Table of Contents

Scenario of the case...................................................................................................................................2

About Lucky Cement................................................................................................................................4
Cement Industry in Pakistan....................................................................................................................4
Financial statements Lucky Cement:.......................................................................................................5
Comprehensive income statement........................................................................................................5
Statement of financial position.............................................................................................................6
Financial statement of bestway cement....................................................................................................7
Comprehensive income statement........................................................................................................7
Statement of Finacial position..............................................................................................................8
Financial over view of lucky cement......................................................................................................10
Financial overview of Best way Cement................................................................................................10
Future prospects of lucky and bestway cement.....................................................................................12
Title of case: Evaluation performance of close competitors in Pakistan using
ratio Analysis.

Department: BS A$F

Submission to: Dr Akhtar

Date: 11-3-20

Group members:

Ashjay Aftab i17-1509

Fatima Ejaz i17-1597

Rabia Sarfaraz i17-1592

Fatima Arshad i17-1615

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Scenario of the case

This case examines the relevance of financial statement analysis such as ratio analysis, common size analysis
and trend analysis to the market capitalization of two very similar firms Lucky Cement and Bestway Cement in
Pakistan. Lucky cement and Bestway cement are close competitors in Pakistan’s Cement industry. Despite the
differences between these two firms lucky cement’s market capitalization is 120.52Billion and bestway cements
market capitalization is 53.06Billion as of 2020, the day this case takes place on. This case provides
students/readers with four years of financial statements and market data for both firms and challenges them to
perform a complete financial ratio analysis that will help them to develop a justification for the difference in the
valuation of the two companies.

Recently, a construction company signed a contract for the making of a shopping mall and they require cement
in great demand for the construction. The managing director of the construction company called three of his
junior associates for the meeting in which he assigned them a task that was worthy of their talents. The two
biggest players in the cement industry are lucky and bestway cement but lucky cement has really left bestway
cement in the dust in terms of market capitalization. The managing director is leaning towards lucky cement but
first he wants to have a better understanding of why lucky cement’s valuation is so much higher than bestway’s
despite the fact that they have such similar business. The task for the junior associates is to explain the
managing director that why the valuation of lucky cement is twice as high as the best way cement? Is the gap
due to differences in the operating performance or financial conditions of the two companies?

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About Bestway cement
Group of individuals identified an opportunity in Pakistan’s cement industry and they thought to establish the
first cement setup in Hattar. With an initial investment of US$120 million. Pakistan’s worth annual production
capacity of 1.1 million tons in 1995. In hatter BCL was established in industry with the record breaking time of
24 months. This was a project of Greenfield and the plant was established in the underdeveloped unprivileged
area of Hattar. Bestway provided 800 jobs and helped developed the area. Later the plant was set up in chakwal
with the total investment of US$140 million and with the help of this bestway was able to create 900 jobs in
central Punjab. In September 2005 bestway acquired third cement plant in Mustehkam as part of the
government privatization plant. In June 2008 bestway set up its third Greenfield plant, right next to its plant in
chakwal at a cost of US$180 million. This plant had annual capacity of 1.8 million tons and created 500 jobs.
Later BCL saw an opportunity in the Afghanistan market and began exporting cement in 2003 now BCL has
become one of the leading exporters of cement. It later started exporting to India, South Africa, and Sri Lanka
and Middle East countries. BCL also established its first power generation plant under zameer guidance with an
initial investment of US$ 29Million. The plant created 35 jobs. The plant has the capacity to generate 1.5MW
power by reducing cost, wasted heat. It provided electricity to its two plants in chakwal. BCL has grown from
small to Pakistan’s second largest cement producer with four modern state of the art with annual capacity of 6
million which has provided employment to 3000 people in Pakistan.

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About Lucky Cement
Abdur Razzak Tabba founded Lucky Cement Limited in 1993. Lucky Cement Limited (LCL) is
one of the largest producer and leading exporter of quality cement in Pakistan with the
production capacity of 7.75 million tons cement per annum. The company is listed on Karachi,
Lahore, Islamabad, and London Stock Exchanges.

Over the years, the Company has grown substantially. Lucky Cement has a network of over 200
dealers which enables it to dominate the local market and is Pakistan’s one of the first company
to export large quantities of loose cement making LCL being the only cement manufacturer to
have its own loading and storage terminal at Karachi Port. LCL is successfully attaining its
financial and strategic objectives on short term and long term basis. LCL prioritizes its corporate
social responsibility (CSR) as a part of strategic objectives and it assists its employees and
communities by providing better educational, health and other humanitarian facilities.

Cement Industry in Pakistan

In every economy, construction industry is core the back bone of the country. Cement industry
plays an important role in construction of anything be it is house or anything that is going to be
constructed. Therefore, the cement industry in Pakistan is a market with share of 35 plus million
tons that grows at around 3% per annum in terms of production volume and approximately 8% in
terms of sales. Moreover, 23% of the cement is exported around the world. The challenges this
company faced was from giant cement companies that consisted of energy sector, adulteration in
cement products selling at low cost, fake exports to Afghanistan claiming reduction in taxes from
government. They even offered sales discounts just to gain more sales and gain a competitive
advantage. Also the impact of exports gained positive image of Pakistan.

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Financial statements Lucky Cement:
Comprehensive income statement

5
Statement of financial position

6
Financial statement of bestway cement

Comprehensive income statement

7
8
Statement of Finacial position

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10
Financial over view of lucky cement
By looking at the 4 years comprehensive income statement we can analyze that the turnover has
increased to PKR 48.0 Billion in 2019 than the previous financial years with an increase of
11.5%. The reason for this increases growth in sales volume. Also cost of sales has increased in
2019 by PKR 34.0 Billion. Gross profit has decreased in 2019 than in previous years because of
sales mix from cement to clinker that resulted in lower retention also higher fuel and other cost
lead to decrease in gross profit. Moreover Net profit decrease by PKR to 10.5 billion in 2019
with a decrease in 7.5% this is mainly due to increase in expenses done by the company. The
non-current liabilities showed an increase in figures of 30.3% from 2016 to 2019 and it is mainly
due to increase in deferred tax liability. Lucky cement also as positive non-current asset of
128.1%in NCA from 2016 to 2019 it is because of capital expenditures also the company has
expanded its operations such capacity expansion, alternative energy, lucky motors, lucky electric
power etc.

Financial overview of Best way Cement

After looking at the comprehensive income statement of 4 years, we can see that the turnover has
increased in 2019 by PKR 53601.51. This increase id sue to higher sales growth in 2019. Gross
profit of bestway cement has also increased in 2019 than 2016 by 29.9%. This growth is because
of the sale of the cement and lower fuel cost. Moreover, net profit of the company has decreased
by PKR 10097.28 in 2019 than the previous 4 years. Operating and other expenses has also
increased and due to which the profit of the company declined. Whereas by looking at the
financial position of bestway cement we can see that non-current liabilities has increased by
11.42% than the previous year but overall the total liabilities has declined. This is mainly due to
the fall in long-term debts.

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Different option that can be used to tackle the problem of companies both having different
market capitalization. There are some reasons that includes.

1. Increase Production capacity: With the latest expansion and production capacity
increased to 12.15 million tons per annum, Lucky Cement has overtaken Bestway
Cement, as Pakistan's largest cement producer. Bestway Cement has a capacity of 10.3
million tons per annum
2. Pricing Strategy: Lucky cement has best cost and value strategy due to which it has
taken over the market and with the help of this it has gain competitive advantage.
Whereas bestway failed to determine the cost effectively for its products, due to which it
also faced losses in the recent years.
3. Marketing strategy: lucky cement’s focus is on business-to-business (B2B)
customers, who then take care of business-to-consumer (B2C) market. Hence, it spends
less on advertising and promotional tools. While bestway cement is also making efforts to
establish competitive marketing strategy in order to remain competitive in the cement
industry in Pakistan
4. Improved Production line: Lucky cement has expanded its production line by
constructing Construction and installation and design modification with respect to the
brownfield expansion for the additional line of 2.8 million tons per annum at our north,
Khyber-Pakhtunkhwa, plant has been successfully completed

5. Changes in exchange rate: Also both the companies are exporting cement outside
Pakistan so they will be facing ups and down in their financial performance because of
the fluctuations in exchange rate.

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Future prospects of lucky and bestway cement
We have seen a growth in domestic consumption of around 14-15 percent this year. So the
government will continue to spend on building new infrastructures; primarily roads, highways,
and port expansions, and of course, developing the Gwadar and the CPEC. If everything goes
well, we can expect the growth to continue, for at least the next couple of years. So seeing this
opportunity lucky and both bestway cement will continue to supply cement to fulfil the domestic
demand. CPEC is not three in fact it is 10 year project and it’s just not a road connectivity there
will be establishment of roads, economic zones and much more. Also there will be few
expansions in the country that will also generate cement demand in Pakistan but on the other
hand Pakistan’s GDP is likely to fall down in coming years because of major political
insecurities and major health issues for example coronavirus has become worldwide phenomena
these days. Due to which industries have been locked down. There is no demand right now.
Also to set up industries in Pakistan permission from government takes years to be granted so it
becomes difficult set up industry or any plant. The industry is competitive and commodity prices
for cement are globally on a decline but cement prices in Pakistan are rising. Some companies
are running idle capacity so is the perception that there is a cartel true?

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.

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