STRATEGIC FINANCIAL MANAGEMENT

CEMENT SECTOR FINANCIAL ANALYSIS

STRATEGIC FINANCIAL MANAGEMENT
FINAL REPORT
JANUARY 11TH, 2006

‘A STRATEGIC FINANCIAL ANALYSIS OF PAKISTAN’S CEMENT SECTOR’

PRESENTED TO MR. FUZAIL ZUBAID AHMED

PRESENTED BY: SYED ALI AHMED – 2621 SHAHID HAMID – 2326

College of Business Management

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CEMENT SECTOR FINANCIAL ANALYSIS

GLOBAL CEMENT INDUSTRY At the start of 2005, the global cement industry was estimated to include 1,655 integrated production facilities, with another 344 separate grinding installations with a total combined cement capacity of 2.1 billion tones. Global cement consumption has continually exhibited strong growth, reaching up to 2.16 billion tones in 2004. In percentage terms, this indicates that global cement consumption has risen by an average of 8.9% per year over the past four years. This can mainly be attributed to accelerated economic activity in world economies, which has resulted in increased demand from China, USA and India.
Global Cement Consumption
Billion Tones

2002 1.82

2003 2.00

2004 2.15

2005 2.25

Table: 1 Global cement consumption*

Leading Cement Consuming Countries
Million Tones

China 963

India 125

USA 121

Japan 56

S.Korea 55

Spain 47

Italy 45

Table: 2 Leading Cement Consumers*

China serves as the biggest consumer of cement products worldwide, and consumes more than 45% of the world’s total consumption of cement. This statistic can be attributed to the fact that China has the largest population in the world, and housing and infrastructure requirements for this bulk of the world’s population would thus require a very heavy usage of cement.
Break-up of w orld cement consumption
China 45%

Rest o f the wo rld 55%

The largest producers of cement in the world are China, India, and USA. Whereas following the decline in recent years of Thailand’s export of cement, the biggest exporter spot has now gone to Turkey, with Japan in second, and Thailand trailing in third place.
Leading Cement Exporters
Million Tones

Turkey 11.00

Japan 10.25

Thailand 9.90

India 9.00

Egypt 7.50

Indonesia 7.00

Table: 3 Leading Cement Exporters*

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USA is the largest cement importing country in the world. Yet despite a high rate of capacity expansion, US cement manufacturers are only able to fulfill 75 to 80% of their domestic demand. With the massive devastation caused by hurricanes Katrina and Rita, it is expected that US cement imports will further increase in the following few years. The second largest cement importer is Spain, which had an estimated import of 8.5 million tones in 2004 to meet local demand. In Asia, Bangladesh bought 6.4 million tones of mainly clinker from suppliers including Japan, the Philippines and Thailand.
Leading Cement Importers
Million Tones

USA 26.2

Spain 8.5

Bangladesh 6.4

Nigeria 6.2

Italy 4.8

Vietnam 4.5

Table: 4 Leading Cement Importers*′

* Source: Mahmood, Khalid (NIT)

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CEMENT SECTOR FINANCIAL ANALYSIS

PAKISTANI CEMENT SECTOR The cement industry in Pakistan is among the most advanced industries in Pakistan, and has integrated production facilities based on locally available raw materials. The past few years have seen the cement sector pervade itself on the guiding principles set by the cartel formed in 1998, in which the major players in the industry mutually established capacity production levels, and product prices. The country’s current cement production capacity can be pegged at approximately 19 million tones. There are two zones in operation, the North zone and the South zone, where companies that are situated in Punjab and NWFP come under the North zone, which accounts for 73.3% of total production capacity, whereas the South zone is represented by companies based in Sindh and Balochistan, which have 26.7% of the share.
Area-Wise Cement Production Capacity Province North Punjab NWFP South Sindh Balochistan Total Units 15 8 7 9 8 1 24 Capacity (Tones) Clinker Cement 12,324,000 12,937,050 6,660,000 5,664,000 4,478,000 3,758,000 720,000 16,802,200 7,487,550 5,449,500 4,701,900 3,945,900 756,000 17,638,950 % age 73.3% 42.4% 30.9% 26.7% 22.4% 4.3% 100%

Table 5 Area wise cement production capacity*′

The main raw material component for the production of cement is limestone. There is an abundance of good quality limestone throughout the provinces of Pakistan, as well as in Jammu and Kashmir. The utilization of these reserves has elicited an acceleration of the cement industry over the last few years, with significant contributions towards the economic growth of Pakistan, through the development of infrastructure, both at regional and national levels. There has been an unprecedented rise in demand for cement during the last few years as a result of increased construction activities due to an improved economic scenario. The large scale undertakings of various developmental and infrastructural projects, such as the construction of buildings, roads, various bridges, underpasses, and institutions have taken place at a national level. For the private sector, a growth in the construction of housing schemes and civic facilities has also contributed to this rise. A robust economic performance, increasing per capita income, sustained workers’ remittances, the government’s attention towards infrastructural development and the availability of export markets have all had a positive significant impact on the cement industry.

* Source: Mahmood, Khalid (NIT)

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CEMENT SECTOR FINANCIAL ANALYSIS

Additionally, not at the expense of sounding crude, the recent earthquake that struck Northern Pakistan on October 8th, 2004, has also prompted a significant hike in the demand for cement. This is because of the heavy construction demands of the rebuilding process of the afflicted areas is estimated to take at least five years, and would require nearly double of the current cement production capacities. Therefore, the demand is to be met through expansion programs being carried out by existing players in the industry. Currently the industry is operating close to the 90% utilization mark, which has led many of the manufacturers to invest in expanding their businesses via new plants, ‘capexing’ in existing plants and de-bottlenecking. The cement sector in Pakistan is forecasted to undergo a revival in terms of further productivity. Many players at an individual level have managed to allocate funds in order to finance their plant capacity expansions. A brief synopsis of two of the most key industry players has been provided below. DG Khan Cement
• • • • • DG Khan Cement, a cement sector flagship company proved its mettle by absorbing the cartel jolts and remaining above the cut-off line. Minimum competition in central Pakistan, where it largely markets its product (no other cement plant within a radius of 300km). Efficient plant as compared to Lucky Cement‘s Chinese technology and Maple Leaf’s Wet portion. 100% conversion to coal. DG Khan Cement has a substantial share in cement export to Afghanistan (10 % in FY02-03). The Export market share has increased to 18% in FY05. Ongoing capacity expansion of 7,000 tpd.

Lucky Cement
Lucky cement has proved its strength in difficult times (cartel break-up) by remaining profitable during nose-dived cement prices due to higher cement dispatches. Lucky cement has a substantial share in cement export to Afghanistan (17.7% of total exports in FY05). 100% conversion to coal. Huge expansion is on the cards, and has started coming online, which will not only benefit Lucky in the long run but also help to take advantage as an innovator in the industry. The only cement company that will have a presence in both zones (North and South).

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INDUSTRY ANALYSIS CEMENT SECTOR COMPOSITE DATA Balance Sheet Data
Year Assets Fixed Assets (Rs.M) Investment (Rs.M) Total Non Current Assets (Rs.M) Total Current Assets (Rs.M) Total Assets (Rs.M) Equity Paid up Capital (Rs.M) Retained Earnings (Rs.M) Liabilities Total Long term Debt (Rs.M) Other Non Current Liabilities (Rs.M) Total Short term Debt (Rs.M) Other Current Liabilities (Rs.M) Total Liabilities and Equity (Rs.M) 85,322.55 5,517.06 2,307.34 19,529.18 112,676.13 30,140.04 14,920.67 35,173.50 12,135.14 9,601.88 10,704.87 112,676.10 62,419.63 4,290.00 1,934.52 13,526.53 82,170.68 27,488.26 2,727.20 24,334.41 11,683.25 6,836.29 9,101.28 82,170.69 63,698.71 3,932.01 1,586.37 12,190.48 81,407.57 25,697.63 490.83 30,747.90 7,905.09 9,122.74 7,443.37 81,407.56 61,853.22 2,407.23 1,253.24 10,670.36 76,184.04 24,669.12 -290.95 23,374.59 13,367.41 7,600.43 7,463.42 76,184.02 2005 2004 2003 2002

Income Statement Data
Sales (Rs.M) Other Income (Rs.M) Other Net Expenses (Rs.M) Financial Charges (Rs.M) Taxation (Rs.M) Net Profit (Rs.M) Dividend (Rs.M) Cash from Operations (Rs.M) 40,643.92 2,360.75 2,355.82 1,871.97 2,426.69 7,967.71 767.23 18,964.25 28,514.14 486.87 2,428.50 1,462.69 947.10 3,330.31 899.42 7,971.86 21,591.54 522.00 1,358.58 2,375.98 -581.50 -28.27 687.08 2,506.31 22,020.66 331.54 1,025.93 3,110.47 284.51 183.43 672.21 3,453.40

Asset Turnover Current Asset Turnover Sales to total debt Sales to total current liabilities

0.36 2.08 0.60 2.00

0.35 2.11 0.55 1.79

0.27 1.77 0.31 1.30

0.29 2.06 0.43 1.46

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CEMENT SECTOR FINANCIAL ANALYSIS

We can see that the cement sector has shown a considerable growth in terms of fixed assets over the years, especially in the past year. This can be evidence of capital expansion programs initiated by several cement companies as they set up new plants and factories. However this capex requirement was funded through long term debt financing. The future prospect of required investment in capacity expansion was determined to be a long term decision, thus the mode of financing chosen was through long term debt. Industry sales increased by more than 42% from 2004 to 2005. The fiscal year 2003 shows a dip that is not congruent with the trend based from other years. Its sales figure is slumped, as well as having a net loss recorded for the year. Yet the industry seems to have rebounded successfully as it was able to retire both long term debt as well as short term loans in 2004, and was able to pay high dividends as compared to other years. One plausible reason for the industry dividends being lower in 2005 than in 2004 is because the recent earthquake has prompted several companies to consider expanding plant capacities, and thus their funds need to be allocated towards this cause rather than paying off their shareholders. The industry saw a significant retention of earnings in 2005, which increased by nearly 550%. This huge improvement in retained earnings can be a result of a more efficient and tighter management in the utilization of funds. The efficient utilization of assets and proper debt allocation also improved over the course of the four years. 2003 again seemed to be a slump year for the cement industry, yet the continual growth over the past two years is a good sign of prosperous times for the sector. Thus, we can see a general increase in the profitability of the sector with over 130% growth in net profits from 2004 to 2005. Furthermore, the investment in fixed assets is increasing in tandem with the increase in sales levels, so the increased investment can be said to be justified. The trend in current ratio of the industry has shown sustained improvement, yet the net working capital composite data leads us to believe that on average, companies in the industry as a whole, at certain times were not as liquid as they would have liked to be.

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INDUSTRY AVERAGES

Cement Industry Averages 2005 Average Net Working Capital (Rs.M) Current Ratio (x) Solvency (x) Debt Leverage (x) Gross Profit Margin (%) Net Profit Margin (%) Dividend / Net Profit (%) Return on Investment (%) Return on Equity (%) 54.13 1.21 1.32 2.38 29.08 17.27 6.03 10.93 25.71 Max 1,140.92 3.08 2.51 13.36 43.81 33.31 38.94 25.29 55.65 Min -1,104.35 0.25 0.40 0.34 1.05 7.78 Quartile 1 -221.09 0.87 0.92 0.66 22.07 10.93 5.58 16.10 Median 32.25 1.03 1.11 1.10 30.95 16.24 7.80 20.49 Quartile 3 284.93 1.47 1.86 1.88 38.01 22.53 10.47 16.00 35.73

Industry Averages 2004 Average Net Working Capital (Rs.M) Current Ratio (x) Solvency (x) Debt Leverage (x) Gross Profit Margin (%) Net Profit Margin (%) Dividend / Net Profit (%) Return on Investment (%) Return on Equity (%) 113.97 1.16 1.40 6.62 28.83 16.07 20.47 9.38 40.67 Max 1,066.18 2.11 2.39 34.82 40.15 32.08 55.54 20.57 172.45 Min -270.16 0.51 0.76 0.45 8.21 2.13 0.57 12.93 Quartile 1 -260.87 1.21 1.46 1.05 22.56 10.51 8.52 22.19 Median 25.99 1.03 1.12 1.34 32.42 14.67 14.26 8.60 21.22 Quartile 3 168.71 1.67 2.42 3.63 51.74 31.62 46.48 15.59 46.50

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Industry Averages 2003 Average Net Working Capital (Rs.M) Current Ratio (x) Solvency (x) Debt Leverage (x) Gross Profit Margin (%) Net Profit Margin (%) Dividend / Net Profit (%) Return on Investment (%) Return on Equity (%) -45.57 1.11 1.84 7.98 15.80 6.27 243.15 2.63 11.76 Max 524.80 2.43 5.77 64.63 25.57 16.16 1,251.38 8.87 69.47 Min -1,288.69 0.44 0.72 0.33 4.82 0.26 0.09 0.27 Quartile 1 -159.62 0.79 1.07 0.89 9.96 1.74 0.82 3.30 Median -13.28 0.97 1.38 1.28 16.34 6.26 67.60 1.58 5.49 Quartile 3 344.85 1.34 1.71 2.05 20.44 9.16 198.79 4.73 9.51

Industry Averages 2002 Average Net Working Capital (Rs.M) Current Ratio (x) Solvency (x) Debt Leverage (x) Gross Profit Margin (%) Net Profit Margin (%) Dividend / Net Profit (%) Return on Investment (%) Return on Equity (%) -25.48 1.02 1.65 2.81 23.10 8.68 53.45 4.62 10.18 Max 264.73 1.99 4.29 14.07 35.70 18.40 102.12 10.69 20.95 Min -320.26 0.37 0.78 0.24 12.47 3.12 0.40 2.74 Quartile 1 -212.71 0.77 0.89 0.78 18.20 4.48 1.21 5.14 Median 36.44 1.05 1.25 1.18 22.70 8.03 66.68 4.55 8.66 Quartile 3 106.66 1.16 1.82 2.01 28.35 11.24 89.59 6.72 14.69

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CEMENT SECTOR FINANCIAL ANALYSIS

COMPANIES’ ANALYSIS 1. Al-Abbas (Essa) Cement
RATIOS Sales to total assets Sales to total current assets Sales to total debt Sales to total current liabilities Gross margin Net profit margin Sales to ASDG expenses ratio Operating profit to total assets ratio Operating profits to total debt ROI ROE Net working capital (Rs. M) Current Ratio CA to CL (minus debt) STL to LTD ratio 2005 0.315 1.592 0.395 1.200 (Loss) (Loss) 23.58 (Loss) (Loss) (Loss) (Loss) 2004 0.338 2.311 0.465 1.058 10.26% (Loss) 44.75 0.03 0.04 (Loss) (Loss) 2003 0.336 2.486 0.500 1.097 4.82% 0.26% 117.02 0.02 0.03 0.09% 0.27% 2002 0.387 3.654 0.579 1.344 12.47% 3.12% 53.73 0.04 0.06 1.21% 3.64%

-122.44 0.75 1.10 0.18

-293.91 0.46 1.47 0.68

-296.26 0.44 1.10 0.52

-320.26 0.37 0.96 0.48

Al-Abbas has been performing quite poorly in the past few years. Its’ ratios analysis shows it to be in the bottom 25% of the industry. It has consistently been posting a net loss for the last two years. In 2004, they were obliged to pay an exorbitant 123.79 million rupees in taxes, which would seem to be the sole reason behind their loss. Yet in 2005, with taxes of less than 10 million, they still posted a net loss of about 82 million. Thus the reason behind AlAbbas’ poor performance cannot be solely attributed to a single factor, rather it is the amalgamation of mismanagement and lackluster performances. However, a silver lining may be present in that Al-Abbas is attempting to rectify its financial situation. The company has been retiring its short term debt and instead opting for long term sources of finance. This would be a better option for them considering that in order to switch from their aggressive and foolish approach to a more conservative one, they would

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require smart decisions in financing sources. Thus the company is securing long term loans and investing the funds into either improving the company’s liquidity by increasing production, or perhaps even expanding production capacities. The company is foregoing its liquidity position currently because they see high demands for cement in the near future. Thus as the future looks bright, the company is able to reduce liquidity in order to expand capacity.

2. Attock Cement
RATIOS Sales to total assets Sales to total current assets Sales to total debt Sales to total current liabilities Gross margin Net profit margin Sales to ASDG expenses ratio Operating profit to total assets ratio Operating profits to total debt ROI ROE Net working capital (Rs. M) Current Ratio CA to CL (minus debt) STL to LTD ratio 2005 0.78 3.09 2.01 4.67 39.72% 33.31% 10.77 0.34 0.91 25.29% 40.61% 2004 1.02 2.62 3.30 5.07 32.58% 14.89% 10.45 0.25 0.82 15.15% 21.89% 2003 0.97 2.46 3.62 5.99 17.69% 9.16% 15.24 0.14 0.51 8.87% 12.12% 2002 0.96 2.57 3.44 5.11 19.14% 7.00% 15.84 0.15 0.53 6.71% 9.31%

283.34 1.51 1.53 0.01

347.21 1.93 1.98 0.60

344.85 2.43 2.54 0.42

264.73 1.99 2.34 1.66

Attock cement has shown a consistent improvement over the past four years in regards to its profitability position. It falls in the top 25% of companies with regards to its net working capital, gross margin, and net margin. The company’s operating profits increased by more than 150% from 2004 to 2005. This success would make an aggressive company take a risky proposition by using short term loans to

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finance its capex requirement, yet Attock chose to take long term debt, thus it would be safe to say that they are conservative in their approach. It just seems that they may be a little too conservative, they increased their long term debt to around Rs. 550 million. This in contrast to 14 million in 2004, seems to more than justify their expansion plans. It can be seen through these ratios that Attock is planning its expansion for the next few years. It has taken a significantly large long term debt as compared to previous years, and is using this to finance its growth in terms of fixed assets. Furthermore, it is compromising on its liquidity position as it sees a positive future situation in which demand for cement has increased manifold.

3. Bestway Cement
RATIOS Net Working Capital (Rs.M) Current Ratio (x) Solvency (x) Debt Leverage (x) Gross Profit Margin (%) Times Interest Earned (x) Fin Charges/Total Revenue (%) Fin Charges/Total Expense (%) Net Profit Margin (%) Dividend / Net Profit (%) Return on Investment (%) Return on Equity (%) 2005 -221.09 0.87 1.22 1.51 43.81 10.29 3.87 20.24 26.33 20.78 10.32 25.88 2004 -270.16 0.77 1.10 1.25 40.15 7.68 5.00 27.24 25.45 28.51 11.33 25.46 2003 -1,288.69 0.51 1.50 2.00 25.57 1.59 14.76 71.33 6.28 128.82 1.72 5.17 2002 -168.06 0.83 1.51 1.19 35.70 2.34 13.94 76.07 18.40 45.36 6.72 14.69

Bestway cement is classified in 2005 as the best company in the lowest 25% of companies. This is a good indicator of their poor performance over the past four years. No effort has been placated towards salvaging a bad liquidity position. Instead, they have utilized short term debt to finance their growth, which would be a highly risky proposition. They do not have the resources to back this kind of funding, and if they do not gain the type of return that they are seeking, then they will be forced to shut up shop.

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Although they are showing an incremental growth over the past four years in their profit margins, it is this disconcerting situation regarding their liquidity that would put a hinder on their success.

4. Cherat Cement
RATIOS Net Working Capital (Rs.M) Current Ratio (x) Solvency (x) Debt Leverage (x) Gross Profit Margin (%) Times Interest Earned (x) Fin Charges/Total Revenue (%) Fin Charges/Total Expense (%) Net Profit Margin (%) Dividend / Net Profit (%) Return on Investment (%) Return on Equity (%) 2005 934.68 3.08 0.92 0.84 35.68 21.10 1.40 9.23 21.34 38.94 16.00 29.40 2003 199.10 1.48 1.07 0.89 9.96 1.85 1.92 17.05 0.65 682.65 0.51 0.97 2002 106.66 1.21 0.85 0.78 18.20 7.79 1.71 15.94 9.06 93.32 7.91 14.07

Cherat cement is very conservative in its approach. It has increased its investment in assets (both in current and fixed) through the sourcing of long term loans and through retained earnings in 2005. Cherat has significantly raised its ROI and ROE from their considerably poor positions in 2003. This has been brought about through better management practices. In 2005, Cherat has the highest current ratio in the entire industry, a whopping 3.08. Yet this figure does not necessarily mean a very good position. In fact, 3.08 signifies a very conservative outlook, in fact in view of the current increase in demand for cement, Cherat is unnecessarily holding liquid reserves and can be said to be risk-averse. This shows an inefficient utilization of assets, whereas many would say Cherat is financially sound, I feel that if they do not pick up the pace, they will be left behind.

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5. D.G. Khan Cement
RATIOS Net Working Capital (Rs.M) Current Ratio (x) Solvency (x) Debt Leverage (x) Gross Profit Margin (%) Times Interest Earned (x) Fin Charges/Total Revenue (%) Fin Charges/Total Expense (%) Net Profit Margin (%) Dividend / Net Profit (%) Return on Investment (%) Return on Equity (%) 2005 1,140.92 1.37 1.10 0.93 36.91 7.98 5.08 31.20 31.86 16.44 9.34 18.05 2004 252.70 1.10 1.12 0.82 35.68 7.11 4.72 27.66 21.37 30.30 7.08 12.93 2003 524.80 1.34 1.25 0.90 22.65 1.87 12.90 108.10 16.16 34.66 5.01 9.51 2002 99.86 1.07 1.81 1.48 28.35 1.57 18.17 84.71 10.29 – 3.23 8.01

Sales to total assets Sales to total current assets Sales to total debt Sales to total current liabilities

0.29 1.26 0.61 1.73

0.33 1.35 0.73 1.48

0.31 1.46 0.65 1.96

0.31 1.82 0.52 1.95

DG Khan cement has shown itself as a forerunner and leader in the cement sector. This is also highlighted through the company’s financial data. It falls in the top quartile for nearly all ratios, making it one of the best companies in the sector. Furthermore, it has consistently improved on its profit margins, as well as on its ROI and ROE over the past four years. In 2005, DG Khan was able to invest in the expansion of its plant capacities through the borrowing of long term loans and through its own retained earnings. Thus it financed its increase in asset base through a quasi conservative, yet smart approach. One point of concern though, is that it has a low asset turnover rate. Its ratios are lower than that of the industry composite average. This is in part due to an expansion program initiated in 2005 which would see its asset base increase, but over the years it has not made efficient use of its assets. Considering its size as it is has the biggest plant capacities and should thus make 14

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use of economies of scale and better bargaining power with suppliers, whereas it has not really done so. However, lower asset efficiencies in terms of sales are not always a bad sign, because sometimes expensive assets perhaps will not achieve a higher sales volume, but rather an increase in profit margins. So perhaps DG Khan is recognizing its asset efficiency through its higher profit margins and not through sales.

6. Fauji Cement
RATIOS Net Working Capital (Rs.M) Current Ratio (x) Solvency (x) Debt Leverage (x) Gross Profit Margin (%) Times Interest Earned (x) Fin Charges/Total Revenue (%) Fin Charges/Total Expense (%) Net Profit Margin (%) Dividend / Net Profit (%) Return on Investment (%) Return on Equity (%) 2005 -93.23 0.92 1.89 1.54 38.01 4.31 8.04 39.43 17.94 8.20 20.84 2004 202.34 1.54 2.39 2.05 32.26 8.73 43.51 13.68 5.32 16.20 2003 249.01 1.53 2.82 2.89 11.62 30.50 64.77 2002 45.37 1.08 2.24 1.98 25.13 0.78 26.12 80.45 -

Fauji cement grew in 2003 to 2004 by utilizing the collections of receivables from customers and enhanced sales of the year. Yet instead of using their positive liquid position to source a long term loan in 2005, they instead relied on these enhanced funds from 2004 and payments from back taxes of 550 million to aggressively indulge in the sourcing of a significant amount of short term debt. This debt, possibly in the form of running finance or overdraft from banks, would show Fauji to be generally aggressive in its approach. Fauji’s efficient utilization of its assets can be seen as it progressively increased its asset turnover over the four years. Sales to total assets for 2005 was nearly 0.46 times. This means that Fauji was achieving nearly half of the cost of their assets through their sales figures for the

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year. This shows a leaner and more efficient utilization of assets as compared to the industry average. Fauji has used its running finance short term loans in order to finance an increase in current assets. This could most probably be for increasing their inventory base. They are not planning an expansion in plant capacity, yet are hoping to capitalize on the new demands in the market through an increased utilization of current plant capacities through this risky approach.

7. Gharibwal Cement
RATIOS Net Working Capital (Rs.M) Current Ratio (x) Solvency (x) Debt Leverage (x) Gross Profit Margin (%) Times Interest Earned (x) Fin Charges/Total Revenue (%) Fin Charges/Total Expense (%) Net Profit Margin (%) Dividend / Net Profit (%) Return on Investment (%) Return on Equity (%) 2005 284.93 1.67 0.90 1.17 10.18 5.33 2.78 36.31 12.85 7.80 16.94 2004 -231.77 0.51 2.02 25.90 8.21 3.57 3.61 133.72 9.90 6.41 172.45 2003 -488.61 0.32 2.51 16.95 122.00 2002 -436.93 0.41 2.58 0.16 12.59 67.74 -

Gharibwal cement posted net losses for both 2002 and 2003. This situation was however rectified in 2004 and 2005, as the company improved both its profitability and liquidity positions. Gharibwal cement has used its retained earnings to finance its growth in asset base. Thus it can be said that Gharibwal is more interested in improving its liquidity and profitability in recent years rather than focusing too heavily on expansion. Furthermore, the company’s ROE in 2004 was 172%. This is not a good sign, as they had a significant negative retained earnings which means that this return on equity does not have basis, and should thus be discounted.

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8. Lucky Cement
RATIOS Net Working Capital (Rs.M) Current Ratio (x) Solvency (x) Debt Leverage (x) Gross Profit Margin (%) Times Interest Earned (x) Fin Charges/Total Revenue (%) Fin Charges/Total Expense (%) Net Profit Margin (%) Dividend / Net Profit (%) Return on Investment (%) Return on Equity (%) 2005 -800.26 0.63 2.19 1.88 34.66 56.78 0.54 3.91 20.77 5.58 16.10 2004 1,066.18 2.11 1.02 0.63 37.84 90.59 0.37 2.62 23.58 9.74 15.92 2003 -159.62 0.79 1.06 0.33 20.44 12.79 1.33 13.23 10.41 80.60 4.73 6.30 2002 16.52 1.02 0.98 0.24 19.99 9.40 1.70 27.12 13.78 67.42 5.88 7.29

Lucky cement’s financial position over the past four years has shown that of a company very interested in expansion and high levels of growth. This is certainly true of their performance in 2005. Lucky can be said to be extremely aggressive in its approach. However, this aggression is not baseless. The company has funded its increased capex requirement through both retained earnings and debt, although more through debt. Among debts, the company utilized a heavy long term loan needed to fund its expansion project of two new plants. Along with this, Lucky also increased its short term loans in this period, for two reasons. One because banks were more willing to lend therefore they availed the opportunity. Secondly because in order to maintain a decent cash flow to run operations during the year they would require extra funds which were sourced through this STL. Thus, Lucky would be able to live with the fact the they have reduced their current ratio tremendously, because they foresee a very positive future in which they could possibly take over from DG Khan as market leaders. Also, Lucky chose not to pay dividends for the last two years which would again show its aggressive nature in retaining all its funds for capital expenditure. Therefore, when we say that Lucky is extremely aggressive, it is with appreciation of the fact that they are using a combination of financing sources and we believe that it is a wise approach that they are taking.

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CEMENT SECTOR FINANCIAL ANALYSIS

9. Maple Leaf Cement

RATIOS Net Working Capital (Rs.M) Current Ratio (x) Solvency (x) Debt Leverage (x) Gross Profit Margin (%) Times Interest Earned (x) Fin Charges/Total Revenue (%) Fin Charges/Total Expense (%) Net Profit Margin (%) Dividend / Net Profit (%) Return on Investment (%) Return on Equity (%)

2004 40.10 1.03 1.62 1.07 34.01 3.42 9.18 46.26 14.44 55.54 6.88 14.23

2003 394.71 1.34 1.71 1.28 15.03 0.78 17.63 183.25 6.24 2.05 4.68

2002 140.76 1.16 1.82 1.17 25.41 1.39 16.56 83.39 6.01 2.37 5.14

Maple Leaf cement has shown an improvement in its profit margins and ROI and ROE over the last few years. However when evaluating it against the industry averages, the company falls somewhere between the second and third quartiles making it between the middle and top of the middle 50% of companies. In 2005 Maple Leaf used its retained earnings and short term loans to finance its growth in fixed assets. Thus it could be accurate to say that the company is somewhat aggressive in its approach. Like Lucky, Maple Leaf chose not to pay dividends in 2005. This would highlight its decision to hold back funds for use in other regards like plant expansion. Maple Leaf cement is one of those players in the industry that is currently near the middle of the pack but is trying hard to break through to hit the leaders. In fact, Maple Leaf has a significant lead in sales volumes and capacity utilization. Yet, only through an efficient expansion will the company be able to compete at the top level. We believe that the company should have secured a long term loan rather than relying on STL and retained earnings to fund their capex requirements. It is always better to borrow when a company is able to rather than when it needs to.

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STRATEGIC FINANCIAL MANAGEMENT

CEMENT SECTOR FINANCIAL ANALYSIS

COMPETITIVE SNAPSHOT

1 2 3 4 5 6 7 8 9

Sales Leaders DG Khan Maple Leaf Lucky Bestway Fauji Attock Cherat Gharibwal Al-Abbas

2005
5,279.56 4,290.73 3,980.11 3,535.84 2,845.14 2,587.41 2,400.53 1,469.50 593.46

1 2 3 4 5 6 7 8

ROI Leaders Attock Cherat Bestway DG Khan Fauji Gharibwal Maple Leaf Lucky

2005
25.29% 16.00% 10.32% 9.34% 8.20% 7.80% 6.88% 5.58%

1 2 3 4 5 6 7 8

ROE Leaders Attock Cherat Bestway Fauji DG Khan Gharibwal Lucky Maple Leaf

2005
40.61% 29.40% 25.88% 20.84% 18.05% 16.94% 16.10% 14.23%

Profit Leaders 2005 1 2 3 4 5 6 7 8 9 DG Khan Bestway Attock Lucky Maple Leaf Cherat Fauji Gharibwal Al-Abbas
1,682.08 930.83 861.74 826.59 727.45 512.30 510.49 188.88 -82.35

1 2 3 4 5 6 7 8 9

Capacity Utilization Leaders DG Khan Maple Leaf Lucky Bestway Gharibwal Fauji Cherat Attock Al-Abbas

2005
1,890,000 1,534,050 1,510,000 1,230,000 1,098,946 945,000 787,500 756,000 472,500

Future Capacity Leaders 1 2 3 4 5 6 7 8 9 Lucky DG Khan Maple Leaf Bestway Cherat Attock Fauji Gharibwal Al-Abbas

2005
6,550,000 4,350,000 3,904,050 2,940,000 2,227,500 1,656,000 1,155,000 1,098,946 472,500

Cash Flow Leaders 1 2 3 4 5 6 7 8 9 DG Khan Cherat Gharibwal Attock Maple Leaf Fauji Al-Abbas Bestway Lucky

2005
1,140.92 934.68 284.93 283.34 40.1 -93.23 -122.44 -221.09 -800.26

1 2 3 4

Dividend Paying Leaders DG Khan Cherat Bestway Attock

2005
276.59 199.47 193.47 90.20

(Figures in Millions of Rupees)

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STRATEGIC FINANCIAL MANAGEMENT

CEMENT SECTOR FINANCIAL ANALYSIS

USEFUL FINDINGS Lucky cement and Fauji cement are perhaps the two most aggressive companies in the cement sector. Lucky has managed to maintain its profitability over the last four years, and it has recently decided to open two new plants. These plants will require a heavy investment, and as we can see, Lucky has financed this investment in fixed assets through both long term debt, and short term loans. However, it has left itself in a quandary. In 2005 it had a severe negative net working capital, and a very low current ratio. This leads us to believe that Lucky is not concerned with its liquidity position for the moment and instead is more interested in availing any and all funds for the allocation towards their capex requirement. This signifies a highly risky yet bold strategy, and thus it would be justified to say the Lucky is an extremely aggressive and risk loving player in this industry. Yet since Lucky foresees a very positive future situation, their strategy can be defended as a risky yet wise decision with a possibly huge payoff. Fauji on the other hand has not shown very profitable finances over the past four years. It posted a net loss for 2002 and 2003. Even though they have shown a consistent improvement over the last two years, it is through the sourcing of short term loans that Fauji has financed its growth. It has used STL to fund its growth in current assets. Thus this improvement can be said to be false because Fauji has not shown any growth in fixed assets which leads us to believe they are not expanding their plant capacities. Thus, in case they have capex plans, then they will not be in a position to finance through long term debt, because of their low current ratio. Thus they will again rely on short term financing, which will again lower their liquidity position and thus the cycle will continue unless corrective action is taken. Fauji’s management seems to be trying to fight their current high risk situation with further increasing the risk. However, we do not believe that they are aware of their present calamity, even if they are, then they are not showing any signs of a possible recovery from this negative position that they have found themselves in. The difference between both these risk taking companies is that it would seem that Lucky is increasing its risk on purpose in order to avail higher returns in the future, whereas Fauji is either forced into the risky situation through its bad decisions of modes of financing, or is unaware that it is facing this risk. Cherat cement and Attock cement are the most conservative companies in the cement sector. In 2005, Cherat had the highest current ratio in the entire industry, a whopping 3.08. Yet this figure does not necessarily mean a very good position. In fact, 3.08 signifies a very conservative outlook, in fact in view of the current increase in demand for cement, Cherat is unnecessarily holding liquid reserves and can be said to be risk-averse. This shows an inefficient utilization of assets, whereas many would say Cherat is financially sound, I feel that if they do not pick up the pace, they will be left behind.

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STRATEGIC FINANCIAL MANAGEMENT

CEMENT SECTOR FINANCIAL ANALYSIS

Attock cement took on a very large long term debt in order to fund its growth in fixed assets. This would signify its conservative approach, which goes in tandem with what we can garner from the company’s general attitude towards risky situations; instead of using borrowing to fund its growth in 2004, it relied on its retained earnings. Even with the looming prospect of a positive future situation these two companies have opted for a more secure and safe approach to funding its growth, and thus can be said to be highly conservative in nature. Of all the companies in the cement sector, DG Khan cement is reacting to the current economic situation the best. As it is, DG Khan has remained the market leader in nearly all respects, and now the company is showing a very intelligent approach to expand in order to meet the necessary demand levels for the rebuilding of the earthquake afflicted areas, through a combination of long term loans and retained earnings, and not through short term debt. Of all the companies analyzed, Al-Abbas and Gharibwal seem to be the poorest performers. However, of these two, Al-Abbas has shown the wiser decision making as it is now sourcing its current growth in assets through long term financing. Whereas Gharibwal has not even shown any inclination towards expansion projects, and is focused on improving its situation through retained earnings growth. Conversely though, we are of the opinion that Bestway is the one company that is most likely headed for failure. In 2005 it chose to finance its expansion through short term loans and this is because it was in a poor liquid position and could not acquire a long term loan. Yet it still chose to expand and through this risky situation it will fall deeper into the hole, and will need to further take short term debt to try and salvage its position. This cycle, if not handled professionally and intelligently will see the company yield only failure. Thus our recommendations to Bestway’s management and Board of Directors, will be to try and secure a long term loan as soon as they are able to. They should currently put their expansion plans on hold and first rectify their liquidity position. Once they are able to maintain a positive cash flow, then they should go ahead with the expansion project sourced either through long term loans or through retained earnings.

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