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Pioneer Cement (OBU)

Pioneer Cement (OBU)

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Published by Ahmed Jabran
This is a research project I prepared for OBU degree.
This is a research project I prepared for OBU degree.

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Published by: Ahmed Jabran on Mar 24, 2013
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Oxford Brookes University Research and Analysis Project

The Business and Financial Performance over a Three Year Period Of

Pioneer Cement Limited
December 2008

By: Ahmed Ali Registration number: 1322209

Words: 6,495
1

Contents
Topic 1. Project objectives and overall research approach 1.1 Reasons for choosing topic and company 1.2 Project objectives and research questions 1.3 Research approach Page no.

3. 3. 4.

2.

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

5. 6. 6. 6. 7.

3.

Analysis and conclusion 3.1 Company profile 3.2 Group profile 3.3 Sector analysis 3.4 Ratio analysis 3.5 Porter’s five force analysis 3.6 SWOT analysis 3.7 Conclusion and recommendations

9. 9. 9. 10. 13. 16. 17.

Appendix A: Appendix B: Appendix C: Appendix D: Appendix E: Appendix F:

References and bibliography Graph – Net sales Graph – Operating assets Graph – EPS Balance sheet and Income statement Ratios sheet 2

19. 21. 22. 23. 24. 26.

3 .Appendix G: Sample questionnaire and its response 27.

the pros of choosing this one outweighed all the others. this topic provided the most lucrative information which could be analyzed deeply. Although. This topic provided me with a number of potential benefits and opportunities. which is not only related to the past but also goes to consider the situation in the future. PROJECT OBJECTIVES AND OVERALL RESEARCH APPROACH 1. during the current year I came across several articles regarding the cement sector and pricing cartels which were a much publicized issue. 1. In the business world an accountant is expected to be able to perform in depth analysis of financial information and evaluate qualitative and quantitative information. this topic extends to give a wholesome view of the organization in relation to its surroundings. cash position and working capital and to be able to satisfy its creditors demands on time. As I stared researching I realized that the cement sector was a major contributor to the economy of Pakistan. This included ratio analysis. I was already familiar with the tools that I had to use in order to complete my research and analysis.2 Project objectives and research questions This project evolves around a number of different. uses and limitations to the extent of examination questions. Even though I had several options of companies to choose from amongst the sector. • 4 . along with its ability to survive and thrive in the environment. SWOT analysis and Porter’s five force analysis. I have come across these tools during my course of studies. This gives an insight into the company’s ability to continue its operations in the future. which is why I chose it. PIOC is a well known organization. which is one of the reasons why authentic information related to it is easily accessible. these are: • To analyze the current profitability of the organization and the returns that it promises to its shareholders in the future. 2002) To assess the ability of PIOC to manage its liquidity. This involves not only analyzing the current situation of its income but also the ability of PIOC to be able to maintain these in the future (Mainwaring. I could have achieved this objective using other topics. using them in a real life scenario for the first time was much more challenging and I took it as an opportunity to enhance my analytical skills. I selected Pioneer Cement Company Limited (PIOC) as it was one of the important market players. However. Amongst the several options this is the most generalized topic so all the tools used are very flexible and can be used to conduct analysis of other organizations and sectors. so I understand their application.1. Another reason is that.1 Reasons for choosing this topic and company Among a number of viable topics which I could have selected. This became a major reason for my interest in the sector. Furthermore.

To judge the competitive environment of PIOC and where it stands in the industry. 06 Jun 2005) 1. After doing so I directed my search in the course on those information sources and picked the most relevant data. so I did a little background research. to see what are the threats that the company faces and the weaknesses that it has. the next step was to decide which tools to use and what methodology to follow in order to carry out the research. and what strategies does it take to overcome these drawbacks • • • Before starting work on my project I had to ask myself a few research questions and the following questions gave me a useful guideline on how to go about my research and have tailored my research work accordingly • • • • • • • What is my research question/title of my project? What is the current literature on the subject and the underlying theory? What methods will be used to gather information about the topic? How will the analysis be carried out? What conclusions can be drawn from the analysis? What are the key elements that I should present to my mentor? What have I learned from the process? (Johnson.3 Research Approach After deciding the topic and company for research. its debt repayment structure and whether it will be able to make these payments on time and its ability to generate further capital in future To explore the impact of the financial position of PIOC on the investors and their reactions to the profitability of the company. Also. the reaction in some scenarios is rather unusual. Since the company operates in a weak form efficient market.• To be able to comment on the current situation of capital financing of PIOC. Initially I had to gain understanding of the types of information I needed and the sources of that information. I identified the type of information that I would require in order to conduct my project effectively. I structured a few key words that were necessary for the search and stuck to them while doing the 5 . This will give an idea regarding the future potential of the company to grow or survive in the industry To investigate the opportunities that the environment has to offer to the company and how does it use its strengths to attain benefit from these. After doing so I came to the conclusion that I needed to have a combination of sources to conduct the research. I realized that to carry out the research in an effective way I had to go about in a systematic way.

1 Sources of information There are two main sources of information. I used several search engines such as Yahoo Google and ask. Each search engine provided me with a different list of information and mostly with authentic information with valid sources. There were ample sources for secondary data. and how it dealt with its strengths. Although. Annual reports obtained from the Lahore Stock Exchange were the most important source for calculation of ratios. Muhammed Saleem.research. It provided a useful source in answering the questions I was unable to ask the CFO. Here the most useful were the ACCA textbooks from BPP and FTC.com It is more easily obtainable. However. I had two available sources of primary data. it is the more reliable type of information. Another major source of information was text and reference books. The second source I had was a questionnaire that was filled by assistant manager finance. Although I gained most of the required information 6 . and I had to use several tactics to be able to get primary data Primary data: is original data derived from a new research study and collected at source. INFORMATION GATHERED AND BUSINESS TECHNIQUES USED 2. The internet was a major source for collecting relevant data. I started sorting it in a logical pattern. Mr. 2.com so that I could search in a wider section of the web and reach my desired links more quickly. how the company intended o deal with its cash flow and debt structuring issues. It provided me with information regarding changes in major ratios.bnet. one resulting in gathering of primary data and the other producing secondary data. It was a quick meeting as the CFO had very little time to spare so I had to shorten my questions list and enquire only about the most important areas. opportunities and threats Secondary data: is existing primary data that was collected by someone else or for a purpose other than the current one www. how is it effecting PIOC and what is PIOC doing to mitigate the risks caused by this slump.businessdictionary. as opposed to previously published material www.com Although more difficult to obtain. whenever I came across a source of secondary data. both types of sources were invaluable secondary sources were generally easy to get. After collecting the data. but it becomes less reliable. I ensured that for all the data that I collected I mentioned the references. During this interview I was able to gain information about the future strategies of PIOC and a general idea of why there is a slump in the industry. weaknesses. I made sure that it was authentic before including it in my project. Firstly I had an interview with the chief financial officer (CFO) of PIOC. I used my college library to browse through relevant books about the business techniques I was going to use for the analysis.dictionary.

Mostly I found the related material in my college library. 2. Porter. The assistant finance manager was a little reluctant to fill the questionnaire. While searching on the internet I typed key relevant words and run the search engine this provided me with a number of related links. One of the major sources for gathering information was the published annual reports of the company. The ACCA approved textbooks provided help regarding the application of analytical tools. I did not use it.3 Limitations of information The information collected had several limitations • The interview with CFO of PIOC was very short and I could only get limited information from him • The information from internet was not reliable in most of the cases and it took me lot of time to ensure the genuineness of information • To obtain the archives of business recorder I had to visit their office twice as the relevant files were unavailable.from these sources I went one step further and went through the archives of a few trade journals. So when using a less known source.4 Ethical issues While collecting information I had to ensure that I was within the ethical parameters as set by ACCA at all times. newspapers and magazines such as Business Recorder and ACCA’s Student Accountant. which provided me with valuable information for the analysis. To do this I tried to use only well known websites such as the official website of PIOC. If there were no references as to where the information came from. They are as mentioned below. professional behavior and professional care. However. I ensured the authenticity of information by checking the references mentioned.2 Description of methods used to gather information I used several methods to gather information from the above mentioned sources. After browsing through the material found I picked the most relevant information and then I ensured that the information was authentic. confidentiality. I had to uphold objectivity. These provided me with further information regarding my approach to the project and the scenario of the company I had selected. it was not always possible. 2. integrity. I also searched the archives of well-known trade magazines. • For information related to porters five force analysis I had to find the article written by Michael E. porters five force analysis and SWOT analysis. so that reliance could be placed in the information they provided. It was not available in the college library so I had to search for it elsewhere and it took me three days before I could obtain the required material 2. as he was unsure whether 7 . The particularly helpful ones were the BPP textbooks for papers P2 and P3 as they provided information about how to apply ratio analysis.

the bargaining power of customers. it must be used with caution. (BPP.. Weaknesses. Financial ratios are categorized according to the financial aspect of the business which the ratio measures… Liquidity ratios measure the availability of cash to pay debt. before obtaining this information. Specifically. a sense that all factors have been duly considered and dealt with…Any analysis must pursue as high a degree of objectivity as possible if there is too much subjectivity unfounded complacence will result. The method of SWOT analysis is to take the information from an environmental analysis and separate it into internal (strengths and weaknesses) and external issues (opportunities and threats).. straightforward model that assesses what an organization can and cannot do as well as its potential opportunities and threats. I talked to a senior and ensured that the disclosure of this information would not cause any harm. the bargaining power of suppliers. the threat of substitute products or services (where applicable). 2000) Limitations of ratio analysis: there are several limitations of financial analysis through ratios • Profit and capital employed are arbitrary figures. SWOT is a basic. 1979) Limitations of Porter’s five force analysis: the five forces model provides a comprehensive framework for analysis the competitive environment.. 2. and the jockeying among current contestants (Porter.Market ratios measure investor response to owning a company's stock and also the cost of issuing stock (Groppelli. Debt ratios measure the firm's ability to repay long-term debt… Profitability ratios measure the firm's use of its assets and control of its expenses to generate an acceptable rate of return.. Its very comprehensiveness can encourage a feeling of omniscience in those who use it.he had the authority to disclose the information I required. An apparent increase in profit may not be a ‘true’ increase. Respecting the confidentiality of the company.5 Business techniques used and their limitations Ratio analysis: financial ratios quantify many aspects of a business and are an integral part of financial statement analysis. SWOT analysis determines what may assist the firm in 8 . They depend on the accounting policies adopted by an entity • Many businesses produce accounts to a date on which there are relatively low amounts of trading activity • Ratios based on the historical cost accounts do not give a true picture of trends from year to year. Once this is completed. 2007) Porter’s five force analysis: the nature and degree of competition in an industry hinge on five forces: the threat of new entrants. 2008) SWOT analysis: It is a tool that identifies the Strengths. However. because of the effects of inflation ( FTC. Opportunities and Threats of an organization.

netmba. and the SWOT framework provides no guidance (www. (www.referenceforbusiness. and what obstacles must be overcome or minimized to achieve desired results. A technological change can be an either a threat or an opportunity. it does not address how the company can identify the elements for their own company.com) 9 .com) Limitations of SWOT analysis: One major problem with the SWOT analysis is that while it emphasizes the importance of the four elements associated with the organizational and environmental analysis. The classification of some factors as strengths or weaknesses or as opportunities or threats is somewhat arbitrary. the SWOT framework has a tendency to oversimplify the situation by classifying the firm environmental factors into categories I which they may not always fit. Perhaps what is more important than the superficial classification of these factors is the firm’s awareness of them and its development of a strategic plan to use them to its advantage.accomplishing its objectives. For example a particular company culture can be either strength or a weakness. (www.com) While using for reducing a large quantity of situational factors into a more manageable profile. Many organizational executives may not be able to determine what these elements are.answers.

The Company’s products include Ordinary Portland cement (OPC) and sulphateresistant cement (SRC) (www. It may then follow conventional growth rate of 7% per year. The cement association is less of a trade group and more of an unnamed cartel. Government development expenditures count for onethird of total cement consumption.3 SECTOR ANALYSIS Cement industries in Pakistan are currently operating at their maximum capacity due to the boom in commercial and industrial construction within Pakistan. Local shareholders own 13. which employs about 2. 3. December 23. December 28. District Khushab.3.com). The principal activity of the Company is manufacturing and sale of cement.000 personnel throughout Pakistan Manufacturing facilities are located at Bhalwal.noonsugar. All members are assigned capacity utilization and none can increase their capacity without prior permission. The Group is managed by Noon family duly assisted by qualified and experienced technical and business professionals as working Directors and Senior Executives. 10 .8% and financial institutions own 10% of the company's stock (Correspondent.8% of the company's total 162. Prices are set by the cartel and everyone shares profits amicably.48 million paid-up shares of Rs 10 each. Consumers face a tough decision with regards to prefer which brand over which because of the similar pricing of cement industry. First National Equity Ltd holds 10% and the directors and members of their families own 44. 2006) 3. ANALYSIS AND CONCLUSION 3. The current demand in the market is approximately 25mln metric tons of cement. (www. (Mangi. The formation of cartel by the cement manufacturers have exploited local consumers a lot and this has led to the concentrated degree of oligopoly. except when an unsatisfied member threatens to leave the cartel.com). Their combined market power is simply a diluted version of the dominance that a single firm with a monopoly market share can exert. Its shares are quoted on all stock exchanges in Pakistan. 1986. District Sargodha and Chenki. 2004) The demand of Pakistani cement is expected to continue to grow at the rate of 20% for approximately four years to come. where the firms are acting as a single unit to perform their monopoly.pioneercement.2 GROUP PROFILE PIOC is a part of the Noon group.1 COMPANY PROFILE PIOC was incorporated in Pakistan as a public company limited by shares on February 09. Announcement of major dams will dramatically increase this demand.

076mln.131mln.4. The contribution made by local sales towards total sales has increased from 87% to 90% in FY’05 to 90% in FY’06.2 PROFITABILITY ANALYSIS Gross Profit margin: The gross profit margin had been gradually increasing over some years until FY’07 when it saw sudden downfall. 3.9% in FY’05. A price war prevailed during the FY’07 which caused a decline of about 50% in the net price of cement.3. due to a decrease in sale prices the exports generated only 8% of the total turnover in FY’07 as compared to 10% in FY’06. over the year which adversely affected the operating results of Company.8% in FY’07 it is minimal as compared to the growth of 50% and 54. However.1. Of which 34% was contributed by a drastic increase in selling prices and 16% was because of increase in sales volume of cement. The turnover during FY’07 has shown very little growth of only 1.4. The only atypical change was in salaries and wages which increased by 79. This is contributed mainly to the increase in average retention prices of cement over the year.000 metric tons in FY’07. In FY’06 the gross profit ratio increased to 40% as compared to 32. A massive decline of 35% was recorded in average prices of cement in the domestic market during FY’07.8% from Rs. 2. in general. compelling the Company to make adjustments in the prices almost on daily basis. 3. even though there is a dire increase in demand for cement. This represents an approximate 51.372mln to Rs.4 RATIO ANALYSIS The sources used to analyze the ratios are annual accounts of PIOC for FY’05 to FY’07.845mln. PIOC exported 132.284 tons of cement in FY’07 as compared to 118. There was an increase in the cost of sales of 34% from Rs. presents a very worrying picture.000 metric tons in FY’06 to 1.1 SALES ANALYSIS The turnover growth. however this was offset by a substantial decrease in sale prices.8% increase in sales volume this was mostly due to high demand in the market due to construction of housing societies and the earthquake in northern areas of Pakistan.8% 11 . the price of cement continued to remain highly volatile.076mln to Rs.045mln to Rs.028 tons of cement exported in the previous year and registered a rise of 12%. The turnover from in FY’06 as compared to FY’05 has grown by 50% from Rs. Even though there has been a growth of 1. It seems that the sales prices have fallen throughout in the cement sector. 3. 3.1. Due to fierce competition prevailing in the cement market. It means that PIOC is concentrating more on local sales as compared to exports. See Appendix-F for detailed calculation of the ratios. While commenting on the feasibility of the each ratio industry averages were also looked into.6% in FY’06 and FY’05 respectively.267. 3. The company saw an unusual growth in quantities of cement sold which increased from 835.

845mln in FY’06 to Rs. However there was an unusual increase in “other operating income”.995mln in FY’05 to Rs.2%from 40% in FY’06.7% in FY’06. it was predictable that there would be an increase in ROCE.In FY’07 the gross profit margin took a downturn and fell to 10. but even with a nominal gross profit. 12 . Fuel and power constitutes more than 50% of the total cost of sales.5. Overall FY’06 had been a good year for PIOC. This was because of two reasons.com). the first being a decline in sales prices which led to an inadequate turnover growth and second being a 52% increase in cost of sales from Rs. The rise in international fuel costs has caused an increase in the cost of sales. As it showed a reasonable increase in turnover and profits.2. Another reason for increase in costs is the increase in depreciation charge.366mln in FY’07.5 times its original size in FY’06. However PIOC was able to mitigate the impact of fuel prices on its profit in FY’07 as it started using 80:20 blend of imported and local coal that helps reduce its energy cost and impact the margins positively (www. This was mainly due to a gain made on derivatives. and reversal of unrealized loss on fair value of those derivatives.3% from 14.1. the condition of the net profit margin would not have been so abysmal had the finance costs not increased by 86. It seems the expansion has not yet brought about the bounties that were expected from it. There has not been any major cost cutting in distribution or administration costs. Without any further employment of resources the ROCE would have been even better.7.6% in FY’05 to 14. not only due to falling profitability but also because most of the capital employed has been used for extension of the plant it is acceptable that it did not generate profit in the current year as it will be of benefit in the long term.665mln in FY’06 On the other hand FY’07 presents a picture quite to the contrary.8% from Rs.pacra. The major reason for such abnormal fluctuation is that most of the long term loans are acquired at a floating rate. Distribution costs also fell leaving a reasonable increase in net profits.7% in FY’06. The escalation was caused by the expansion project of PIOC and increased investment in non current assets Net Profit margin: The net profit margin increased commendably from FY’05 to FY’06 from 19.9%).813mln in FY’07. The low gross profit primarily contributed to the loss occurring. The ratio falls to 2. FY’07 was a difficult year for PIOC since its net profit ratio fell from 30 % in FY’06 to a net loss percentage of (5. Return on capital employed (ROCE): The return on capital employed had increased from 8. however due to the expansion undertaken in the plant the capital employed has increased by 28% from Rs.3% to 30%. There has been little increase in capital employed since FY’06 which grew by only 1%. mainly due to increase in gross profit.197mln in FY’06 to Rs. Finance cost amplified in FY’07 to 2.

3. Generally PIOC has a negative operating cycle so they have to maintain enough cash to be able to pay trade creditors on time 13 . the quick ratio improved in FY’07 to 0. the quick ratio would have worsened. Ideally this figure should not exist in the financial statements. the liquidity position of the company has not improved or worsened much. The small number of debtor days could be because of limited credit terms offered to old customers.3 LIQUIDITY ANALYSIS Although consistent.44:1 as compared to FY’05 when it was 0. It means that the company is reasonable capable to pay its current obligations subject to the market conditions in which it operates. But it position strengthened a little in FY’07 to 0. They compose approximately 50% of the total current liabilities.45:1 is way below the industry average of 1:1. It deteriorated a little in FY’06 to 0. In FY’05 it was 0. In the past three years. So the situation improved in FY’07 as the creditor days reduced to 131 days.4 WORKING CAPITAL MANAGEMENT PIOC operates in a sector where sales are on cash basis so it does not require debtor management.4. 2007). An average current ratio of 0. Mostly the current liabilities consist of current portion of non-current liabilities.48:1.20:1 mainly because the cash flow conditions improved as PIOC acquired new long term loans. However PIOC needs to improve its creditor management.12:1 which fell further in FY’06 to become 0. the liquidity conditions of PIOC are not particularly impressive. It means that PIOC will be unable to pay its current obligations when they fall due. In FY’05 PIOC was paying its creditors at an average of 212 days and this situation worsened in FY’06 when it increased to 265 days on average. There were 15 days in FY’05 and 19 days in both FY’06 and FY’07. The quick ratio represents an even more worrying picture. This implies that the company has efficiently reduced the risk of a stock out without engaging too much capital in the inventory. Had PIOC only relied on operating cash flows. However.3. Conversely this would cause discontent and loss of goodwill amongst creditors. The stock is repurchased after every 2-3 weeks. Even though it is it is still very high it is still quite an improvement.4. Due to appalling liquidity conditions the management is using trade creditors as a source of short term finance. The most consistently managed portion on the working capital is inventory days. Other than cash there are no major additions to the current asset side of the quick ratio.47:1. It is quite likely that the creditors would not have liked this.10:1. PIOC has been rated as an A2 in the short term by Pakistan credit rating agency limited (PACRA.

The market value fell to Rs. the company does not seem to have a strict dividend policy.35 in FY’05.091mln. However since there was loss in FY’07 it gives a P/E ratio of negative 66. Even though the profit before interest was worse. Yet.3.40 in FY’07 due to poor performance (www.2% on the market value which is pretty low.5 MARKET RATIOS The weighted average number of shares has been restated for the years FY’06 and FY’05 since there was a bonus issue in all three years.pk) The price to earnings (P/E) ratio reflects the investors’ confidence in the company. Generally the way PIOC is operating it suggests that they intent to promising their investors long term capital gains rather than regular cash flow in form of dividend. This is mainly due to the expansion project. this increased to 65.kse. This increase in confidence was probably due to the brighter future prospects of the cement industry. As expected the expansion project’s completion has increased investors expectation for the company future and resultantly the market value shot up to Rs. 1. It varies with markets’ expectation about the prospects of the company. the tax relief in FY’07 improved the conditions of PIOC to some extent. Since dividend was only paid in FY’06 the yield is 2.4.8:38. it may not have been feasible to pay a dividend in FY’07.7:1.95 to Rs.739mln in FY’06 and increased further by 7% in FY’07 to Rs.45.5:1 in FY’06.98. The dividend yield does not seem to affect the investors’ confidence 3. The debt to equity ratio remained almost constant in FY’05 and FY’06 at 62. Although.65 in FY’06 from Rs.37.55. The expansion project is one of their policies to indicate long term benefits. However.745mln in FY’05 to Rs. but the gearing did not change since the company had issued bonus shares in all three years.4 in FY’07.3. The dividend per share (DPS) figure shows that the company only paid out dividends in FY’06 probably due to the exceptionally high profits.6 and 61.3.4.2. PIOC has acquired further loans in all three years. since the liquidity conditions of PIOC are not up to the mark. This ratio was 10. The amount of long term debt increased by 26% from Rs.20.6 :34.4:1 in FY’05 and increased to 11. This is more a mathematical value than a meaningful comparison. The market value per share presents a varying picture.com.5.4:37. 14 . This means PIOC has not raised any capital from issue of equity. The earning per share (EPS) of PIOC saw an improvement from FY’05 to FY’06 as it approximately doubled from Rs. This situation worsened in FY’07 when there was a loss per share of 0.6 CAPITAL DEBT STRUCTURING The gearing of the company is currently high.4. the reason being a higher net profit achieved in FY’06.

Barriers to entry such as strict government policy could hinder entrance of new companies. This increase. prospects for increase in demand and encouraging government policies in the cement sector could act as a welcoming sign for new entrants.5. so the likelihood of a new entrant in the Punjab market is very less. lucrative business. oligopolistic competition. it is imperative that PIOC raise funding to restructure its borrowings. High capital investment requirements of the cement industry. This indicates a liquidity crisis in the future. 3. The rivalry becomes more emphasized due to high exit barriers and abandoning costs and the fact that due to industry wide expansion projects and takeovers production capacity of most of the manufacturers has extended and the companies are fighting to achieve the desired capacity utilization or otherwise report losses. more or less.8%. as mentioned in the net profit margin analysis was because of loans acquired on floating interest rates which are on the rise during the year. It holds 5. the decrease in profits contributed to fall in interest cover and secondly the increase in finance costs of 86. However.5% of the market share. mainly due to increase in gross profit in that year. Firstly. This rivalry is reduced by the fact that brand identities are not predominant in the cement sector and the large manufacturers can use cartel mechanism to induce a monopolistic effect. the same type of cement.5 PORTER’S FIVE FORCE ANALYSIS 3. 15 . In FY’07 the plight worsened and interest cover fell to 0. economies of scale achieved by existing manufacturers and existence of cartels among larger firms could act as hindrance for new entrants. Two things caused such a drastic impact. Given the current maturity pattern of these obligations.3 times in FY’05. It increased in FY’06 to 5. 3.2 Competitive rivalry: There are twenty seven cement manufacturers in Pakistan cement sector of which PIOC falls in the top five players of the market.Even after having a number of loans deferred there are quite a few loans approaching maturity and currently PIOC does not have enough funds to be able to repay them. even though these cartels are not very long lasting. The debt restructuring is expected to synchronize the debt repayment with emerging cash flow patterns The interest cover situation has worsened dramatically.1 New market entrants: The possibility of new market entrants in the industry depends upon several factors.5. The plant of PIOC is located in the north of Pakistan where there is already a lot of competition.5 times. The cement industry has oligopolistic competition the competitors do not differ on the basis of product range since all of the manufacturers make.7 times from 4.

As for the bargaining power of suppliers of fuel it is also low. Mostly these include contractors for large dams.3 Suppliers’ bargaining power: Suppliers can be divided into two types one being suppliers of raw material for example limestone and second being the suppliers of fuel and power. 16 . And a very extraction is stared on long term contracts with minimal royalties being paid. since coal. 3. So it is highly unlikely that the need for this product will die down in the future. 3.5 Product substitutes: Here the sector is at an advantage. However. However the recent hike in coal prices internationally may indicate a contrary picture.5. there are some buyers who have the equipment to test the quality of cement and are buying in such large quantities that they become very important to the manufacturers this gives them some bargaining power.3. In this way the bargaining power of suppliers of raw material is very low. commercial buildings and housing societies as a whole. which is the source of fuel for the cement industry. since cement has no alternatives so far. Mostly this is due to the existence of cartels in the cement industry and the fact that there are no alternative products that can be used instead of cement.5. is abundantly available and has an open market. The cost of switching suppliers is also low to the manufacturers this further reduces the bargaining power of suppliers. It is the only material of its kind. The product is of high importance to customers and even though quality of cement used is important to them smaller consumers can not measure it. Mostly plants for manufacturing of cement are established in areas where there is easy access to limestone ridges. companies are not likely to be affected by switching of a few customers. Since the cement industry has several buyers. The quality of coal does matter which is precisely why PIOC has started importing coal rather than using the local one due to its sulphate impurity content.5.4 Customers’ bargaining power: Even though the cost of switching to other companies in not high for the customer and they are not affected by the brand loyalty. the bargaining power of customers is low.

6 SWOT ANALYSIS Strengths: • • • • • • • • • • • • • • • • • • • • Lowest expansion cost (www.businessplus.3.tv) Timely completion of expansion Conversion to low cost fuel ISO 9000-2000 ISO 14000-2001 Brand of the year awards 2006 (www.brandsaward.com) 5.5% market share SRC considered of best quality in the market Weaknesses Second hand Chinese plant Falling capacity utilization Low dividend payout Opportunities Rising export market especially India Potential to cover lower Punjab Dam constructions Robust domestic demand Threats Supply glut and price war Increase in interest rates Liquidity crisis Political instability Economic downturn 17 .

PIOC needs to restructure its debts and generate enough profits to be able to report a decent interest cover. The profitability of the company has been further depressed by rising finance costs.7 CONCLUSION Profitability in recent years: PIOC has gone through major ups and downs in the past few years. The cash position of PIOC is very alarming since all its sales are cash based. gross profit. thus leading to a fall in net profit. return on capital employed and investor ratios. however. only in the short term and it is expected that as soon as the cartel is restored the company will become profitable again and the expansion project will start generating fruitful returns for the company Liquidity and working capital management: The liquidity ratios although consistent in all three years are way below industry average which places the company in constant risk and since there are many long term loans reaching maturity very soon PIOC needs to manage it liquidity risks. Capital and debt structuring: The gearing position of PIOC reflects that there is high financial risk in the company. There is not much debtor management involved. mainly because it operates in a very volatile market. PIOC has sold larger volumes of cement. It improved tremendously in FY’06 as compared to FY’05. This left the company with depleted revenue reserves. However the increase in sales volume over the past 5 years is a good sign. Even though PIOC has recovered from this situation in the past three years there is still a lot to be done to improve its capital situation. due to the persistence of a price war throughout the year it was not able to derive lucrative revenues. PIOC is putting a lot of stress on one of its most valuable short term credit lines.3. However it did not show the profits expected from it during FY’07. this situation has improved in FY’07. There has been an improvement in the gearing position of the company since FY’05 as compared to the earlier seven years when the entire cement industry was facing continuous losses. This is. Since PIOC is exposed to the currently rising interest rates it needs to manage its financial risk 18 . However. The reason for this increase is the substantial amount of loans acquired and thus the additional financial risk. However. and PIOC is managing its inventory very efficiently. PIOC needs to take drastic measures to improve its liquidity and decrease its current liabilities The working capital management in wake of efficiency ratios is well balanced. The only area where there seems to be some strain is the creditor days’ management.

number of suppliers in the market. It turns out that competitive rivalry is high as well.26 million for Annual Development Projects. alternative products. alternative products.Porters five force analysis: The possibility of new market entrants is analyzed on basis of entry barriers to the industry. SWOT analysis: PIOC has several strengths and has been using them astutely and has been trying to overcome its weaknesses alongside.543. exit barriers. The effect of competitive rivalry was assessed using the number of competitors. customer bargaining power is low as demonstrated by the factors of brand loyalty. • PIOC should improve liquidity ratios by arranging credit lines from banks/ financial institutions to prevent possible default. number and significance of customers and importance of quality to customers. importance of brand identities and demand and supply in the market. type of competitive environment and trading mechanism. position of PIOC among the companies. The suppliers bargaining power is also low due to brand loyalty. The local demand is likely to rise as Government of Pakistan in the budget for FY’08 has allocated Rs. 19 . Profitability of the PIOC is likely to improve if export to India is allowed by the government. Recommendations: • The company should make efforts to reduce creditors’ days. continues to remain a disturbing factor in the wake of dramatic escalation in the international prices of coal. However. competition environment and government polices in the sector. It also recognizes the several opportunities that it can avail and is working towards utilizing these while mitigating the threats that it faces Prospective Outlook: An encouraging scenario which has recently emerged is a tremendous growth in demand of cement in the neighboring countries. Price hike of coal however. Export prices have shown an impressive recovery during April-07 due to shortage of cement in the region including India. The restoration of the cement cartel in FY’08 is crucial to the performance of PIOC. moreover since no product substitutes for cement currently exist here the threat to the cement industry is low so overall PIOC has a very competitive position. capital investment requirements. cost of switching suppliers and importance of quality of fuel. It seems that chances of new market entrants are high.

Correspondent (December 28.referenceforbusiness.APPENDIX A: REFERENCES AND BIBLIOGRAPHY Mainwaring (2002).brandsaward.col1 http://www.html?tag=content. Porter. Angelico A.com/strategy/swot/ www.com http://www. How competitive forces shape strategy. Harvard business review 1979 BPP (2008).html 20 .pacra.bnet. 2004). 433.businessplus.com/definition/primary+data.com/definition/secondary-data.html Groppelli. Mangi (December 23. ACCA Paper P2. business analysis. 2006).answers. UK http://dictionary.com/2008/survey%20pioneer-cement.com. London UK http://www. Ehsan Nikbakht (2000) Finance 4th Ed.html http://www.html www. Student Accountant.htm.noonsugar.. Cement: PIONEER CEMENT LIMITED. Kaplan publishing Foulks Lynch. BPP learning media Ltd.pdf http://www. Strategic Business Planning and Development. ISBN 0764112759 FTC (2007).kse.tv/Programme/pdf/Pioneer%20Cement%20Report. Comment: Are flourishing cartels reason enough to shut down the impotent MCA? Daily Times http://www. UK Shane Johnson (06 Jun 2005). corporate reporting.com/groupprofile.businessdictionary.pdf http://www.pk/kse4/index. Barron's Educational Series. ACCA publications. Business Recorder Naween A.com/pdf/PCL_R07. UK Michael E.com/management/Pr-Sa/SWOT-Analysis.com/topic/swot-analysis http://www. How not to rap. ACCA Paper P3. Inc. FTC publishing London.netmba.pioneercement.

Prentice Hall International Ltd. Lesley Wing Jan (2003). Publisher Curriculum Corporation.George Kieffer (1988). 21 . the Strategy of Meetings.wikipedia. Focus on Inquiry. Warner books Maureen Guirdham (1990).org/wiki/Interpersonal_skills Jeni Wilson. Interpersonal Skills at Work. Victoria. UK http://en.

APPENDIX B: GRAPH – Net sales 22 .

23 .

APPENDIX C: GRAPH – Operating assets 24 .

APPENDIX D: GRAPH – EPS 25 .

APPENDIX E: BALANCE SHEET AND INCOME STATEMENT 26 .

27 .

5:1 2.0% 30.3% 40.7:(1) N/A Rs.1.37.9%) 2.7% 32.2% Rs.4% 54.20:1 0.55) N/A Rs.10:1 0.48:1 0.65 11.47:1 0.40 66.2 5.4:1 N/A 4 days 131 days 19 days 1 day 265 days 19 days 3 days 212 days 15 days 0.12:1 10.3% 8.9% 19.3.6:34.1 Rs.8% FY’06 FY’05 28 .35 10.98 Re.5 times 61.8% 50.4:37.APPENDIX F: RATIO SHEET FY’07 Sales analysis Turnover growth Profitability analysis Gross profit margin Net profit percentage Return on Capital Employed (ROCE) Liquidity analysis Current ratio Quick ratio Working capital management Debtor days Creditor days Inventory days Market ratios Earning per share (EPS) Dividend per share (DPS) Market value per share P/E ratio Dividend yield Capital debt structure Gearing ratio Interest cover 65.20.2% (5.(0.44:1 0.3 times Rs.4 0.95 N/A Rs.6% 1.6 4.45.8:38.7 times 62.3% 14.

APPENDIX G: SAMPLE QUESTIONNAIRE AND ITS RESPONSE 29 .

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