Financial Analysis of DG Khan Cement Company Ltd.

Vertical analysis of balance sheet................................................................................... . 48

Liquidity Ratios.................................................................................................. .............. 51

Long Term Debt Paying Ability.................................................................................. ....... 53

Profitability Ratios......................................................................................................... ... 54

Assets Utilization............................................................................... ........................ 54

Investment Ratios ......................................................................................................... ... 56

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Financial Analysis of DG Khan Cement Company Ltd.

Introduction Mission Statement

To provide quality products to customers and explore new markets to promote/expand sales of the Company through

good governance and foster a sound and dynamic team, so as to achieve optimum prices of products of the Company

for sustainable and equitable growth and prosperity of the Company.

Vision Statement

To transform the Company into modern and dynamic cement manufacturing company with qualified professionals

and fully equipped to play a meaningful role on sustainable basis in the economy of Pakistan.

D.G. Khan Cement Company Limited NISHAT GROUP

Nishat Group is one of the leading and most diversified business groups in South East Asia. With assets over

PRs.300 billion, it ranks amongst the top five business houses of Pakistan. The group has strong presence in three

most important business sectors of the region namely Textiles, Cement and Financial Services. In addition, the

Group has also interest in Insurance, Power Generation, Paper products and Aviation. It also has the distinction of

being one of the largest players in each sector. The Group is considered at par with multinationals operating locally

in terms of its quality of products & services and management skills.

Mian Mohammad Mansha, the chairman of Nishat Group continues the spirit of

entrepreneurship and has led the Group successfully to make it the premier business group of the region. The group

has become a multidimensional corporation and has played an important role in the industrial development of the

country. In recognition of his unparallel

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Financial Analysis of DG Khan Cement Company Ltd. contribution, the Government of Pakistan has also conferred him with “Sitara-e-Imtiaz”, one of the most prestigious civil awards of the country.

D.G. Khan Cement Company

D.G. Khan Cement Company Limited (DGKCC), 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 list on all the Stock Exchanges of Pakistan.

DGKCC 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. The plant and machinery was supplied by M/s F.L. Smidth of

Denmark. 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.

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Financial Analysis of DG Khan Cement Company Ltd.

Power Generation

For continuous and smooth operations of the plant uninterrupted power supply is very crucial. The company has its

own power generation plant along with WAPDA supply. The installed generation capacity is 23.84 MW.

Environmental Management

DG Khan Cement Co. Ltd., production processes are environment friendly and comply with the World Bank’s

environmental standards. It has been certified for “Environment Management System” ISO 14001 by Quality

Assurance Services, Australia. The company was also certified for ISO-9002 (Quality Management System) in

1998. By achieving this landmark, DG Khan Cement became the first and only cement factory in Pakistan certified

for both ISO 9002 & ISO 14001...

BOARD OF DIRECTORS •

Mrs. Naz Mansha Chairperson/Director •

Mian Raza Mansha Chief Executive/Director •

Saqib Elahi Director •

Khalid Qadeer Qureshi Director •

Mohammad Azam

Director •

Zaka ud din Director •

Inayat Ullah Niazi Director & Chief Financial Officer

Why cement sector for our project

At the time of independence in 1947, only one or two units were producing grey cement in the country. During the

decade of 1948-58, the number of cement units increased to six. During the Ayub era the economy started to grow

and the construction activities underwent a boom. To meet the growing demand of cement new units were set up.

During the decade of 1958-68, the number of cement units increased from 6 to 9. During the following period of

Zulfiqar Ali Bhutto all the industrial units, including cement industry, were nationalized, therefore, no new unit was

set up during 1971-77. During the period of General Zia-ul-Haq, 1977-88, denationalization of industrial units

boosted the investments. Housing and construction industries picked up and the demand for cement increased. Thus,

the number of cement units increased from 9 to 23 and finally 24.

The cement industry in Pakistan has become a long way since independence when country had less than half a

million tones per annum production capacity. By now it has exceeded 10 million tones per annum as a result of

establishment of new manufacturing facilities and expansion by existing units. Privatization and effective price

decontrol in 1991-92 heralded a new era in which the industry has reached a level where surplus production after

meeting local demand is expected in 1997.

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Financial Analysis of DG Khan Cement Company Ltd.

The cement industry is needed a highly important segment of industrial sector that plays a pivotal role in the socio-

economic development. Through the cement industry in Pakistan has witnessed its lows and high in recent past, it

has recovered during the last couple of years and is buoyant once again.

There are total number of units are 23, from which 4 units are in the public sector while the remaining 19 units are

owned by the private sector. Two of the four units in the public sector had to close down their operations due to stiff

competition and heavy cost of production. The cement plants are located in every province of Pakistan.

The province-wise distribution of cement plant is as under. Providence Units Capacity (Million Tons) Punjab 8 7.488 Sindh 8 3.851 NWFP 6 4.945 Baluchistan 1 0.758 Total 23 17.040

Three additional cement plants with installed capacity of over 2.1 million tons are in the final stage of completion

despite the available excess capacity in this sector. The following table shows installation of new cement factories

and expansion of the existing facilities during the current decade.

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Cement: DG Khan Cement Company Ltd - Analysis of Financial Statements Financial Year 2002 - 3Q 2010

Monday, 07 June 2010 11:27

Highlights - Corporate News

OVERVIEW : DG Khan Cement Company Limited (DGKC) is producer and seller of ordinary portland and sulphate-resistant cement. The company is a unit of Nishat group, which is a leading and diversified business group with a strong presence in three most important sectors of Pakistan - textiles, cement and financial services.

The group also has considerable stake in insurance, power generation, paper products and aviation sectors. DGKC is listed on the stock exchanges of Karachi, Lahore and Islamabad.

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Name of Company      D.G Khan Cement Company Limited

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Ticker               DGKC

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Assets (June 2009)         Rs.42,723,041,000

Share Capital   (Rs.304,249,388 ordinary shares of Rs.10 each)

Sales Revenue (June 2009)       Rs.18,038,209,000

PAT (June 2009)          Rs.525,581,000

Market Share Price (30th June 2009)       Rs.29.65

Market Capitalization         7,517,496,580

DGKC was established in 1978 under the management control of State Cement Corporation of Pakistan Limited (SCCP). The company started its commercial production on April 1986 with 2000 tons per day (TPD) clinker based on dry process technology. In 1992, DGKC was acquired by Nishat Group under the privatisation program of the government. Since its privatisation, DGKC has undergone intensive capacity expansion. As a result, DGKC is presently the second largest cement producer of the sector (second only to Lucky Cement). The company had a total installed capacity of 37,156,750 metric tons as at June 2008.

DGKC had a market share of 13% in the local cement industry during the first nine months of FY09.DGKC has two plants at Dera Ghazi Khan and a new Greenfield cement plant at Khairpur village, which was started in FY04 and began commercial production in June 2007. The plant has a capacity of 2.1mtpa. Commencement of production at the new plant and effective and efficient operations management led to 70% and 66% increase in the volume of clinker and

cement production respectively. The company has its own power generation plant along with WAPDA supply. A dual fuel power generation plant at Khairpur cement plant also started its commercial operations successfully in FY08.

RECENT RESULTS 3Q10

During the 3rd quarter of FY10 the local sales augmented by nearly 24% in terms of volume as compared with the same period last year. The cement sales ballooned significantly from the corresponding period last year, mainly on account of activities in housing sector and commercial activities. Cement production also grew by 26% during July-March 2010 compared with corresponding period ensued from increased cement demand in the country.

The net sale revenue declined by 10% to be Rs. 11.85 billion during the period under review compared with the same period last year due to plummeting cement prices that on one hand increased the volume but brought down the overall revenue. Gross profit declined to Rs. 2.1 billion from Rs. 3.7 billion compared to the same period last year.

Overall prices went down of fuel- coal and furnace oil, which comprise a major chunk of the input costs. Also stability in the exchange rate brought about a decline in the financial charges with respect to 3Q09. Financial charges were Rs. 1.42 million as compared to Rs. 2.0 million in 2Q09. Other income for the period is inclusive of dividend income and gain on sale of shares of Rs. 586 million and 79 million respectively against a dividend of Rs. 546 million last year same period.

Profit after Tax of Rs. 388.170 million was recorded. (FY09 Rs 321.117 million). EPS was Rs. 1.28 as compared to Rs. 1.06.

SALES AND PRODUCTION

In FY09, DG Khan Cement hit a major landmark regarding growing sales, despite the severe power crises and security situation of the state. Moreover, due to global recession and the liquidity and credit crunch, the buying power of the major customers both at home and abroad was looking bleak. Local sales decreased by 14%, while the exports passed the 10 million ton mark. Also the company had to recover from a negative profit after tax due to a huge amount of debt leverage in the balance sheet. Despite all these factors the company due to sharp and effective steps recorded a huge boost in sales of 45%, a figure which even overshadowed the 17.86% rise in the operating cost thus registering a profit after taxes of Rs525m. The exports also doubled playing a major part in the increasing sales. The company s production of both cement and clinker was less than the previous year. The cement production was 8.3% less than the year 2008-09 due to lack of resources like power and also due to the weakening buying powers of the customers because of inflation. The production of clinker followed similar trend being 4% less than FY08 in FY09.

PROFITABILITY ANALYSIS

The cement sector overall remained profitable during whole of the year with all of the companies enjoying good profit margins in FY08-09. The profit margin of the DG Khan Cement was 31.49% which is double than the last year s margin of 15.39%. The sales increased by almost 44% while most of the credit of increasing sales goes to the 25% inflation in the real estate and construction sectors. Against the sales the cost of sales increased by 17.36% in this year. The major break through in the sales came from positive response of the world market to the products of DG Khan Cement. The cement and clinker of worth Rs 5.9 billion was exported by DG Cement which is almost double than the amount of last year which was approximately Rs 2.7 billion. This huge export of cement abroad has helped the DG Khan Cement to become market leader for this year s profit after taxes which were negative last year. This year all of the associated companies owned by this group were in profit so unlike last year the company didn t have to share the loss of Rs 8.6 billion which was suffered by a subsidiary in FY08. The huge amount of the exports was stimulated by the Government by announcing rebates and that decision seems to have immediately paid of as DG Khan Cement recovered from the huge loss accumulated in FY08. The rebate given to DG Khan Cement was Rs11.6m.

The return on assets also came back to the positive after being negative due to the loss of last years. However it will be improved in the future as the company s Rs3.9bn inventory and goods in transit to Iraq and Afghanistan will further increase the sales of the company. FY09 s return on assets was 1.5% which is slightly less than the industry average of 2.2%, yet it can be accepted as a positive sign as company reduced those assets especially investments which were not yielding the cash flows for the company . The company also reduced its stake in the other subsidiaries of the business groups by 53% and brought the long terms loans owed to itself to Rs. 166 million. All these reductions together with the large profits through exports brought its ROA to 41.5% in FY09 from -0.50% in FY08. The company

also redeemed its preferred shares by almost 37% which helped reducing the equity by 30% although the number of common shares floated in the market to finance the 6% increase in plant and equipment of the company were increased by 20%.

LIQUIDITY ANALYSIS

The company s current ratio is alarmingly low at 0.84 in FY09 but the overall trend in the big companies of the sector shows that it is satisfactory. No company has in the cement sector has reported a current ratio of more than 1 this year. The inter-company analysis shows that the Attock Cement is the most liquid company in the industry.

This trend can be explained by looking at the overall behaviour of the economy where all the big companies try to finance their operating funds requirements by taking short term loans from the banks to save their finance costs and the risk of falling equity markets of the country. The DG Khan Cement has also done the same. It has taken a fresh 5-year loan from Habib Bank worth Rs 300 million. Due to gradual increase in the interest rates as one of the steps taken by the Government for monetary contraction the accrued interest due on the company has increased by 45%. More over due to the increasing debt leverage used by the company, the current portion of long-term debt has increased by almost 80% further increasing the current liabilities. Also by selling almost 50% of its stake in the associated companies, DG Khan Cement reduced its overall current assets by 30%. All these factors were responsible for the low current ratio of 0.84 but still as compared to other notable players in the sectors the company appears to be on a solid footing.

ASSET MANAGEMENT RATIOS

The company s inventory turnover rate has decreased slightly from 3.83 last year to 3.23.

The recent increasing exports of the company have limited the inventory conversion cycle to 76.55 days. The boosting sales of the company also helped in this regard. The companies Day Sales Outstanding or the amounts of time in which the receivables are converted into cash have also increased owing to the increase in trade receivables by 40%. The total assets turnover has also increased from that of the previous year due to the phenomenal increase in sales and the reduction of the in efficient assets by the company but6 still DG Khan Cement has invested in expansions of its plants and equipments which have been increased by 5% this year. The company s operating cycle has been relatively stable at around 86 days. The sales to equity ratio has been doubled due to redemption of preferred shares and increased sales by the company.

DEBT MANAGEMENT RATIOS

Due to the increasing trend of the cost of finance being evident in the economy DG Cement took a bold decision to shift to short term borrowings rather than long-term loans from the banks. The cross-country analysis reveals that this policy was adopted by almost all of the companies in the cement sector except Attock Cement which mostly relies on equity rather than debt for its financing purposes.

These loans were repaid by either taking the short term loans which resulted in the 14.83% increase in the current liabilities or by issuing more amounts of common shares which were increased by 20%. So the total liabilities were decreased by 7.8% and the assets too were decreased by 17.8% which resulted in the increase in total debt to asset ratio from 44% to 51%.

The same trend is evident in debt to equity ratio which has been greatly increased from 78.62 last year to 104.24 this year. Similarly long-term debt to equity ratio showed a decline from 32.7% in 2008 to 28.5% in 2009. This decline is not too great as expected by the trend but the company also redeemed about 40% of its preferred shares which reduced the overall equity by 30.4%. The TIE ratio has decreased despite the fact that the finance cost of the company was increased by 45% but was shadowed by a tremendous 124.4% increase in the profit before taxes of the company.

MARKET VALUE RATIOS

The earnings per share of the company were back in the positives due to huge increase of 342% in the net income this year. The price to earnings ratio was increased and was positive this time but the average price of the DG Khan Cement stock fell from Rs 99.5 to Rs 35.2 per share. So P/E ratio is 18.63. The book value of the shares also decreased due to 30% decrease in the overall equity of the company. The huge difference between the Rs 68.75 book value and Rs 32.5 market price shows the severe under pricing due to the over all situation of the capital markets.

COURTESY: Economics and Finance Department, Institute of Business Administration, Karachi, prepared this analytical report for Business Recorder.

DISCLAIMER: No reliance should be placed on the [above information] by any one for making any financial, investment and business decision. The [above information] is general in nature and has not been prepared for any specific decision making process. [The newspaper] has not independently verified all of the [above information] and has relied on sources that have been deemed reliable in the past. Accordingly, the newspaper or any its staff or sources of information do not bear any liability or responsibility of any consequences for decisions or actions based on the [above information].

 

 

Courtesy: Business Recorder