Financial Management Final Project


D.G Khan Cement Company

Table of Contents:
Location of Cement Plants in Pakistan Introduction Market Share Exports Sales Data Procedures Definitions of Terms Used Ratio Analysis Profitability Ratios Long Term Solvency Ratios

Location of Cement Plants across Pakistan

Lucky Cement Pioneer near Sargodha Maple leaf Fauji Cement DGKC

D.G. Khan Cement Company
Introduction: D.G. Khan Cement Company Limited (DGKC), a unit of Nishat group, is the largest cement-manufacturing unit in Pakistan with a production capacity of 5,500 tons clinker per day. It has a countrywide distribution network and its products are preferred on projects of national repute both locally and internationally due to the unparallel and consistent quality. It is listed on all the Stock Exchanges of Pakistan. DGKC was established under the management control of State Cement Corporation of Pakistan Limited (SCCP) in 1978. DGKCC started its commercial production in April 1986 with 2000 tons per day (TPD) clinker based on dry process technology. Plant & Machinery was supplied by UBE Industries of Japan. Acquisition of DGKCC by Nishat Group: Nishat Group acquired DGKCC in 1992 under the privatization initiative of the government. Starting from the privatization, the focus of the management has been on increasing capacity as well as utilization level of the plant. The company undertook the optimization by raising the capacity immediately after the privatization by 200tpd to 2200tpd in 1993. Capacity Addition: To meet the increasing demand and to capitalize on its geographic location, the management further expanded the capacity by adding another production line with a capacity of 3,300 tons per day in year 1998. Design of the new plant is based on latest

dry process technology, energy efficient and environmental protection from particulate pollution according to the international standards. M/s F.L. Smidth of Denmark supplied the plant and machinery. As a result, DGKCC emerged as the largest cement production plant in Pakistan with annual production capacity of 1,650,000 M tons of clinker (1,732,000 M.Tons Cement) constituting about 10% share of the total cement production capacity of the country. The optimization plan is still underway to increase the total capacity of the two units to 6700 TPD by mid of 2005 from 5500 TPD at present. Expansion -Khairpur Project: Furthermore, the Group is also setting up a new cement production line of 6,700 TPD clinker near Kalar Kahar, Distt. Chakwal, the single largest production line in the country. First of its kind in cement industry of Pakistan, the new plant will have two strings of pre-heater towers, the advantage of twin strings lies in the operational flexibility whereby production may be adjusted according to market conditions. The project will be equipped with two vertical cement grinding mills. The cement grinding mills are first vertical Mills in Pakistan. The new plant would not only increase the capacity but would also provide proximity to the untapped market of Northern Punjab and NWFP besides making it more convenient to export to Afghanistan from northern borders. Products: Ordinary Portland Cement

Market Share
DGKC was a longstanding market leader until major expansions from LUCKY wrestled the top spot away from DGKC. It is currently producing at a capacity of 2.1MnTPA. In May 2007 their new plant started operations, which has increased their current capacity to 4.2 MnTPA. With this additional capacity DGKC is expected to maintain its second place in terms of market shares in the next few years. DGKC is one of the very few players in the industry that are producing more than their installed capacity for the last few years. The major reason being the superior

European technology. The new plants use European technology. Furthermore, DGKC also utilizes more man-hours. The industry-wide norm is to quote capacity using 300 days 24x7. In FY06 DGKC worked 328 days, 24x7 due to which it was able to achieve greater than 100% capacity utilization.

The location of plant makes it difficult to export through sea especially when no BOT Terminal is available. However, in the near future DGKC plans to explore the Northern market and increase its share of exports to Afghanistan. Recently DGKC initiated exports to India with 1,500tn cement exported through sea.

*DGKC 6.40% * Others 93.60%

In terms of local sales DGKC seems to be losing its market share. The main reason being the slightly delayed expansion compared to its local peers. In FY02, DGKC had 11.1% share of total local sales. Its share remained at 11% in FY06 after slight deviation in the middle of the year. Meanwhile, the shares of other competitors have changed. LUCKY had crossed it by more than 30% in FY07. It does not seem likely that DGKC will be able to become market leader again in the immediate future unless

it undertakes further expansions. It is expected that DGKC will remain a competitive market player and retain its second place in the market share. DGKC in the past years has been operating on a uniform utilization of around 85% and in the future with additional capacity it is expected to utilize 80% of its capacity. FY06 was an exception because in order to keep its local sales share intact it had to produce at 111% capacity, which it did successfully and made up for its slightly late decision to expand. Sales growth was recorded at 51% in FY06. In an effort to maintain its local market share of 11% DGKC has successfully been producing at more than 100% of its capacity. In FY08 Company is expecting to achieve a total sales growth of around 20% as it will be producing with additional capacity of 2.1MnTPA along with existing capacity of 2.1MnTPA making it 4.2 MnTPA.

The main source of data for the research is the Islamabad and Karachi stock exchanges and the internet, as the research is based on secondary data so that the data is gathered from the annual reports of the companies chosen, and from

For the purpose of research three types of analysis were done, which are as under

Ratio Analysis:
The financial performance of DGKC has been measured using the Financial Ratios and trends mentioned below

Definitions of terms used:
1. Return on Equity (ROE)

This ratio measures the average return on the firm’s capital distribution from its owners (i.e. Stockholders). It indicates how many rupees of income were produced for each rupee invested by the common stockholders.

ROE is calculated by the following formula: ROE =
Net Income

Share Holder ' s Equity
2. Gross Profit Margin

It measures how much profit remains out of each sales rupee after the cost of goods sold is subtracted. It is calculated by dividing Gross Profit by sales, i.e.

Gross Pr ofit M arg in =

Gross Pr ofit × 100 Sales

This ratio shows how well a firm generates revenues compared to its cost of goods sold. The higher the ratio the better it is for the organization
3. Net Profit Margin

It measures how much profit out of each rupee sale is left after all expenses is subtracted. It calculated by dividing net income by sales revenue. NP Margin =

Net Income x 100

4. Total Assets Turnover

It measures how efficiently a firm utilizes its assets. A company that has a high assets utilization ratio suggests that its assets help promote sales revenue. It is computed as under: TATO =


Total Assets
5. Current Ratio

It compares all the current assets of the firm to all the current liabilities of the company. It is a measure of the company’s ability to pay short-term debts. It is calculated by dividing Current Assets by the Current Liabilities, i.e. Current Ratio =

Current Assets

Current Liabilitie s
6. Inventory Turnover It gives us the number of times inventory is turned over in a financial year. It tells how efficiently the firm converts inventory into sales. It is calculated by dividing sales by average inventory. Some analysts use the cost of goods sold to calculate this ratio. The later one is more realistic. Here COGS is used to calculate this ratio. ITO =

Cost of Goods Sold
Average Inventory

7. Debtor Turnover This ratio gives the number of times debtors are turned over during the year. It is calculated by the formula

Debtor Turnover =
8. Inventory Turnover Period

Sales Average Debtors

This ratio gives the information about the number of day’s inventory is held before it is converted into sales. It is calculated by the formula as under

Inventory Turnover Period
9. Debt to Equity Ratio:


Inventory Cost Of Goods Sold

× 365

This ratio shows what percentage the total debt constitutes of equity. It is concerned with company’s long-term stability. It is calculated as

Debt to Equity Ratio


Total Debts × 100 Total Equity

A total debt comprises of current liabilities as well as long-term debts
10.Debt to Total Assets

This ratio measures the firm’s assets that are financed with debts. It is also called debt ratio and calculated as dividing total debts by the total assets.

Debt to Total Assets
11.Interest Cover:


Total Debts × 100 Total Assets

This is the ratio between PBIT and interest expense and it gives the times interest expense is earned, which means the number of times PBIT covers the interest payable.

12.Earning Per Share


PBIT Interest Expense

EPS is widely used as a measure of company’s performance especially in company results over a period of several years. A company must be able to sustain its earnings in order to pay dividends and reinvest in the business to achieve future growth.

Earning Per Share =
13. P/E Ratio

Net Pr ofit Weighted Average Number of Shares

P/E ratio reflects the confidence of the market. It is the ratio between the Market Price per Share and Earning per Share.

Pr ice Earning Ratio =

Market Pr ice Per Share Earning Per Share

Ratio Analysis: Profitability Ratios
Return on Equity Table: 1.1 Year ROE Increase / (Decrease) Percentage

2004 2005 2006 2007

43.48 -30.47 -61.91

12.58 18.05 12.55 4.78

Figure: 1.1

20 15 10 5 0 2004 2005 2006 2007 12.58 18.05 12.55 4.78

Analysis Return on Equity ratio is specifically for shareholders and is aimed at measuring the return they should expect from their shares in the business. The company’s return on equity ratio is 4.78%, which shows that after investing Re.1 in company it will get back 4.78%.

Gross Profit Ratio Table: 1.2 Year 2004 2005 2006 2007 Gross Profit Increase/Decrease 3.45 34.95 -36.46 Percentage 35.68 36.91 49.81 31.65

Figure: 1.2
GP Margin
60 50 40 30 20 10 0 49.81 35.68 36.91 31.65





Analysis: The Gross Profit ratio of the company is 31.65% which shows that the company has greater scope for absorbing various expenses on administration, maintenance, arranging finance, selling and distribution and yet leaving net profit for the proprietors or shareholders. From the figure it is clear that there GP margin is almost same in 2004, 2005, 2007. The increase in 2006 is due to increase in sales.

Net profit Margin Table: 1.3 Year Net Profit Margin Increase / (Decrease) Percentage

2004 2005 2006 2007

55.72 -4.58 -16.88

20.46 31.86 30.40 25.27

Figure: 1.3 Net Profit Margin
40 30 20 10 0 2004 2005 2006 2007 20.46 31.86 30.4


Analysis: From 2004 to 2006, net profit margin has gradually increased due to the earthquake. In 2007, the net profit decreased by 14 percent due to the inflation. In 2007 the prices of oil and fuel rose increasing the production cost. In 2007 the prices of cement decreased due to the oversupply of cement in market.

Total Assets Turnover Table: 1.4 Year Total Assets Turnover Increase / (Decrease) Times

2004 2005 2006 2007

-12.12 -20.69 -47.83

0.33 0.29 0.23 0.12

Figure: 1.4 Total Assets Turnover
0.4 0.3 0.2 0.1 0 2004 2005 2006 2007 0.33 0.29 0.23 0.12

Analysis: From 2004 to 2007, this ratio has gradually declined. In 2007 fixed assets increased by 33 percent and current assets increased by 94 percent. A low turnover indicates that capital tied up in too many assets relative to what is needed.

Liquidity Ratios
Current Ratio Table: 1.5 Current Ratio Year Increase / (Decrease) Times

2004 2005 2006 2007

13.22 20.44 57.58

1.21 1.37 1.65 2.60

Figure: 1.5 Current Ratio
3 2.5 2 1.5 1 0.5 0 2.6 1.37 1.65






Analysis: From 2004 to 2007, the current ratio has gradually increased due to the rise in current assets. From 2006 to 2007, debtors have increased by 94 percent and short-term investment increased by 98 percent. In 2007, their creditors decreased by 27 percent.

Inventory Turnover Table1.6 Year Inventory Turnover Increase / (Decrease) (%) 2004 2005 2006 2007 292.86 -45.45 -16.67 8.4 33 18 15 Times

Figure: 1.6 Inventory Turnover
40 30 20 10 0 2004 2005 2006 2007 8.4 18 15 33

Analysis: The stock turnover ratio of company is 15, which shows that the company has efficient inventory control, sound sales policies, trading in quality goods, reputation in the market, better competitive capacity and so on. Inventory turnover is decreasing from 2005 to 2007. In 2005 inventory turnover increased due to the increased demand owing to the earthquake.

Debtor Turnover Table: 1.7 Debtor Turnover Year Increase / (Decrease) Times

2004 2005 2006 2007

22.73 29.63 28.57

22 27 35 45

Figure: 1.7 Debtor Turnover
50 40 30 20 10 0 2004 2005 2006 2007 22 35 27 45

Analysis: Receivable turnover Ratio is used to estimate how long it takes for the credit customers to settle their balances. When setting the receivable days, an enterprise should also consider how long its major suppliers demand their payments. Failure to match receivable and payable days will result in failure to settle short-term liabilities when they fall due. The D.G Khan Cement Company usually takes 8 to 9 days in collecting their receivables

Inventory Turnover Period Table: 1.8 Inventory Turnover Period Year Increase / (Decrease) Days 2004 2005 2006 2007 -74.54 86.49 20.77 43.6 11.1 20.7 25 Days

Figure: 1.8 Inventory Turnover Period
50 40 30 20 10 0 2004 2005 2006 2007 11.1 20.7 25 43.6

Analysis: The inventory turnover period shows that an average how many days were taken to dispose off average inventory. The company usually takes 25 days to dispose of its average inventory. From 2004 to 2005, Inventory Turnover Period has declined by 33 times due to earthquake and after that it rapidly increased due to demand for cement in reconstruction activities after the devastating earthquake.

Long Term Solvency Ratios
Debt to Equity Ratio Table: 1.9 Debt to Equity Ratio Year Increase /(Decrease) % 2004 2005 2006 2007 12.90 -20.00 -10.71 31 35 28 25 Percentage

Figure: 1.9 Debt to Equity Ratio
40 30 20 10 0 2004 2005 2006 2007 31 35 28 25

Analysis: A ratio over 100% indicates a highly geared company and any prudent lender will not be willing to extend loan finance to such businesses. The equity holders will also be threatened, as much of the profit earned during the year will have a bigger portion used in interest payments leaving less returned profit for the shareholders. The debt to equity ratio of company is 25.84% that shows that company has 25.84% portion of debt in equity. From 2004 to 2006, the ratio increased by 4 percent. From 2005 to 2007, it has gradually declined. In 2007 paid up capital has increased by 37 percent and their liabilities against subject to finance decreased by 96 percent.

Interest Cover Table: 1.10 Year Interest Cover Increase / (Decrease) % 2004 2005 2006 2007 57.01 -9.42 -49.52 6.56 10.30 9.33 4.71 Times

Figure: 1.10
Interest Cover
12 10 8 6 4 2 0 10.3 6.56 4.71 9.33





Analysis: In 2005 the sales of DGKC increased that’s why interest coverage ratio increased but after that company’s sales declined which in turn decreased the net profit. Interest coverage ratio decreased in 2006 and 2007 due to the low profits and company is not able to pay its financial cost.

Shareholder’s Investment Ratios
Earning Per Share Table: 1.11 Year Earning Per Share Increase / (Decrease) % 2004 2005 2006 2007 92.41 43.86 -51.22 4.74 9.12 13.12 6.40 Rupees

Figure: 1.11 Earning Per Share
15 10 5 0 2004 2005 2006 2007 4.74 9.12 6.4 13.12

Analysis: The EPS of the company is Rs.8.9, which will attract more investors to acquire shares in the company as it indicates that the business is more profitable enough to pay the dividends in time. From 2004 to 2006 this ratio has gradually increased due to increase in net profit but in 2007, EPS decreased due to decrease in net profit. Net profit decreased due to decline in sales and increase in cost of production.

P/E Ratio Table: 1.12 Year P/E Ratio Increase / (Decrease) % 2004 2005 2006 2007 5.74 6.51 6.91 11.43 8.81 5.44 9.33 Times

Figure: 1.12 P/E Ratio
15 10 5 0 2004 2005 2006 2007 11.43 8.81 5.44 9.33

Analysis: In 2007 the P/E ratio increased dramatically. P/E suggests that investors are expecting higher earnings growth in the future compared to companies with a lower P/E.

Profitability The company showed operating profit growth of 336% in FY06. And show a decline of 8% in FY07 as DGKC suffers from the consequences of a self initiated cartel war. Reasonable operating profit growth is likely in FY08 as DGKC may gain the desired market share, which was the motive behind the cartel war. In FY07, return on equity is decline from 12.55% to 4.78%. However, consistent improvement in returns is expected in the coming years. Market information KSE Code Capacity Utilization (M. Tons) DGKC 2,288,170

Current Price (PRs per share) as on 63.87 07/07/08 Average Daily Volume (shares) Market Capitalization (PRs mn) Paid-up Capital (PRs bn) Shares Traded (PRs M) No. of Shareholders Weightage in KSE-100 (%) Average Price (PRs per share) Factory Sites 12,855,908.28 16,193.67 2535.41 2801.215 5431 0.5 98.75 Khofli Sattai, Distt. Dera Ghazi Khan, and Choa Saiden ShahKallar Kahar Road, Khairpur, Tehsil Kallar Kahar, Distt. Chakwal











DGKC Price Performance

100 INDEX Share Price 0 20 40

7/ 2/ 2 7/ 00 16 7 /2 7/ 00 30 7 /2 8/ 00 13 7 /2 8/ 00 27 7 /2 9/ 00 10 7 /2 9/ 00 24 7 /2 10 00 /8 7 / 10 20 /2 07 2/ 2 11 00 /5 7 11 /20 /1 07 9/ 2 12 00 /3 7 / 12 20 /1 07 7/ 12 20 /3 07 1/ 2 1/ 00 14 7 /2 1/ 00 28 8 /2 2/ 00 11 8 /2 2/ 00 25 8 /2 3/ 00 10 8 /2 3/ 00 24 8 /2 0 4/ 08 7/ 2 4/ 00 21 8 /2 0 5/ 08 5/ 2 5/ 00 19 8 /2 0 6/ 08 2/ 2 6/ 00 16 8 /2 6/ 00 30 8 /2 00 8






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