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.

Exports:

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%

Sales:

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.

Data
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
http://www.kse.com.pk.

Procedures
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
Gross Pr ofit M arg in = × 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

Sales

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 = Sales
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 = Sales

Average Debtors

8. Inventory Turnover Period

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 = Inventory

Cost Of Goods Sold × 365
9. Debt to Equity Ratio:

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

Total Debts
Debt to Equity Ratio = × 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.
 Total Debts
Debt to Total Assets = × 100
Total Assets

11.Interest Cover:

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.

TIE = PBIT
Interest Expense

12.Earning Per Share

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.

Net Pr ofit
Earning Per Share =
Weighted Average Number of Shares

13. P/E Ratio

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

Market Pr ice Per Share

Pr ice Earning Ratio =
Earning Per Share
Ratio Analysis:
Profitability Ratios
Return on Equity

Table: 1.1 ROE

Year Increase / (Decrease) Percentage

2004 - 12.58

2005 43.48 18.05

2006 -30.47 12.55

2007 -61.91 4.78

Figure: 1.1

ROE

20 18.05

15 12.58 12.55

10
4.78
5
0
2004 2005 2006 2007

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 Gross Profit

Year Increase/Decrease Percentage

2004 - 35.68

2005 3.45 36.91

2006 34.95 49.81

2007 -36.46 31.65

Figure: 1.2

GP Margin

60 49.81
50
35.68 36.91
40 31.65
30
20
10
0
2004 2005 2006 2007

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 Net Profit Margin

Year Increase / (Decrease) Percentage

2004 - 20.46

2005 55.72 31.86

2006 -4.58 30.40

2007 -16.88 25.27

Figure: 1.3

Net Profit Margin

40
31.86 30.4
30 25.27
20.46
20

10
0
2004 2005 2006 2007

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 Total Assets Turnover

Year Increase / (Decrease) Times

2004 - 0.33

2005 -12.12 0.29

2006 -20.69 0.23

2007 -47.83 0.12

Figure: 1.4

Total Assets Turnover

0.4 0.33
0.29
0.3 0.23
0.2
0.12
0.1
0
2004 2005 2006 2007

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 - 1.21

2005 13.22 1.37

2006 20.44 1.65

2007 57.58 2.60

Figure: 1.5

Current Ratio

3 2.6
2.5
2 1.65
1.21 1.37
1.5
1
0.5
0
2004 2005 2006 2007

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 Inventory Turnover

Year Increase / (Decrease) Times

(%)

2004 - 8.4

2005 292.86 33

2006 -45.45 18

2007 -16.67 15

Figure: 1.6

Inventory Turnover

40 33
30
18
20 15
8.4
10
0
2004 2005 2006 2007

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 - 22

2005 22.73 27

2006 29.63 35

2007 28.57 45

Figure: 1.7

Debtor Turnover

50 45
40 35
27
30 22
20
10
0
2004 2005 2006 2007

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

Days

2004 - 43.6

2005 -74.54 11.1

2006 86.49 20.7

2007 20.77 25

Figure: 1.8

Inventory Turnover Period

50 43.6
40
30 25
20.7
20 11.1
10
0
2004 2005 2006 2007

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) Percentage

%

2004 - 31

2005 12.90 35

2006 -20.00 28

2007 -10.71 25

Figure: 1.9

Debt to Equity Ratio

40 35
31
28
30 25

20

10

0
2004 2005 2006 2007

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 Interest Cover

Year Increase / (Decrease) Times

%

2004 - 6.56

2005 57.01 10.30

2006 -9.42 9.33

2007 -49.52 4.71

Figure: 1.10

Interest Cover

12 10.3
9.33
10
8 6.56
6 4.71
4
2
0
2004 2005 2006 2007

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 Earning Per Share

Year Increase / (Decrease) Rupees

%

2004 - 4.74

2005 92.41 9.12

2006 43.86 13.12

2007 -51.22 6.40

Figure: 1.11

Earning Per Share

15 13.12

9.12
10
6.4
4.74
5

0
2004 2005 2006 2007

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 P/E Ratio

Year Increase / (Decrease) Times

%

2004 - 11.43

2005 5.74 8.81

2006 6.51 5.44

2007 6.91 9.33

Figure: 1.12

P/E Ratio

15
11.43
8.81 9.33
10
5.44
5

0
2004 2005 2006 2007

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 DGKC

Capacity Utilization (M. Tons) 2,288,170

Current Price (PRs per share) as on 63.87

07/07/08

Average Daily Volume (shares) 12,855,908.28

Market Capitalization (PRs mn) 16,193.67

Paid-up Capital (PRs bn) 2535.41

Shares Traded (PRs M) 2801.215

No. of Shareholders 5431

Weightage in KSE-100 (%) 0.5

Average Price (PRs per share) 98.75

Factory Sites Khofli Sattai, Distt.

Dera Ghazi Khan,
and
Choa Saiden Shah-
Kallar Kahar Road,
Khairpur, Tehsil
Kallar Kahar,
Distt. Chakwal
 7/
2/
2

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14 7
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DGKC Price Performance

25 8
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