Oxford Brookes University Research and Analysis Project

The Business and Financial Performance over a Three Year Period Of

Pioneer Cement Limited

December 2008

By: Ahmed Ali Registration number: 13

!"

#ords: $%&"'
1

(ontents
Topic 1. Project objectives and overall research approach 1.1 Reasons for choosing topic and company 1.2 Project objectives and research !estions 1.3 Research approach Page no.

3. 3. ".

2.

#nformation gathered and b!siness techni !es !sed 2.1 $o!rces of information 2.2 &escription of method !sed to gather information 2.3 (imitations of information 2.4 )thical iss!es 2.5 B!siness techni !es !sed and their limitations

%. '. '. '. *.

3.

Analysis and concl!sion 3.1 +ompany profile 3.2 -ro!p profile 3.3 $ector analysis 3.4 Ratio analysis 3.5 Porter0s five force analysis 3.6 $1O2 analysis 3.7 +oncl!sion and recommendations

,. ,. ,. ./. .3. .'. .*.

Appendix A: Appendix B: Appendix C: Appendix D: Appendix E: Appendix F:

References and bibliography -raph 3 4et sales -raph 3 Operating assets -raph 3 )P$ Balance sheet and #ncome statement Ratios sheet

.,. 5.. 55. 53. 5". 5'.

Appendix G:

$ample !estionnaire and its response

5*.

1. PRO ECT OB ECT!"E# A$D O"ERA%% RE#EARC& APPROAC& 1.1 Rea'on' (o) c*oo'ing +*i' +opic and co,panAmong a n!mber of viable topics 6hich # co!ld have selected7 the pros of choosing this one o!t6eighed all the others. 2his topic provided me 6ith a n!mber of potential benefits and opport!nities7 6hich is 6hy # chose it. # 6as already familiar 6ith the tools that # had to !se in order to complete my research and analysis. 2his incl!ded ratio analysis7 $1O2 analysis and Porter0s five force analysis. Amongst the several options this is the most generali8ed topic so all the tools !sed are very flexible and can be !sed to cond!ct analysis of other organi8ations and sectors. # have come across these tools d!ring my co!rse of st!dies7 so # !nderstand their application7 !ses and limitations to the extent of examination !estions. 9o6ever7 !sing them in a real life scenario for the first time 6as m!ch more challenging and # took it as an opport!nity to enhance my analytical skills. Another reason is that7 this topic extends to give a 6holesome vie6 of the organi8ation in relation to its s!rro!ndings7 along 6ith its ability to s!rvive and thrive in the environment. #n the b!siness 6orld an acco!ntant is expected to be able to perform in depth analysis of financial information and eval!ate !alitative and !antitative information7 6hich is not only related to the past b!t also goes to consider the sit!ation in the f!t!re. Altho!gh7 # co!ld have achieved this objective !sing other topics7 this topic provided the most l!crative information 6hich co!ld be analy8ed deeply. :!rthermore7 d!ring the c!rrent year # came across several articles regarding the cement sector and pricing cartels 6hich 6ere a m!ch p!blici8ed iss!e. 2his became a major reason for my interest in the sector. As # stared researching # reali8ed that the cement sector 6as a major contrib!tor to the economy of Pakistan. )ven tho!gh # had several options of companies to choose from amongst the sector7 # selected Pioneer +ement +ompany (imited ;P#O+< as it 6as one of the important market players. P#O+ is a 6ell kno6n organi8ation7 6hich is one of the reasons 6hy a!thentic information related to it is easily accessible. 1.2 P)o.ec+ o/.ec+i0e' and )e'ea)c* 12e'+ion' 2his project evolves aro!nd a n!mber of different7 these are= 2o analy8e the c!rrent profitability of the organi8ation and the ret!rns that it promises to its shareholders in the f!t!re. 2his involves not only analy8ing the c!rrent sit!ation of its income b!t also the ability of P#O+ to be able to maintain these in the f!t!re ;>ain6aring7 5//5< 2o assess the ability of P#O+ to manage its li !idity7 cash position and 6orking capital and to be able to satisfy its creditors demands on time. 2his gives an insight into the company0s ability to contin!e its operations in the f!t!re.

&

2o be able to comment on the c!rrent sit!ation of capital financing of P#O+7 its debt repayment str!ct!re and 6hether it 6ill be able to make these payments on time and its ability to generate f!rther capital in f!t!re 2o explore the impact of the financial position of P#O+ on the investors and their reactions to the profitability of the company. $ince the company operates in a 6eak form efficient market7 the reaction in some scenarios is rather !n!s!al. 2o j!dge the competitive environment of P#O+ and 6here it stands in the ind!stry. 2his 6ill give an idea regarding the f!t!re potential of the company to gro6 or s!rvive in the ind!stry 2o investigate the opport!nities that the environment has to offer to the company and ho6 does it !se its strengths to attain benefit from these. Also7 to see 6hat are the threats that the company faces and the 6eaknesses that it has7 and 6hat strategies does it take to overcome these dra6backs

Before starting 6ork on my project # had to ask myself a fe6 research !estions and the follo6ing !estions gave me a !sef!l g!ideline on ho6 to go abo!t my research and have tailored my research 6ork accordingly

1hat is my research !estion?title of my project@ 1hat is the c!rrent literat!re on the s!bject and the !nderlying theory@ 1hat methods 6ill be !sed to gather information abo!t the topic@ 9o6 6ill the analysis be carried o!t@ 1hat concl!sions can be dra6n from the analysis@ 1hat are the key elements that # sho!ld present to my mentor@ 1hat have # learned from the process@

;Aohnson7 /' A!n 5//%< 1.3 Re'ea)c* App)oac* After deciding the topic and company for research7 the next step 6as to decide 6hich tools to !se and 6hat methodology to follo6 in order to carry o!t the research. # reali8ed that to carry o!t the research in an effective 6ay # had to go abo!t in a systematic 6ay. #nitially # had to gain !nderstanding of the types of information # needed and the so!rces of that information7 so # did a little backgro!nd research. After doing so # came to the concl!sion that # needed to have a combination of so!rces to cond!ct the research. # identified the type of information that # 6o!ld re !ire in order to cond!ct my project effectively. After doing so # directed my search in the co!rse on those information so!rces and picked the most relevant data. # str!ct!red a fe6 key 6ords that 6ere necessary for the search and st!ck to them 6hile doing the

'

research. After collecting the data7 # started sorting it in a logical pattern. # ens!red that for all the data that # collected # mentioned the references. 2. !$FOR3AT!O$ GAT&ERED A$D B4#!$E## TEC&$!54E# 4#ED 2.1 #o2)ce' o( in(o),a+ion 2here are t6o main so!rces of information7 one res!lting in gathering of primary data and the other prod!cing secondary data. Altho!gh7 both types of so!rces 6ere inval!able secondary so!rces 6ere generally easy to get7 and # had to !se several tactics to be able to get primary data P)i,a)- da+a: is original data derived from a ne6 research st!dy and collected at so!rce7 as opposed to previo!sly p!blished material 666.dictionary.bnet.com Altho!gh more diffic!lt to obtain7 it is the more reliable type of information. # had t6o available so!rces of primary data. :irstly # had an intervie6 6ith the chief financial officer ;+:O< of P#O+7 >r. >!hammed $aleem. #t 6as a !ick meeting as the +:O had very little time to spare so # had to shorten my !estions list and en !ire only abo!t the most important areas. &!ring this intervie6 # 6as able to gain information abo!t the f!t!re strategies of P#O+ and a general idea of 6hy there is a sl!mp in the ind!stry7 ho6 is it effecting P#O+ and 6hat is P#O+ doing to mitigate the risks ca!sed by this sl!mp. 2he second so!rce # had 6as a !estionnaire that 6as filled by assistant manager finance. #t provided a !sef!l so!rce in ans6ering the !estions # 6as !nable to ask the +:O. #t provided me 6ith information regarding changes in major ratios7 ho6 the company intended o deal 6ith its cash flo6 and debt str!ct!ring iss!es7 and ho6 it dealt 6ith its strengths7 6eaknesses7 opport!nities and threats #econda)- da+a: is existing primary data that 6as collected by someone else or for a p!rpose other than the c!rrent one 666.b!sinessdictionary.com #t is more easily obtainable7 b!t it becomes less reliable. 9o6ever7 6henever # came across a so!rce of secondary data7 # made s!re that it 6as a!thentic before incl!ding it in my project. 2here 6ere ample so!rces for secondary data. Ann!al reports obtained from the (ahore $tock )xchange 6ere the most important so!rce for calc!lation of ratios. 2he internet 6as a major so!rce for collecting relevant data. # !sed several search engines s!ch as Bahoo -oogle and ask.com so that # co!ld search in a 6ider section of the 6eb and reach my desired links more !ickly. )ach search engine provided me 6ith a different list of information and mostly 6ith a!thentic information 6ith valid so!rces. Another major so!rce of information 6as text and reference books. # !sed my college library to bro6se thro!gh relevant books abo!t the b!siness techni !es # 6as going to !se for the analysis. 9ere the most !sef!l 6ere the A++A textbooks from BPP and :2+. Altho!gh # gained most of the re !ired information

from these so!rces # 6ent one step f!rther and 6ent thro!gh the archives of a fe6 trade jo!rnals7 ne6spapers and maga8ines s!ch as B!siness Recorder and A++A0s $t!dent Acco!ntant. 2hese provided me 6ith f!rther information regarding my approach to the project and the scenario of the company # had selected. 2.2 De'c)ip+ion o( ,e+*od' 2'ed +o ga+*e) in(o),a+ion # !sed several methods to gather information from the above mentioned so!rces. 2hey are as mentioned belo6. 1hile searching on the internet # typed key relevant 6ords and r!n the search engine this provided me 6ith a n!mber of related links. After bro6sing thro!gh the material fo!nd # picked the most relevant information and then # ens!red that the information 6as a!thentic. 2o do this # tried to !se only 6ell kno6n 6ebsites s!ch as the official 6ebsite of P#O+. 9o6ever7 it 6as not al6ays possible. $o 6hen !sing a less kno6n so!rce7 # ens!red the a!thenticity of information by checking the references mentioned. #f there 6ere no references as to 6here the information came from7 # did not !se it. >ostly # fo!nd the related material in my college library. 2he A++A approved textbooks provided help regarding the application of analytical tools. 2he partic!larly helpf!l ones 6ere the BPP textbooks for papers P5 and P3 as they provided information abo!t ho6 to apply ratio analysis7 porters five force analysis and $1O2 analysis. # also searched the archives of 6ellCkno6n trade maga8ines7 so that reliance co!ld be placed in the information they provided. One of the major so!rces for gathering information 6as the p!blished ann!al reports of the company7 6hich provided me 6ith val!able information for the analysis. 2.3 %i,i+a+ion' o( in(o),a+ion 2he information collected had several limitations 2he intervie6 6ith +:O of P#O+ 6as very short and # co!ld only get limited information from him 2he information from internet 6as not reliable in most of the cases and it took me lot of time to ens!re the gen!ineness of information 2o obtain the archives of b!siness recorder # had to visit their office t6ice as the relevant files 6ere !navailable. :or information related to porters five force analysis # had to find the article 6ritten by >ichael ). Porter. #t 6as not available in the college library so # had to search for it else6here and it took me three days before # co!ld obtain the re !ired material 2.4 E+*ica6 i''2e' 1hile collecting information # had to ens!re that # 6as 6ithin the ethical parameters as set by A++A at all times. # had to !phold objectivity7 integrity7 confidentiality7 professional behavior and professional care. 2he assistant finance manager 6as a little rel!ctant to fill the !estionnaire7 as he 6as !ns!re 6hether )

he had the a!thority to disclose the information # re !ired. Respecting the confidentiality of the company7 # talked to a senior and ens!red that the disclos!re of this information 6o!ld not ca!se any harm7 before obtaining this information. 2.5 B2'ine'' +ec*ni12e' 2'ed and +*ei) 6i,i+a+ion' Ra+io ana6-'i': financial ratios !antify many aspects of a b!siness and are an integral part of financial statement analysis. :inancial ratios are categori8ed according to the financial aspect of the b!siness 6hich the ratio meas!resD (i !idity ratios meas!re the availability of cash to pay debt... &ebt ratios meas!re the firmEs ability to repay longCterm debtD Profitability ratios meas!re the firmEs !se of its assets and control of its expenses to generate an acceptable rate of ret!rn...>arket ratios meas!re investor response to o6ning a companyEs stock and also the cost of iss!ing stock ;-roppelli7 5///< %i,i+a+ion' o( )a+io ana6-'i': there are several limitations of financial analysis thro!gh ratios Profit and capital employed are arbitrary fig!res. 2hey depend on the acco!nting policies adopted by an entity >any b!sinesses prod!ce acco!nts to a date on 6hich there are relatively lo6 amo!nts of trading activity Ratios based on the historical cost acco!nts do not give a tr!e pict!re of trends from year to year. An apparent increase in profit may not be a Ftr!e0 increase7 beca!se of the effects of inflation ; :2+7 5//*< Po)+e)7' (i0e (o)ce ana6-'i': the nat!re and degree of competition in an ind!stry hinge on five forces= the threat of ne6 entrants7 the bargaining po6er of c!stomers7 the bargaining po6er of s!ppliers7 the threat of s!bstit!te prod!cts or services ;6here applicable<7 and the jockeying among c!rrent contestants ;Porter7 .,*,< %i,i+a+ion' o( Po)+e)7' (i0e (o)ce ana6-'i': the five forces model provides a comprehensive frame6ork for analysis the competitive environment. 9o6ever7 it m!st be !sed 6ith ca!tion. #ts very comprehensiveness can enco!rage a feeling of omniscience in those 6ho !se it7 a sense that all factors have been d!ly considered and dealt 6ithDAny analysis m!st p!rs!e as high a degree of objectivity as possible if there is too m!ch s!bjectivity !nfo!nded complacence 6ill res!lt. ;BPP7 5//G< #8OT ana6-'i': #t is a tool that identifies the $trengths7 1eaknesses7 Opport!nities and 2hreats of an organi8ation. $pecifically7 $1O2 is a basic7 straightfor6ard model that assesses 6hat an organi8ation can and cannot do as 6ell as its potential opport!nities and threats. 2he method of $1O2 analysis is to take the information from an environmental analysis and separate it into internal ;strengths and 6eaknesses< and external iss!es ;opport!nities and threats<. Once this is completed7 $1O2 analysis determines 6hat may assist the firm in

accomplishing its objectives7 and 6hat obstacles m!st be overcome or minimi8ed to achieve desired res!lts. ;666.ans6ers.com< %i,i+a+ion' o( #8OT ana6-'i': One major problem 6ith the $1O2 analysis is that 6hile it emphasi8es the importance of the fo!r elements associated 6ith the organi8ational and environmental analysis7 it does not address ho6 the company can identify the elements for their o6n company. >any organi8ational exec!tives may not be able to determine 6hat these elements are7 and the $1O2 frame6ork provides no g!idance ;666.referenceforb!siness.com< 1hile !sing for red!cing a large !antity of sit!ational factors into a more manageable profile7 the $1O2 frame6ork has a tendency to oversimplify the sit!ation by classifying the firm environmental factors into categories # 6hich they may not al6ays fit. 2he classification of some factors as strengths or 6eaknesses or as opport!nities or threats is some6hat arbitrary. :or example a partic!lar company c!lt!re can be either strength or a 6eakness. A technological change can be an either a threat or an opport!nity. Perhaps 6hat is more important than the s!perficial classification of these factors is the firm0s a6areness of them and its development of a strategic plan to !se them to its advantage. ;666.netmba.com<

"

3. A$A%9#!# A$D CO$C%4#!O$ 3.1 CO3PA$9 PROF!%E P#O+ 6as incorporated in Pakistan as a p!blic company limited by shares on :ebr!ary /,7 .,G'. #ts shares are !oted on all stock exchanges in Pakistan. 2he principal activity of the +ompany is man!fact!ring and sale of cement. 2he +ompany0s prod!cts incl!de Ordinary Portland cement ;OP+< and s!lphateC resistant cement ;$R+< ;666.pioneercement.com<. 3.2 GRO4P PROF!%E P#O+ is a part of the 4oon gro!p7 6hich employs abo!t 57/// personnel thro!gho!t Pakistan >an!fact!ring facilities are located at Bhal6al7 &istrict $argodha and +henki7 &istrict Hh!shab. 2he -ro!p is managed by 4oon family d!ly assisted by !alified and experienced technical and b!siness professionals as 6orking &irectors and $enior )xec!tives. ;666.noons!gar.com<. :irst 4ational ) !ity (td holds ./I and the directors and members of their families o6n "".GI of the companyEs total .'5."G million paidC!p shares of Rs ./ each. (ocal shareholders o6n .3.GI and financial instit!tions o6n ./I of the companyEs stock ;+orrespondent7 &ecember 5G7 5//'< 3.3 #ECTOR A$A%9#!# +ement ind!stries in Pakistan are c!rrently operating at their maxim!m capacity d!e to the boom in commercial and ind!strial constr!ction 6ithin Pakistan. +ons!mers face a to!gh decision 6ith regards to prefer 6hich brand over 6hich beca!se of the similar pricing of cement ind!stry. 2he formation of cartel by the cement man!fact!rers have exploited local cons!mers a lot and this has led to the concentrated degree of oligopoly7 6here the firms are acting as a single !nit to perform their monopoly. 2heir combined market po6er is simply a dil!ted version of the dominance that a single firm 6ith a monopoly market share can exert. 2he cement association is less of a trade gro!p and more of an !nnamed cartel. All members are assigned capacity !tili8ation and none can increase their capacity 6itho!t prior permission. Prices are set by the cartel and everyone shares profits amicably7 except 6hen an !nsatisfied member threatens to leave the cartel. ;>angi7 &ecember 537 5//"< 2he demand of Pakistani cement is expected to contin!e to gro6 at the rate of 5/I for approximately fo!r years to come. #t may then follo6 conventional gro6th rate of *I per year. Anno!ncement of major dams 6ill dramatically increase this demand. 2he c!rrent demand in the market is approximately 5%mln metric tons of cement. -overnment development expendit!res co!nt for oneC third of total cement cons!mption.

1!

3.4 RAT!O A$A%9#!# 2he so!rces !sed to analy8e the ratios are ann!al acco!nts of P#O+ for :B0/% to :B0/*. 1hile commenting on the feasibility of the each ratio ind!stry averages 6ere also looked into. $ee AppendixC: for detailed calc!lation of the ratios. 3.4.1 #A%E# A$A%9#!# 2he t!rnover gro6th7 in general7 presents a very 6orrying pict!re. )ven tho!gh there has been a gro6th of ..GI in :B0/* it is minimal as compared to the gro6th of %/I and %".'I in :B0/' and :B0/% respectively. 2he t!rnover from in :B0/' as compared to :B0/% has gro6n by %/I from Rs. 57/"%mln to Rs. 37/*'mln. Of 6hich 3"I 6as contrib!ted by a drastic increase in selling prices and .'I 6as beca!se of increase in sales vol!me of cement. 2he contrib!tion made by local sales to6ards total sales has increased from G*I to ,/I in :B0/% to ,/I in :B0/'. #t means that P#O+ is concentrating more on local sales as compared to exports. 2he t!rnover d!ring :B0/* has sho6n very little gro6th of only ..GI from Rs. 37/*'mln to Rs. 37.3.mln. 2he company sa6 an !n!s!al gro6th in !antities of cement sold 6hich increased from G3%7/// metric tons in :B0/' to .75'*7/// metric tons in :B0/*. 2his represents an approximate %..GI increase in sales vol!me this 6as mostly d!e to high demand in the market d!e to constr!ction of ho!sing societies and the earth !ake in northern areas of PakistanJ ho6ever this 6as offset by a s!bstantial decrease in sale prices. A massive decline of 3%I 6as recorded in average prices of cement in the domestic market d!ring :B0/*7 over the year 6hich adversely affected the operating res!lts of +ompany. &!e to fierce competition prevailing in the cement market7 the price of cement contin!ed to remain highly volatile7 compelling the +ompany to make adj!stments in the prices almost on daily basis. A price 6ar prevailed d!ring the :B0/* 6hich ca!sed a decline of abo!t %/I in the net price of cement. #t seems that the sales prices have fallen thro!gho!t in the cement sector7 even tho!gh there is a dire increase in demand for cement. P#O+ exported .3575G" tons of cement in :B0/* as compared to ..G7/5G tons of cement exported in the previo!s year and registered a rise of .5I. 9o6ever7 d!e to a decrease in sale prices the exports generated only GI of the total t!rnover in :B0/* as compared to ./I in :B0/'. 3.4.2 PROF!TAB!%!T9 A$A%9#!# G)o'' P)o(i+ ,a)gin: 2he gross profit margin had been grad!ally increasing over some years !ntil :B0/* 6hen it sa6 s!dden do6nfall. #n :B0/' the gross profit ratio increased to "/I as compared to 35.,I in :B0/%. 2his is contrib!ted mainly to the increase in average retention prices of cement over the year. 2here 6as an increase in the cost of sales of 3"I from Rs..73*5mln to Rs..7G"%mln. 2he only atypical change 6as in salaries and 6ages 6hich increased by *,.GI

11

#n :B0/* the gross profit margin took a do6nt!rn and fell to ./.5Ifrom "/I in :B0/'. 2his 6as beca!se of t6o reasons7 the first being a decline in sales prices 6hich led to an inade !ate t!rnover gro6th and second being a %5I increase in cost of sales from Rs..7G"%mln in :B0/' to Rs.57G.3mln in :B0/*. :!el and po6er constit!tes more than %/I of the total cost of sales. 2he rise in international f!el costs has ca!sed an increase in the cost of sales. 9o6ever P#O+ 6as able to mitigate the impact of f!el prices on its profit in :B0/* as it started !sing G/=5/ blend of imported and local coal that helps red!ce its energy cost and impact the margins positively ;666.pacra.com<. Another reason for increase in costs is the increase in depreciation charge. 2he escalation 6as ca!sed by the expansion project of P#O+ and increased investment in non c!rrent assets $e+ P)o(i+ ,a)gin: 2he net profit margin increased commendably from :B0/% to :B0/' from .,.3I to 3/I7 mainly d!e to increase in gross profit. 2here has not been any major cost c!tting in distrib!tion or administration costs. 9o6ever there 6as an !n!s!al increase in Kother operating incomeL. :inance cost amplified in :B0/* to 5.% times its original si8e in :B0/'. 2his 6as mainly d!e to a gain made on derivatives7 and reversal of !nreali8ed loss on fair val!e of those derivatives. &istrib!tion costs also fell leaving a reasonable increase in net profits. :B0/* 6as a diffic!lt year for P#O+ since its net profit ratio fell from 3/ I in :B0/' to a net loss percentage of ;%.,I<. 2he lo6 gross profit primarily contrib!ted to the loss occ!rring7 b!t even 6ith a nominal gross profit7 the condition of the net profit margin 6o!ld not have been so abysmal had the finance costs not increased by G'.GI from Rs..,*mln in :B0/' to Rs.3''mln in :B0/*. 2he major reason for s!ch abnormal fl!ct!ation is that most of the long term loans are ac !ired at a floating rate. Re+2)n on capi+a6 e,p6o-ed :ROCE;: 2he ret!rn on capital employed had increased from G.'I in :B0/% to .".*I in :B0/'. Overall :B0/' had been a good year for P#O+. As it sho6ed a reasonable increase in t!rnover and profits7 it 6as predictable that there 6o!ld be an increase in RO+). 1itho!t any f!rther employment of reso!rces the RO+) 6o!ld have been even better7 ho6ever d!e to the expansion !ndertaken in the plant the capital employed has increased by 5GI from Rs.%7,,%mln in :B0/% to Rs.*7''%mln in :B0/' On the other hand :B0/* presents a pict!re !ite to the contrary. 2he ratio falls to 5.3I from .".*I in :B0/'7 not only d!e to falling profitability b!t also beca!se most of the capital employed has been !sed for extension of the plant it is acceptable that it did not generate profit in the c!rrent year as it 6ill be of benefit in the long term. 2here has been little increase in capital employed since :B0/' 6hich gre6 by only .I. #t seems the expansion has not yet bro!ght abo!t the bo!nties that 6ere expected from it.

3.4.3 %!54!D!T9 A$A%9#!# Altho!gh consistent7 the li !idity conditions of P#O+ are not partic!larly impressive. An average c!rrent ratio of /."%=. is 6ay belo6 the ind!stry average of .=.. #t means that P#O+ 6ill be !nable to pay its c!rrent obligations 6hen they fall d!e. >ostly the c!rrent liabilities consist of c!rrent portion of nonCc!rrent liabilities. 2hey compose approximately %/I of the total c!rrent liabilities. #n the past three years7 the li !idity position of the company has not improved or 6orsened m!ch. #t deteriorated a little in :B0/' to /.""=. as compared to :B0/% 6hen it 6as /."*=.. B!t it position strengthened a little in :B0/* to /."G=.. 2he !ick ratio represents an even more 6orrying pict!re. #n :B0/% it 6as /..5=. 6hich fell f!rther in :B0/' to become /../=.. 9o6ever7 the !ick ratio improved in :B0/* to /.5/=. mainly beca!se the cash flo6 conditions improved as P#O+ ac !ired ne6 long term loans. 9ad P#O+ only relied on operating cash flo6s7 the !ick ratio 6o!ld have 6orsened. Other than cash there are no major additions to the c!rrent asset side of the !ick ratio. 3.4.4 8OR<!$G CAP!TA% 3A$AGE3E$T P#O+ operates in a sector 6here sales are on cash basis so it does not re !ire debtor management. #deally this fig!re sho!ld not exist in the financial statements. 2he small n!mber of debtor days co!ld be beca!se of limited credit terms offered to old c!stomers. 9o6ever P#O+ needs to improve its creditor management. &!e to appalling li !idity conditions the management is !sing trade creditors as a so!rce of short term finance. +onversely this 6o!ld ca!se discontent and loss of good6ill amongst creditors. #n :B0/% P#O+ 6as paying its creditors at an average of 5.5 days and this sit!ation 6orsened in :B0/' 6hen it increased to 5'% days on average. #t is !ite likely that the creditors 6o!ld not have liked this. $o the sit!ation improved in :B0/* as the creditor days red!ced to .3. days. )ven tho!gh it is it is still very high it is still !ite an improvement. P#O+ has been rated as an A5 in the short term by Pakistan credit rating agency limited ;PA+RA7 5//*<. #t means that the company is reasonable capable to pay its c!rrent obligations s!bject to the market conditions in 6hich it operates. 2he most consistently managed portion on the 6orking capital is inventory days. 2here 6ere .% days in :B0/% and ., days in both :B0/' and :B0/*. 2he stock is rep!rchased after every 5C3 6eeks. 2his implies that the company has efficiently red!ced the risk of a stock o!t 6itho!t engaging too m!ch capital in the inventory. -enerally P#O+ has a negative operating cycle so they have to maintain eno!gh cash to be able to pay trade creditors on time

13

3.4.5 3AR<ET RAT!O# 2he 6eighted average n!mber of shares has been restated for the years :B0/' and :B0/% since there 6as a bon!s iss!e in all three years. 2he earning per share ;)P$< of P#O+ sa6 an improvement from :B0/% to :B0/' as it approximately do!bled from Rs. ..,% to Rs.3.,G7 the reason being a higher net profit achieved in :B0/'. 2his sit!ation 6orsened in :B0/* 6hen there 6as a loss per share of /.%%. )ven tho!gh the profit before interest 6as 6orse7 the tax relief in :B0/* improved the conditions of P#O+ to some extent. 2he dividend per share ;&P$< fig!re sho6s that the company only paid o!t dividends in :B0/' probably d!e to the exceptionally high profits. Altho!gh7 since the li !idity conditions of P#O+ are not !p to the mark7 it may not have been feasible to pay a dividend in :B0/*. -enerally the 6ay P#O+ is operating it s!ggests that they intent to promising their investors long term capital gains rather than reg!lar cash flo6 in form of dividend. 2he expansion project is one of their policies to indicate long term benefits. 2he market val!e per share presents a varying pict!re. #t varies 6ith markets0 expectation abo!t the prospects of the company. As expected the expansion project0s completion has increased investors expectation for the company f!t!re and res!ltantly the market val!e shot !p to Rs."%.'% in :B0/' from Rs.5/.3% in :B0/%. 2he market val!e fell to Rs.3*."/ in :B0/* d!e to poor performance ;666.kse.com.pk< 2he price to earnings ;P?)< ratio reflects the investors0 confidence in the company. 2his ratio 6as ./."=. in :B0/% and increased to ...%=. in :B0/'. 2his increase in confidence 6as probably d!e to the brighter f!t!re prospects of the cement ind!stry. 9o6ever since there 6as loss in :B0/* it gives a P?) ratio of negative ''.*=.. 2his is more a mathematical val!e than a meaningf!l comparison. $ince dividend 6as only paid in :B0/' the yield is 5.5I on the market val!e 6hich is pretty lo6. Bet7 the company does not seem to have a strict dividend policy. 2he dividend yield does not seem to affect the investors0 confidence 3.4.6 CAP!TA% DEBT #TR4CT4R!$G 2he gearing of the company is c!rrently high. 2his is mainly d!e to the expansion project. 2he debt to e !ity ratio remained almost constant in :B0/% and :B0/' at '5.":3*.' and '..G:3G.5. 9o6ever7 this increased to '%.' :3"." in :B0/*. P#O+ has ac !ired f!rther loans in all three years. 2he amo!nt of long term debt increased by 5'I from Rs.37*"%mln in :B0/% to Rs."7*3,mln in :B0/' and increased f!rther by *I in :B0/* to Rs.%7/,.mln7 b!t the gearing did not change since the company had iss!ed bon!s shares in all three years. 2his means P#O+ has not raised any capital from iss!e of e !ity.

1&

)ven after having a n!mber of loans deferred there are !ite a fe6 loans approaching mat!rity and c!rrently P#O+ does not have eno!gh f!nds to be able to repay them. 2his indicates a li !idity crisis in the f!t!re. -iven the c!rrent mat!rity pattern of these obligations7 it is imperative that P#O+ raise f!nding to restr!ct!re its borro6ings. 2he debt restr!ct!ring is expected to synchroni8e the debt repayment 6ith emerging cash flo6 patterns 2he interest cover sit!ation has 6orsened dramatically. #t increased in :B0/' to %.* times from ".3 times in :B0/%7 mainly d!e to increase in gross profit in that year. #n :B0/* the plight 6orsened and interest cover fell to /.% times. 26o things ca!sed s!ch a drastic impact. :irstly7 the decrease in profits contrib!ted to fall in interest cover and secondly the increase in finance costs of G'.GI. 2his increase7 as mentioned in the net profit margin analysis 6as beca!se of loans ac !ired on floating interest rates 6hich are on the rise d!ring the year. 3.5 PORTER7# F!"E FORCE A$A%9#!# 3.5.1 $e= ,a)>e+ en+)an+': 2he possibility of ne6 market entrants in the ind!stry depends !pon several factors. Barriers to entry s!ch as strict government policy co!ld hinder entrance of ne6 companies. 9igh capital investment re !irements of the cement ind!stry7 oligopolistic competition7 economies of scale achieved by existing man!fact!rers and existence of cartels among larger firms co!ld act as hindrance for ne6 entrants. 9o6ever7 l!crative b!siness7 prospects for increase in demand and enco!raging government policies in the cement sector co!ld act as a 6elcoming sign for ne6 entrants. 2he plant of P#O+ is located in the north of Pakistan 6here there is already a lot of competition7 so the likelihood of a ne6 entrant in the P!njab market is very less. 3.5.2 Co,pe+i+i0e )i0a6)-: 2here are t6enty seven cement man!fact!rers in Pakistan cement sector of 6hich P#O+ falls in the top five players of the market. #t holds %.%I of the market share. 2he cement ind!stry has oligopolistic competition the competitors do not differ on the basis of prod!ct range since all of the man!fact!rers make7 more or less7 the same type of cement. 2he rivalry becomes more emphasi8ed d!e to high exit barriers and abandoning costs and the fact that d!e to ind!stry 6ide expansion projects and takeovers prod!ction capacity of most of the man!fact!rers has extended and the companies are fighting to achieve the desired capacity !tili8ation or other6ise report losses. 2his rivalry is red!ced by the fact that brand identities are not predominant in the cement sector and the large man!fact!rers can !se cartel mechanism to ind!ce a monopolistic effect7 even tho!gh these cartels are not very long lasting.

1'

3.5.3 #2pp6ie)'7 /a)gaining po=e): $!ppliers can be divided into t6o types one being s!ppliers of ra6 material for example limestone and second being the s!ppliers of f!el and po6er. >ostly plants for man!fact!ring of cement are established in areas 6here there is easy access to limestone ridges. And a very extraction is stared on long term contracts 6ith minimal royalties being paid. #n this 6ay the bargaining po6er of s!ppliers of ra6 material is very lo6. As for the bargaining po6er of s!ppliers of f!el it is also lo67 since coal7 6hich is the so!rce of f!el for the cement ind!stry7 is ab!ndantly available and has an open market. 9o6ever the recent hike in coal prices internationally may indicate a contrary pict!re. 2he !ality of coal does matter 6hich is precisely 6hy P#O+ has started importing coal rather than !sing the local one d!e to its s!lphate imp!rity content. 2he cost of s6itching s!ppliers is also lo6 to the man!fact!rers this f!rther red!ces the bargaining po6er of s!ppliers. 3.5.4 C2'+o,e)'7 /a)gaining po=e): )ven tho!gh the cost of s6itching to other companies in not high for the c!stomer and they are not affected by the brand loyalty7 the bargaining po6er of c!stomers is lo6. >ostly this is d!e to the existence of cartels in the cement ind!stry and the fact that there are no alternative prod!cts that can be !sed instead of cement. 2he prod!ct is of high importance to c!stomers and even tho!gh !ality of cement !sed is important to them smaller cons!mers can not meas!re it. $ince the cement ind!stry has several b!yers7 companies are not likely to be affected by s6itching of a fe6 c!stomers. 9o6ever7 there are some b!yers 6ho have the e !ipment to test the !ality of cement and are b!ying in s!ch large !antities that they become very important to the man!fact!rers this gives them some bargaining po6er. >ostly these incl!de contractors for large dams7 commercial b!ildings and ho!sing societies as a 6hole. 3.5.5 P)od2c+ '2/'+i+2+e': 9ere the sector is at an advantage7 since cement has no alternatives so far. #t is the only material of its kind. $o it is highly !nlikely that the need for this prod!ct 6ill die do6n in the f!t!re.

1$

3.6 #8OT A$A%9#!# #+)eng+*': (o6est expansion cost ;666.b!sinesspl!s.tv< 2imely completion of expansion +onversion to lo6 cost f!el #$O ,///C5/// #$O ."///C5//. Brand of the year a6ards 5//' ;666.brandsa6ard.com< %.%I market share $R+ considered of best !ality in the market

8ea>ne''e' $econd hand +hinese plant :alling capacity !tili8ation (o6 dividend payo!t

Oppo)+2ni+ie' Rising export market especially #ndia Potential to cover lo6er P!njab &am constr!ctions Rob!st domestic demand

T*)ea+' $!pply gl!t and price 6ar #ncrease in interest rates (i !idity crisis Political instability )conomic do6nt!rn

1)

3.7 CO$C%4#!O$ P)o(i+a/i6i+- in )ecen+ -ea)': P#O+ has gone thro!gh major !ps and do6ns in the past fe6 years. #t improved tremendo!sly in :B0/' as compared to :B0/%. 9o6ever it did not sho6 the profits expected from it d!ring :B0/*7 mainly beca!se it operates in a very volatile market. P#O+ has sold larger vol!mes of cement. 9o6ever7 d!e to the persistence of a price 6ar thro!gho!t the year it 6as not able to derive l!crative reven!es7 th!s leading to a fall in net profit7 gross profit7 ret!rn on capital employed and investor ratios. 9o6ever the increase in sales vol!me over the past % years is a good sign. 2he profitability of the company has been f!rther depressed by rising finance costs. 2he reason for this increase is the s!bstantial amo!nt of loans ac !ired and th!s the additional financial risk. 2his is7 ho6ever7 only in the short term and it is expected that as soon as the cartel is restored the company 6ill become profitable again and the expansion project 6ill start generating fr!itf!l ret!rns for the company %i12idi+- and =o)>ing capi+a6 ,anage,en+: 2he li !idity ratios altho!gh consistent in all three years are 6ay belo6 ind!stry average 6hich places the company in constant risk and since there are many long term loans reaching mat!rity very soon P#O+ needs to manage it li !idity risks. 2he cash position of P#O+ is very alarming since all its sales are cash based. P#O+ needs to take drastic meas!res to improve its li !idity and decrease its c!rrent liabilities 2he 6orking capital management in 6ake of efficiency ratios is 6ell balanced. 2here is not m!ch debtor management involved7 and P#O+ is managing its inventory very efficiently. 2he only area 6here there seems to be some strain is the creditor days0 management. P#O+ is p!tting a lot of stress on one of its most val!able short term credit lines. 9o6ever7 this sit!ation has improved in :B0/*. Capi+a6 and de/+ '+)2c+2)ing: 2he gearing position of P#O+ reflects that there is high financial risk in the company. 2here has been an improvement in the gearing position of the company since :B0/% as compared to the earlier seven years 6hen the entire cement ind!stry 6as facing contin!o!s losses. 2his left the company 6ith depleted reven!e reserves. )ven tho!gh P#O+ has recovered from this sit!ation in the past three years there is still a lot to be done to improve its capital sit!ation. P#O+ needs to restr!ct!re its debts and generate eno!gh profits to be able to report a decent interest cover. $ince P#O+ is exposed to the c!rrently rising interest rates it needs to manage its financial risk

1*

Po)+e)' (i0e (o)ce ana6-'i': 2he possibility of ne6 market entrants is analy8ed on basis of entry barriers to the ind!stry7 capital investment re !irements7 competition environment and government polices in the sector. #t seems that chances of ne6 market entrants are high. 2he effect of competitive rivalry 6as assessed !sing the n!mber of competitors7 position of P#O+ among the companies7 type of competitive environment and trading mechanism7 exit barriers7 importance of brand identities and demand and s!pply in the market. #t t!rns o!t that competitive rivalry is high as 6ell. 9o6ever7 c!stomer bargaining po6er is lo6 as demonstrated by the factors of brand loyalty7 alternative prod!cts7 n!mber and significance of c!stomers and importance of !ality to c!stomers. 2he s!ppliers bargaining po6er is also lo6 d!e to brand loyalty7 alternative prod!cts7 n!mber of s!ppliers in the market7 cost of s6itching s!ppliers and importance of !ality of f!el7 moreover since no prod!ct s!bstit!tes for cement c!rrently exist here the threat to the cement ind!stry is lo6 so overall P#O+ has a very competitive position. #8OT ana6-'i': P#O+ has several strengths and has been !sing them ast!tely and has been trying to overcome its 6eaknesses alongside. #t also recogni8es the several opport!nities that it can avail and is 6orking to6ards !tili8ing these 6hile mitigating the threats that it faces P)o'pec+i0e O2+6oo>: An enco!raging scenario 6hich has recently emerged is a tremendo!s gro6th in demand of cement in the neighboring co!ntries. )xport prices have sho6n an impressive recovery d!ring AprilC/* d!e to shortage of cement in the region incl!ding #ndia. Profitability of the P#O+ is likely to improve if export to #ndia is allo6ed by the government. 2he local demand is likely to rise as -overnment of Pakistan in the b!dget for :B0/G has allocated Rs.%"3.5' million for Ann!al &evelopment Projects. Price hike of coal ho6ever7 contin!es to remain a dist!rbing factor in the 6ake of dramatic escalation in the international prices of coal. 2he restoration of the cement cartel in :B0/G is cr!cial to the performance of P#O+. Reco,,enda+ion': 2he company sho!ld make efforts to red!ce creditors0 days. P#O+ sho!ld improve li !idity ratios by arranging credit lines from banks? financial instit!tions to prevent possible defa!lt.

1"

APP)4&#M A= R):)R)4+)$ A4& B#B(#O-RAP9B >ain6aring ;5//5<7 $trategic B!siness Planning and &evelopment7 :2+ p!blishing (ondon7 UH #*ane o*n'on :/' A!n 5//%<? 9o6 not to rap7 $t!dent Acco!ntant7 A++A p!blications7 UH http=??dictionary.bnet.com?definition?primaryNdata.html@tagOcontentJcol. http=??666.b!sinessdictionary.com?definition?secondaryCdata.html -roppelli7 Angelico A7 )hsan 4ikbakht ;5///< :inance "th )d7 BarronEs )d!cational $eries7 #nc.7 "33. #$B4 /*'"..5*%, :2+ ;5//*<7 A++A Paper P57 corporate reporting7 Haplan p!blishing :o!lks (ynch7 UH >ichael ). Porter7 9o6 competitive forces shape strategy7 9arvard b!siness revie6 .,*, BPP ;5//G<7 A++A Paper P37 b!siness analysis7 BPP learning media (td. (ondon UH http=??666.ans6ers.com?topic?s6otCanalysis http=??666.referenceforb!siness.com?management?PrC$a?$1O2CAnalysis.html http=??666.netmba.com?strategy?s6ot? 666.pioneercement.com http=??666.noons!gar.com?gro!pprofile.htm. +orrespondent ;&ecember 5G7 5//'<7 +ement= P#O4))R +)>)42 (#>#2)&7 B!siness Recorder 4a6een A. >angi ;&ecember 537 5//"<7 +omment= Are flo!rishing cartels reason eno!gh to sh!t do6n the impotent >+A@ &aily 2imes http=??666.pacra.com?pdf?P+(PR/*.pdf http=??666.kse.com.pk?kse"?index.html 666.b!sinesspl!s.tv?Programme?pdf?PioneerI5/+ementI5/Report.pdf http=??666.brandsa6ard.com?5//G?s!rveyI5/pioneerCcement.html

-eorge Hieffer ;.,GG<7 the $trategy of >eetings7 1arner books >a!reen -!irdham ;.,,/<7 #nterpersonal $kills at 1ork7 Prentice 9all #nternational (td. UH http=??en.6ikipedia.org?6iki?#nterpersonalPskills Aeni 1ilson7 (esley 1ing Aan ;5//3<7 :oc!s on #n !iry7 P!blisher +!rric!l!m +orporation. Qictoria.

APPE$D!@ B: GRAP& A $e+ 'a6e'

APPE$D!@ C: GRAP& A Ope)a+ing a''e+'

&

APPE$D!@ D: GRAP& A EP#

'

APPE$D!@ E: BA%A$CE #&EET A$D !$CO3E #TATE3E$T

APPE$D!@ F: RAT!O #&EET F97B7 #a6e' ana6-'i' 2!rnover gro6th P)o(i+a/i6i+- ana6-'i' -ross profit margin 4et profit percentage Ret!rn on +apital )mployed ;RO+)< %i12idi+- ana6-'i' +!rrent ratio R!ick ratio 8o)>ing capi+a6 ,anage,en+ &ebtor days +reditor days #nventory days 3a)>e+ )a+io' )arning per share ;)P$< &ividend per share ;&P$< >arket val!e per share P?) ratio &ividend yield Capi+a6 de/+ '+)2c+2)e -earing ratio #nterest cover '%.':3"." /.% times '..G:3G.5 %.* times '5.":3*.' ".3 times Rs.;/.%%< 4?A Rs.3*."/ ''.*=;.< 4?A Rs.3.,G Re.. Rs."%.'% ...%=. 5.5I Rs...,% 4?A Rs.5/.3% ./."=. 4?A " days .3. days ., days . day 5'% days ., days 3 days 5.5 days .% days /."G=. /.5/=. /.""=. /../=. /."*=. /..5=. ./.5I ;%.,I< 5.3I "/./I 3/.3I .".*I 35.,I .,.3I G.'I ..GI %/."I %".GI F97B6 F97B5

APPE$D!@ G: #A3P%E 54E#T!O$$A!RE A$D !T# RE#PO$#E

"