investments in the expansion project and lower
profitability during the FY2007, the company has maintained its dividend per
share of PKR 1.50 for all the 3 periods under study. The increasing trend of EPS
was broken in the FY2007 which can be attributed to the lower profits due to
lower sales prices as well as an increase in the number of shares issued.

The P/E ratio after suffering a nominal decline in the FY2006 increased
to 14.20 in the FY2007. This increase attracts the investors seeking capital
gains, to buy DGKCC shares.
SWOT Analysis:
High quality cement, cost efficiency, secure and profitable investment
portfolio and the confidence of lenders have been the key strengths of DGKCC.
The attractive opportunities existing in the local as well as export market have
been exploited very well according to the up-to-date news about DGKCC. The
company is on its way to minimise its weaknesses. It has been planning an
expansion in the Southern region and eyeing the potential Indian market as
well. However, there exist a number of threats like delay in the construction of
major dams, political unstability, tussle with the Monopoly Control Authority
and Iran’s entrance into the export market.

Porter’s Five Forces:

At present, DGKCC has a very strong competitive position. It has no
threat of substitutes whereas the barriers to entry in the cement sector are
very high. The bargaining power of the buyers and suppliers of DGKCC is also
very low. However, there exists an intense competition among the cement
companies. As the cement companies carry huge fixed costs, they tend to
operate at their full capacity thereby, at times, result in an over-supply
situation which might lead to price wars.

3.8 – RECOMMENDATIONS

The overall performance of the company has been very good. However,
based on my analysis, I would recommend the company to focus more on its
exports. As in the FY2007, the local cement industry suffered an oversupply
situation; it would be profitable in the long-term to secure more of the export
market. Doing an expansion in the Southern region or acquiring any Southern
cement industry are also considerable options.
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APPENDIX A – FINANCIAL STATEMENTS EXTRACTS
DGKCC – Statement of Financial Position as at:
FY2005 FY2006 FY2007
(all figures in PKR thousands)
EQUITY AND LIABILITIES
CAPITAL AND RESERVES
Issued, subscribed & paid-up capital 1,843,937 1,843,937 2,535,412
Share deposit money 8,351
Reserves 7,196,568 15,085,354 29,630,084
Un-appropriated profit 277,493 2,330,558 1,757,689
9,317,998 19,268,200 33,923,185

NON-CURRENT LIABLITIES
Long-term finances 4,899,225 7,372,468 8,686,447
Liabilities against finance leased assets 131,985 28,886 1,141
Long-term deposits 28,674 33,814 79,467
Retirement and other benefits 45,765 26,572 39,862
Deferred taxation 537,000 1,559,000 1,624,000
5,642,649 9,020,740 10,430,917

CURRENT LIABILITIES
Trade and other payables 1,154,426 1,406,869 1,027,274
Accrued markup 960,620 340,757 342,612
Derivative foreign currency forward opt. 306,048
Current portion of non-current liabilities 599,674 2,613,695 3,942,972
Short-term borrowing – secured 1,619,025 2,042,281
Provision for taxation 35,090 35,090 35,090
3,055,858 6,015,436 7,390,229

18,016,505 34,304,376 51,744,331

ASSETS
CURRENT ASSETS
Property, plant and equipment 6,637,237 7,521,723 22,117,551
Assets subject to finance lease 317,262 295,058 133,376
Capital work in progress 3,983,175 11,759,677 1,907,063
Investments 2,610,634 4,482,213 8,174,474
Long-term loans, advances and deposits 271,428 335,810 196,913
13,819,736 24,394,481 32,529,377

CURRENT ASSETS
Stores, spares and loose tools 1,035,081 836,049 1,496,291
Stock-in-trade 100,994 226,286 295,140
Trade debts 76,238 74,165 144,245
Investments 2,769,134 8,543,763 16,933,790
Prepayments & other receivables 121,486 152,465 229,315
Cash and bank balances 93,836 77,167 116,173
4,196,769 9,909,895 19,214,954

18,016,505 34,304,376 51,744,331

DGKCC – Statement of Comprehensive Income:
FY2005 FY2006 FY2007
(all figures in PKR thousands)

Net sales 5,279,560 7,955,665 6,419,625

Cost of sales (3,330,769) (3,992,822) (4,387,640)
Gross Profit 1,948,791 3,962,843 2,031,985

Administration expenses (76,480) (121,953) (104,169)

Selling and distribution expenses (60,905) (34,352) (65,122)
Other operating expenses (93,786) (191,850) (139,307)
Other operating income 707,692 294,114 479,420
Profit from operations 2,425,312 3,908,802 2,202,807

Finance cost (304,041) (450,696) (468,173)

Share of loss of associated companies (9,573) (14,163)
Profit before tax 2,121,271 3,448,533 1,720,471

Taxation (439,193) (1,030,078) (98,000)

Profit for the year 1,682,078 2,418,455 1,622,471

The above stated financial statements have been extracted from the audited
annual reports of DGKCC.
APPENDIX B – QUESTIONNAIRE & ITS RESPONSE
D.G KHAN CEMENT COMPANY LIMITED

QUESTIONNAIRE
1. Please provide me with an insight to the cement industry of the country?
2. What is the corporate structure of the company? Its group?
3. What are the main products and brands of the company?
4. Where are the production factories located?
5. What are the basic operations of the company?
6. How does the company distribute its products?
7. What are the future plans of the company?

RESPONSE
1. The cement Industry of Pakistan is divided into two regions; the Northern
region and the Southern region. As northern region is most rich in the raw
materials of cement as compared to the southern region it caters most of the
cement demand of the country. The industry stands second in contributing to
Pakistan’s economy after textile.

2. DGKCC is the second largest project of Nishat group which is among top
five business houses of Pakistan. Although DGKCC does not own any
subsidiary, the companies in its investment portfolio are strong and give
healthy returns. DGKCC owns 9.20% equity of MCB Bank Ltd. (4rth largest bank
of the country) along with 12.00% of Nishat Mills Ltd. (largest textile exporter
in Pakistan) and 3% of Adamjee Insurance Company Ltd. (a leading insurance
company). In the last five years the company has been involved in joint
ventures with Shuaiba Paper Products Company, Kuwait and Gulf Baraka
Apparel of Bahrain. The names of the associated companies are Nishat Shuaiba
Paper Products Company Ltd. (NSPPL) and Gulf Nishat Apparel Limited (GNAL)
which produce paper sacks for packing of cement and all forms of apparel
products respectively. During the FY2007 the company invested in a new
business of Hotels and Properties to further diversify its investments. The
associated company’s name is Nishat Hotels and Properties Limited (NHPL) and
is under control of Nishat group.
3. DGKCC produces two different products namely Ordinary Portland Cement
and Sulphate Resistant Cement. These products are marketed through two
different brands:
™ DG brand & Elephant brand Ordinary Portland Cement
™ DG brand Sulphate Resistant Cement

4. At present the company has two production sites. The DG Khan site plant
located at Khofli Satti, district Dera Ghazi Khan and the Khairpur site plant
located at a distance of 12 kilometers from Choa Saidan Shah Road, Khairpur,
Tehsil Kallar Kahar, District Chakwal, Pakistan.

5. The operations in which the company is involved are: power generation,

purchasing, mining, crushing, grinding, burning, storing, packaging and
marketing.

6. The company has a wide distribution network and its products are
distributed through its four regional sales offices which are located in Lahore,
Multan, Dera Ghazi Khan and Karachi. Moreover, direct sales are also made to
institutional clients for mega projects.

7. The company is considering the acquisition of Pioneer Cement Company to

expand its production capacity and market share as well as the evaluation of
an expansion in Hub is under consideration. The new expansion would result
in increased exports as the proposed site is located near the sea.