OVERVIEW OF THE ECONOMY 

Pakistan s economy has faced a huge slump this year with the GDP growth mounting to just 5% for 2008 and it s
expected to be just 2% this year. The economy witnessed surging inflation rates which touching 25% high and so as
the case with the interest rates. The crash of the stock market reflected a sheer drop in the stock prices and the fall of
real estate markets followed the suit. The reduction of expenditure in the real estate and construction business had
adverse effects on the cement sector.

This is evident by a drop in investment as a percentage of GDP from 22.5% to mere 19.1% this year. To make
matters worse, the electricity and water shortages girded the industries and caused high losses. This fiscal year s
beginning saw highest oil prices ever and the subsequent of this high price was suffered by each and every industry.
Law and order was again an issue that made the market opportunities uncertain.

RECENT RESULTS 1Q10 

The company achieved cement sales of 840,717 metric tons during the period Jul-Sep 2009 against sale in the
corresponding period of 768,256 metric tons. Production of cement was recorded at 865,201 metric tons during the
quarter against 755,396 metric tons during the corresponding period last year. The overall capacity utilization was
recorded at 83% during the quarter as compared to 79% for the corresponding period last year. However, reduction
in net retention prices and increasing costs led to declining profitability. Company made pre-tax loss of Rs 289.343
million during the period after accounting for financial charges of Rs 573.447 million.

During the corresponding period last year, the pre-tax loss was recorded at Rs 213.179 million. Going forward the
demand of cement in the domestic market may be effected due to adverse economic, financial as well as the law and
order situation currently prevailing in the Country. The prices of cement in the domestic market may be under
pressure due to stiff competition, which will reduce the retentions accordingly. Moreover, the energy cost which is the
major cost of production has started increasing again due to increase in the oil and coal prices in the international
market, this will have a negative impact on the profit margins of the industry.

PROFITABILITY 

The cement sector saw growth of 2% in fiscal year 2008-09. This growth was seen because of a large number of
companies looking for new avenues outside the Pakistani market. Those who were very successful tried to reach the
Middle East and the African markets. MPL capitalized on the growth potential of the countries that are in a process of
reconstruction like Iraq and Somalia. However, Maple Leaf Cement focused on India and after Mumbai attacks, it
suffered a lot as India imposed ban. Despite all the problems, Maple Leaf Cement s sales are raised considerably.

The increase in sales for Maple Leaf Cement this fiscal year was 95.13%. If we break it up further, 52.34% increment
was witnessed in local sales while 175.12% rise was witnessed in export sales. The reason of increased local sales
was partially because of high inflation that has been given as 20% for year 2009 by State Bank of Pakistan. MLC was
exporting to India in large amounts. But after the Mumbai attacks MPL suffered significant hindrance in sales to India.
In an attempt to find new markets outside Pakistan MPL looked towards India, our neighbor that is one of the most
growing economies. However, the Mumbai attacks led to a significant imposition of duties and the sales to India
dropped after that.

Maple Leaf Cement despite increase in sales was unable to lift its profits. If we compare it with the other companies
in the industries, Maple leaf Cement has under-performed. Actually it has shown worst performance this fiscal year.
All the companies that had showed losses or decreased sales have improved but Maple Leaf incurred further losses.
This high increase in sales was coupled by 59% increase in cost of goods sold. The major chunks that caused such
high increment in CGS for Maple Leaf Cement were 57.31% increase in packing material consumed, 90.07%
increase in fuel and power expense and 71.63% increment in rents, rates and taxes.

The first reason for these increments is electricity shortage in the city. The nation witness unprecedented power
outages this year. This has adversely affected the operations of the industrial sector. Even if MPL use the generators,
the surging fuel prices don t help. Despite the drop in international prices of oil, there was not a drop in Pakistani
market because of removal of subsidy on oil. This removal was because of conditions imposed by IMF for bestowing
loan to Pakistan. The loan demands removal on subsidies and increase in price of the energy sector. These adverse
effects have deteriorated the company s profitability ratios.

Maple Leaf Cement s gross profit margin has increased steadily as 274.36% increment was witnessed in gross profit
due to 95.13% rise in net sales. However, we see that once again profit margin shows negative sign. Although the
situation has improved from -8.65% to -6.45%, the condition is not good. The cement sector has improved a lot this
year but it seems that Maple Leaf is the worst performer. One must also notice that the financial charges have
increased by 87.77% because of surging interest rates. This rate is very high because of conservative approach by
State Bank of Pakistan. Hence the major factor that shows lack of correspondence in profit margin and gross profit
margin is Finance cost.

As shown by the following graph from state bank of Pakistan, the surging discount rates of this fiscal year were very
high. Moreover, as MPL made loss last year, this year Maple Leaf Cement s credit rating would have been worsened.
This is evident by Maple Leaf Cement s increased mark-ups. MPL need to diversify Maple Leaf Cement s markets or
increase sales because the return to assets and to equity has gone down by 48.16% and 80.94% respectively. This is
also evident by reduction in Maple Leaf Cement s equity by 19.65% this year and hence, leading to a 51% reduction
in earnings per share.

LIQUIDITY 

Due to immense losses accumulated by Maple leaf Cement this year, Maple Leaf Cement s liquidity is also affected.
MPL are worse off at this avenue as well with current ratio going down by 35.54% because of 13.01% reduction in
current assets while 34.95% increment in liabilities maturing within this year. MPL increased Maple Leaf Cement s
short term borrowing by 30.05% in order to meet the liquidity requirements.

The current ratio of 0.52 is an alarm bell, as the company will not find it easy to pay off its liabilities and MPL have
huge liabilities coming up this year. It is also worthwhile to mention that Maple Leaf Cement s current assets contain
deferred taxes of 162 million, highlighting that MLC will have difficulties this year in paying off liabilities.

ASSET MANAGEMENT 

In an attempt to recover from Maple Leaf Cement s previous year s loss, MPL employed ingenious techniques. MPL
is now getting accounts receivable quickly and this improvement is by about 52%. A reason for this quick conversion
is export-oriented approach. The government of Pakistan has made it mandatory to do transactions in foreign
countries via Letter of credit. This allows them to get money before maturity and hence Maple Leaf Cement s
receivables are being collected sooner. There is a 5.43% decline in the time MPL take to sell of the inventory. This
fall in time is because of export centric approach again. However, the reduction would have been significant had the
Mumbai attacks not happened, MPL would have very easily improved Maple Leaf Cement s time to ell inventory.
Currently MPL holds inventories worth 651 million rupees that is 49.97% higher than what was Maple Leaf Cement s
situation last year. Consequently, Maple Leaf Cement s operating cycle is now 28.86 days that is 33.33% less than
last year. This reduction in operating cycle shows that MPL have improved Maple Leaf Cement s operations but not
to the extent that MPL get into the profit zone.

The inventory turnover rate has improved by 5.74% that means that MPL are generating more sales on the same
amount of inventory. Once again this rise is due to increase prices. One must also take into notice that the cartel
formation of cement manufacturers caused inflated price that went up to Rs 300 per bag. There is 142.86% rise in
sales to equity ratio. This ratio being mathematical has its shortcomings and this huge increment is not just because
of sales but also because of reduction in equity by 19.65%.

DEBT MANAGEMENT 

Maple Leaf has incurred losses this fiscal year again. This has led to reduction in shareholder s equity by 19.65% as
mentioned above. Maple Leaf Cement s liquidity has also gone down. Now in order to finance Maple Leaf Cement s
assets, MPL have incurred loans. These loans are of both short term and long term in nature. The company s long-
term debt has increased by 242.22% this year. This huge increment is because of following reasons: First MPL
entered into a financing agreement in HBL for a Waste Heat Recovery Plant worth Rs 1.16 billion.

Second, the payment of tranches of long-term loans. Maple Leaf Cement s long-term loans have now matured and
MPL have to pay them back as well. Due to increased debt and reduced equity, Maple Leaf Cement Factory Limited
s debt to equity ratio has rose by 32.52% while debt to asset showed just 8.5% rise. This shows that basically MPL
have restructured Maple Leaf Cement s balance sheet and because the increase in debt is only being used as a
means of providing a cushion for the reducing equity. Maple Leaf Cement s TIE has increased by 195.07%. However,
this ratio being mathematical may be misleading.

Firstly, one must acknowledge that MPL have done robust activities for sales and increased Maple Leaf Cement s
earnings before interest and taxes by 453.45%. However, due to high loans, the financial charges also surged up by
87.57%. Now one must take into consideration that all the long term loans that MPL have taken way back in 2006
and 2007 have been on KIBOR plus certain rate. For the 2006 it is KIBOR + 2% and for 2007 it is KIBOR + 1.5%.
One must take into account that this year, due to decreased liquidity in the market, KIBOR surged up. As the floor
was imposed in the market and there was no room to liquidate from the capital markets, interbank rate showed new
heights.

This is also one of the reasons why the financial charges increased. Along with this, as discussed before in order to
curb inflation, the State Bank of Pakistan kept very high discount rate taking all the interest rates to high values. This
also hurt them even when the floor was removed and liquidity was available in the market because of removal of floor
and injection by the State Bank.