Oxford Brookes University

RESEARCH AND ANALYSIS REPORT

THE BUSINESS AND FINANCIAL PERFORMANCE OVER A THREE YEARS PERIOD OF

LUCKY CEMENT LIMITED

By: Muhammad Umer Khan Rao

Registration no. 1148976

June 2008

Words:

Contents
Page No. 1.
Project objectives and overall research approach

1.1 Topic & Organization chosen and Reason for selection 1.2 Objectives and research questions 1.3 An explanation of overall research approach 2. Information gathering and accounting / business techniques 2.1 Sources of information to obtain relevent data 2.2 Description of methods used to gather information 2.3 Limitations of gathering information 2.4 Ethical issues arose during information gathering 2.5 An explanation of accounting/or business techniques & their Limitations Results, analysis, conclusions and recommendations 3.1 Description and presentation of results 3.2 Critical analysis and evaluation of results 3.3 Conclusion 3.4 Recommendations

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3.

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Appendix A References and Bibliography Appendix B Urea Market Share Appendix C Fertilizer Sales Volume (Thousand Metric Tons) Appendix D Per share Earnings vs. Dividends Appendix E Balance Sheet and Profit and Loss Account Appendix F Ratios Sheet Appendix G Questionnaire and its response

1. Project objectives and overall research approach

Topic and organization chosen and reason for selection
It was important to identify the topic in which I could apply my best capabilities. Initially every topic looked easy to me but when I went into its details, it turned into a difficult one. Therefore, I gave a deep thought in selection of the topic. Though it was hard, but I finally reached at the conclusion of trying: The business and financial performance of an organization over a three year period In choosing the topic, the reasons that forced me to select this topic are; Firstly, the topic should be easily understood and its context should be clear to me. Secondly, I should have the required capabilities regarding the topic and should not be struck in between the project. Thirdly, the information should be easily accessible. Fourthly, analyzing the financial situation, performance measurement and environmental analysis is an integral part of the syllabus for the ACCA professional examinations for Paper F7 Financial Reporting, Paper P5 Advanced Performance Management, Paper P3 Business Analysis and Paper P2 Corporate Reporting. I have studied all these papers and I thought it would be a good chance to apply the concepts, which I have learned theoretically. Then the task was to identify and choose an organization. After thinking deeply, I decided to work on Lucky Cement Limited (LCL). LCL, being a public limited company with an annual turnover of about Rs. 12.5 billion in the year 2007 [Annual Report LCL (2007)] provided with an extensive infrastructure consisting of relevant, accurate, reliable and up-to-date information. Analyzing the financial situation of LCL operating in this important economic sector enabled me to grasp a better understanding of Pakistans economy. In addition to all above, another strong reason to choose this topic is that my father is an active investor in Lahore Stock Exchange and has a substantial portion of his portfolio comprising shares of LCL. He induced me to present him a detailed report on the company for his decision-making purposes.

1.1

Objectives and research questions

Users of accounting information are interested in a number of concepts, which include profitability, liquidity, management efficiency, risk and shareholders interest. [E Dunn (2001)] Research questions of this research and analysis project are: What was the financial situation of the compnay in terms of profitability in short term, medium term and long term, liquidity position, efficiency ratio, long term solvency and capital structure and financial risk? How the investors see the LCL from investors perspective, whether its investors friendly or not, and what rate of return they can expect?

Whether the company has enough resources and capabilities to compete in envoironment which it operates both external and internal? What is the companys intensity of competetion in the industry in which it operates? Objectives of this research and analysis project are: To analyze expected future position To draw meaningful conclusions on the basis of such analysis To make practical recommendations for improvements, where there is a scope To comment on the treasury and financial risk management policies of the company. To assess whether the company is effectively managing its foreign exchange, interest rate, credit and liquidity risks or not. To asses whether company fulfilling investors expectations.

After evaluating the ratios and the environment, the next and last part of my report would be to draw a conclusion regarding the over all performance of the organization based on my analysis.

1.2

An explanation of overall research approach

Information gathering and accounting / business techniques

While researching for my project I had to gather financial as well as non financial data from numerous resources according to researchers terminology this can be bifurcated in to primary and secondary data. Both are discussed as follows:

2.1 Primary data:

It can be defined as data collected by researcher himself. (School of Law and Social Sciences, Glasgow Caledonian University) I was not able to gather much primary data however telephonic interview with CFO Mr Omer Ashraf had helped me to enlighten some areas of concern. However he also facilitated me by providing some non financial information along with financial.

2.2 Secondary data:

Secondary data is the data collected by others to be "re-used" by the researcher (School of Law and Social Sciences, Glasgow Caledonian University) Sources and their reasons for use in collection of both qualitative and quantitative secondary data are:

 No doubt annual financial statements were essential and a key source for gathering financial informations and than analyzing and interpreting financial position. Almost all of financial statements of FCCL from FY 2002-2003 up to FY 2006-2007 were available at company official web site and the same was for competitor MLCFL. The internet provided me a platform to initiate my research work and this electronic information proved very relevant and useful as I stepped forwarded. So I was eventually able to gather relevant data that facilitated me to analyze FCCL in particular and cement industry and economy in general. BPP text books for papers P-3, P-5 and P-2 have provided me thorough understanding of the analysis models and appraisal techniques used and I was able to deploy all that theoretical knowledge in a live practical situation. I have studied some business specific news papers and magazines in particular, like Business Recorder, Pakistan economist and in general newspapers business segments i.e. The Dawn, Daily times to make my self familiar and informed with cement industry environment, economy trends and future prospective. These were available at library of Institute of Chartered Accountants of Pakistan. Some industry specific articles by Government of Pakistan i.e. Digest Of Industrial Sectors Pakistan, Investor Information Guide also proved a helping hand in understating over all industrial environment of cement sector. Some books available at above mentioned library on Interpersonal and report writing skills also facilitated me and obviously Oxford Brookes University Research and Analysis Project Guidelines" along with ACCA Student Accountant articles were critical. In order to meet above mentioned objectives and answer the research question I have carried out the financial and non-financial analysis using the following analytical tools and techniques:

RATIO ANALYSIS: It presents potential user a brief statement which describes the
health of the company. Ratios are simply representatives of a larger figure. It involves establishing a financial relationship between the components of financial statements. (Singhvi, Bodhanwala, 2006) PROFITABILITY: Even when every segment is absolutely profitable, managers often want to know which segment is most and least profitable. Relative profitability is concerned with ranking products, customers, and other business segment to determine which should be emphasized. (Garrison-Noreen, 2004) SHAREHOLDERS INVESTMENT RATIOS: To view PTC from the investors perspective, whether its investor friendly or not. These ratios indicate the relationship of the firms share price to dividends and earnings. (BPP, 2006)

LIQUIDITY RATIO: Is the ability of a company to meet its payment obligations on time. Liquidity also measures the speed at which assets turn over compared with liabilities. (Pascal Quiry, 2005) LONG-TERM SOLVENCY AND STABILITY: To evaluate how much PTC owes in relation to its size, whether it is getting into heavier debt or improving its situation, and whether its debt burden seems heavy or light. (FTC, 2006) ACTIVITY RATIO: If a business does not use its assets effectively, investors in the business would rather take their money and place it somewhere else. In order for the assets to be used effectively, the business needs a high turnover. (Robbins Stephen, 2002) COVERAGE: It measures the business capacity to generate enough income to pay the interest on its loans or measure the ability of a company to pay for its interest costs is measured through interest cover. (Rees, 1990) SWOT ANALYSIS: Is a conducting of internal strengths and weaknesses in the organization. External opportunities and threats that affect the organization, based on market and the overall environment in which company operates. The primary purpose of the SWOT analysis is to identify and assign each significant factor, whether these are positive and negative, to one of the four categories, allowing you to take an objective look at your business. The SWOT analysis is a useful tool in developing and confirming goals and marketing strategy of the business. (www.bplans.com). PORTERS FIVE FORCE ANALYSIS: It will help in identifying the sources of competition in an industry or sector. Five forces analysis focuses on five key areas: the threat of entry, the power of buyers, the power of suppliers, the threat of substitutes, and competitive rivalry. (Student Accountant, 2006

3. Results, analysis, conclusions and recommendations

Company History, Business & Profile
Lucky Cement came into existence in 1996 with a daily production capacity of 4200 Tons per day, currently is an omnipotent cement plant of Pakistan, and rated amongst the few best Plants in Asia. With production facilities in Pezu (Production capacity: 13,000 Tons per day) as well as in Karachi (Production capacity: 8000 Tons per day) it has the tendency to become the hub of cement production in Asia. In addition, Lucky Cement is aggressively pursuing to develop export markets for cement to export bulk loose cement from Pakistan to the Gulf Countries, African Markets, and Far East Region including Nepal & Sri Lanka. Considering sizeable exports potential, Lucky Cement has decided to increase the capacity of its Karachi Plant by addition of two more Production lines, having 6

capacity of 2.5 Million Tons per Annum. The expansion program is likely to be completed by end 2008. Lucky Cement Limited has been sponsored by Yunus Brothers Group (YB Group) which is one of the largest business groups of the Country based in Karachi and has grown up remarkably over the last 50 years. The YB Group is engaged in diversified manufacturing activities including Textile, Spinning, Weaving, Processing, Finishing, Stitching and Power Generation. (www.lucky-cement.com)

Overview of cement sector

Out of a total of 24 cement plants, currently 22 units are operative, 17 companies being listed on the Karachi Stock Exchange. The country, at present, has an installed capacity of producing 17.55 million tonnes of cement per annum, mainly Portland cement. It is envisaged to increase installed capacity to 28.21 million tonnes per annum by 2008.The sector has the potential to export cement worth $1 billion per year to Saudi Arabia, Central Asian States and other Middle Eastern countries. Pakistan is fortunately rich in the deposits of limestone, clay and gypsum, which constitute basic raw materials for manufacturing of cement. In spite of having abundant raw materials and rising growth in demand of cement, only five cement factories were established during the initial thirty years of independence, with aggregate capacity of 3.2 million tonnes. Consequently, Pakistan had to import cement for a long period, which reached to a level of 1.3 million tonnes in the year 198182. Import of cement continued from 1971 to 1985. Its scarcity also hampered the development process in the country. (www.fnetrade.com) Pakistans cement market is divided into two distinct regions, north and south. All Pakistan Cement Manufacturer Association APCMA is a trade association safeguarding the interest of manufactures.

Company market share and contribution in sector

LCL successfully has managed an overall market share of 19.16% of the industry for the period under review. The domestic market share of LCL was 15.13% whereas LC L acquired 45.70% in overall exports.

RATIO ANALYSIS The ratios have been calculated and other quantitative financial data has been taken from Annual Audited Financial Statements of LCL from 2005 to 2007. Competitor: D.G Khan Cement Company Limited (DGKCCL) FY07 financial statements have been used to compare with financials of LCL. APCMA members set cement prices with agreement through out the country. This sometime objected as a cartel. Therefore before moving onward a brief but short overview of price methodology is vital. Generally prices remain standardized; however sometimes the price fluctuates due to cartel breakdown but this does not prevail for long. In return it brings together every one again on platform of APCMA. This trend can be easily traced out in FY-07 when after reaching highs of Rs. 430/bag cement prices fell sharply during early FY-07. Average cement prices were Rs. 234/bag as on 17th May, 2007 as compared with Rs. 315/bag in Fy-06.

PROFITABILITY AND RETURN:

Ratio
Turnover (Rs in Million) Change in sales % Operating profit to sales % Gross profit to sales % Pre-Tax profit to sales % After-Tax profit to sales % ROCE % ROE %

DGKCCL Y.E30/06/07 6,420 -19.0 34.3 31.7 26.8 25.3 3.8 4.8

LCL Y.E30/6/07 12,522 56.8 28.4 29.3 23.6 20.3 14.4 27.2

LCL Y.E30/06/06 7,985 100.6 32.7 36.5 32.0 24.3 11.2 27.4

LCL Y.E30/06/05 3,980 36.9 30.9 34.7 30.4 20.8 7.1 16.1

(Source: Annual Reports 2007,2006,2005)

A) Turnover Growth: - It can be further breakdown in to quantitative growth and price change.

PARTIULARS LCL QUNATATIVE SALES Domestic Sales (Tones) Export Sales Total Sales (Tones) (Tones)

FY-2007

FY-2006

FY-2005

3,182,942 1,457,049 4,639,991 111.3% 2698.7 -25.8%

1,861,187 334,864 2,196,051 54.6% 3635.9 29.8%

1,143,101 277,268 1,420,369 26.8% 2802.2 7.9%

% GROWTH IN QUANTATIVE SALES AVERAGE PRICE PER TONE % GROWTH IN PRICE

TOTAL INDUSTRIAL QUNATATIVE SALES Domestic Sales (Tones) 21,034,278 Export Sales (Tones) 3,188,424 Total Industry Sales 24,222,702 % GRQWTH IN INDUSTRIAL SALES LCL SHARE IN INDUSTRY Domestic- Share Export- Share Total industrial share 32.1%

16,833,814 1,504,959 18,338,773 12.2%

14,788,174 1,557,999 16,346,173 20.0%

15.1% 45.7% 19.2%

11.1% 22.3% 12.0%

7.7% 17.8% 8.7%

FY-2007 There has been a robust growth of cement demand seen both in domestic and export markets during the FY 2007. The industry also achieved a new level of dispatches of 24.22 mtpa against the last year dispatches of 18.34 mtpa and registered an overall robust growth of 32.1% which is

the highest in the history of Pakistan cement industry both in terms of percentage and volumetric growth. FY 2007 was a great milestone both for the company. LCL has made a land mark achievement by making a record quantitative sale of 4.64 mtpa during the FY 2007 against the last year sales of 2.20 mtpa and registered an overall tremendous growth of 111.3%. Despite reduction in price by -25.8% as compared to last year where price increased by 29.8%, LCL has made growth in turnover in monetary terms by 56.8% as compared to its competitor DGKCCL with reduction in turnover by 19.0%. FY-2006 and 2005 In FY 2006 there has been a tremendous sale growth in monetary terms i.e. 100.6% compared to FY 2005 with 36.9% of LCL despite the quantitative sales growth stood at 54.6% in FY 2006 and 26.8% in FY 2005. This is due to large price increase by 29.8% as compared to only 7.9% in FY 2005. As far as industry is concerned its sales growth in FY 2006 is 12.2% which is lower than FY 2005 i.e. 20.0% this might be because of price increase in FY 2007 discouraging buyers to postpone their projects due to large budget variances. B) Operating profit Margin. FY-2007 There has been drastic increase in operating income by Rs 629.3 million in FY 2007 as compared with FY 2006 which is only Rs 203 thousands due to large gain from Excise duty refundable of Rs 538.8 millions. Even then LCL operating profit margin falls to 28.4% in FY 2007, however in FY 2006 it was 32.7%. This happened because there has been large increase in distribution cost by 381% in FY 2007. Large part of the distribution cost increment consists of Exports Logistics and related charges, partly because of increase in exports and partly because of increment in freight and cargo charges due to increased fuel charges. DGKCCL has greater operating profit margin ratio with 34.3% than LCL in FY 2007, however this ratio also decreased in FY 2007 as compared to FY 2006 it was 49.1% again this is because of increment in distribution costs. FY-2006-2005 In FY 2006 operating profit margin was 32.7% as compared with FY 2005 of 30.9%, however in FY 2006 there is a reduction in Operating income i.e. Rs 203 thousands in FY 2006 and Rs 1.1 million in FY 2005.

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C) Gross profit Margin.

PARTIC ULARS LC L Q U NATATIVE SA LES D omestic Sales (Tones) Export Sales Total Sales (Tones) (Tones)

FY-20 07

FY-2006

FY-2 005

3,182,942 1,457,049 4,639,991 1,906.62

1,861,187 334,864 2,196,051 2,310.42

1,143,101 277,268 1,420,369 1,830.92

A VERA GE CO ST PER TO NE

FY 2007 GP margin has been declined to 29.3% mainly due to reduced sale prices. The cost per ton of LCL reduced by 17.5% during the year under review because of economy of scale and efficiency in fuel and power consumption in-spite of increase in the prices of coal and oil in the international markets. The gross profit of LCL for FY 2007 registered a growth of 23.32% in terms of value over last year because of volumetric growth in sales and reduction in cost of production. DGKCCL has GP margin of 31.7% which is a bit higher than LCL which shows DGKCCL also controlling its cost efficiently. However, higher sales volume growth of LCL partially offset it. FY 2006 and 2005 In FY 2006 GP margin of LCL was 36.5% which is much higher than FY 2007, this was due to high sales prices plays an important role in increasing GP margin. Same trend showed in FY 2005 in which GP margin was 34.7%. D) Pre and After Tax Margins FY 2007 In FY 2007 Finance cost increased by 942% due to large increase in Mark-up on long term finance and short term borrowings and reduce pre-tax profit margin to 23.6%. Current tax charges increased by 58% due to increase in sales, however deferred tax for FY 2007 decreased by -86.2% which brings after-tax profit margin to 20.3% there is no brief information available about why deferred tax reduced drastically. DGKCCL has pre-tax profit margin of 26.8% in FY 2007 which is higher than LCL due very little increase in finance cost i.e. 3.8%. DGKCCL also has higher after-tax profit margin of 25.3% because of reduced tax expense due to reduction in sales.

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FY 2006 and 2005 Pre-tax profit margin was 32.0% and 30.4 in FY 2006 and FY 2005 respectively which is higher than FY 2007 because finance costs are much lower as compared to FY2007. However there is substantial amount of deferred tax in FY 2006 and FY 2005 as compared to FY 2007 which brings after-tax profit margin to 24.4% and 20.8% for FY 2006 and FY 2005 respectively. E) ROCE and ROE FY-2007 In FY 2007 ROCE increased to 14.4% due to increase in profits and some reduction in long term debt, there is no issuance of shares in this year. However ROE remains about the same as previous years at 27.2%, only .2% lower than last year because, however there is an increase in profits but reserves also increased, i.e. nominator and denominator both increased. DGKCCL has ROCE and ROE at 3.8% and 4.8% respectively which is way lower than LCL, which shows LCL giving much more return on its capital employed than DGKCCL. FY-2006-2005 In FY 2006 ROCE and ROE showed increase 11.2% and 27.4% respectively as compared to FY 2005 with only 7.1% and 16.1% respectively due to boost in profits this causes nomitor to increase thus increasing ROCE and ROE.

LIQUIDITY RATIO Ratio Current ratio (X) Quick ratio (X) DGKCCL Y.E30/06/07 2.60:1 2.56:1 LCL Y.E31/06/07 0.85:1 0.74:1 LCL Y.E31/06/06 0.94:1 0.85:1 LCL Y.E31/06/05 0.63:1 0.57:1

(Source: Annual Reports 2007, 2006, 2005) FY 2007 The liquidity stance assessed with respect to the current ratio, deteriorated during FY 2007 from an already weak position in FY 2006. Trade debts have increased substantially in FY 2007. Again this may reflect a change in the management's credit policy. The cash balances on the other hand, have declined for the same period. A higher growth in current liabilities resulted in a decline in its current ratio. One of the most significant reasons for this growth was an increase in the short term borrowings of the company. Eliminating the closing stock, prepayment, spares and focusing on near cash and receivables. This ratio shows how quickly a company can pay its liabilities (Meigs & Meigs, 2005). Quick ratio should be 1:1; in case of LCL again it is lower than ideal point and declined from last year. DGKCCL performed well in this ratio and both current and quick ratio is above the ideal point, stock of DGKCCL contributes very little portion in current assets and because of this there is no significant difference between current and quick ratio. FY-2006-2005

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In FY 2006 both current and quick ratio increased to 0.94:1 and 0.85:1 respectively as compared to FY 2005 where both ratios were 0.63:1 and 0.57:1 respectively, in FY 2006 it shows that company was improving its liquidity position but this trend does not shown in FY 2007. ACTIVITY/EFFICIENCY RATIO Ratio Total Assets Turnover Net Interest Cover (X) Return on total Assets (Source: Annual Reports 2007, 2006, 2005) DGKCCL Y.E30/6/07 LCL Y.E31/6/07 LCL Y.E31/6/06 LCL Y.E31/6/05

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