Analysis Of Business And Financial

Published Date: 02 Nov 2017

An Analysis of Business and Financial Performance of Maple Leaf Cement Factory Limited Over a Period of Three Years

RESEARCH AND ANALYSIS REPORT

Prepared by: Ibrahim Ahmad Khan

Registration number: 1715981

Word Count: 6,498

Table of Contents

PROJECT OBJECTIVES AND OVERALL RESEARCH APPROACH

REASONS FOR CHOOSING THE TOPIC AND THE ORGANISATION 3.

AIMS AND OBJECTIVES OF RESEARCH REPORT 3.

RESEARCH QUESTIONS 4.

RESEARCH APPROACH 4.

INFORMATION GATHERING AND BUSINESS TOOLS USED

SOURCES OF INFORMATION 5.

DESCRIPTION OF METHODS USED TO COLLECT INFORMATION 5.

LIMITATIONS OF INFORMATION GATHERING 6.

ETHICAL ISSUES 6.

BUSINESS/ACCOUNTING TOOLS USED AND THEIR LIMITATIONS 7.

ANALYSIS, FINDINGS AND RECOMMENDATIONS

COMPANY PROFILE 9.

INDUSTRY OVERVIEW 9.

RATIO ANALYSIS 10.

SWOT ANALYSIS 19.

PORTER’S FIVE FORCES ANALYSIS 20.

CONCLUSION 21.

RECOMMENDATIONS 23.

APPENDICES

APPENDIX A. REFERENCING AND BIBLIOGRAPHY 24.

APPENDIX B. RATIOS 27.

APPENDIX C. QUESTIONNAIRE AND ITS RESPONSE 28.

APPENDIX D. FINANCIAL STATEMENTS 30.

PROJECT OBJECTIVES AND OVERALL RESEARCH APPROACH

1.1 REASONS FOR CHOOSING THE TOPIC AND THE ORGANISATION

I had some reasons for the selection of this topic like:

I also had easy access to the financial information of the company.

I was looking forward to establish my career in a cement manufacturing company. Working on this topic, helped me to understand the process of analyzing things in the practical world.

This topic was closely related to my ACCA studies.

This topic was very vast. Many conclusions could be drawn out of same analysis. So to come up with a logical conclusion required great effort.

Once I was watching a television show about the cement manufacturing and particularly operations of Maple Leaf Cement factory Limited (MLCFL) so I had a general idea regarding this company.

1.2 AIMS AND OBJECTIVES OF RESEARCH REPORT

The aims and objectives are as follows:

To review the company and obtain a concise overview of cement sector.

To analyse MLCFL’s financial performance using:

Sales Analysis: It indicates how effectively the firm manages resources at its disposal to generate sales.(Studyfinance.com n.d.)

Profitability: Measure the company’s overall efficiency and performance.(Downey, 1984)

Liquidity: Determine a company's ability to pay off its short-terms debts obligations. (Investopedia.com, n.d.)

Working capital management: To assess the company's efficiency at managing its resources.(Randall, 1996)

Capital/debt structure and gearing: Measure of financial leverage, demonstrating the degree to which a firm's activities are funded by owner's funds versus creditor's funds.(Laughlin et al, 2001)

Investment Ratios: These ratios are concerned with the return on investment for shareholders, and with the relationship between return and the value of an investment in company’s shares.(BPP, 2009)

Use SWOT analysis to obtain a realistic understanding of the company in relation to its internal and external environments.(Kinicki and Williams, 2003)

Use Porter’s five forces to analyze the intensity of competition in the industry.(David, 2002)

To draw conclusions on the basis of such analysis and make appropriate recommendations.

1.3 RESEARCH QUESTIONS

Which business and financial tools will I require to use in order to perform my analysis?

How well has MLCFL performed from FY08 – FY10?

How well is MLCFL performing against other competitor i.e. Dera Ghazi Khan Cement Limited(DGKCL)?

What are the particular strengths, weaknesses, opportunities and threats that MLCFL faces?

Is the information that is publicly available reliable to use in the RAP?

What type of data will be required to analyze MLCFL’s performance?

How many different sources will be sufficient to draw a conclusion?

What type of IT and communication skills will be required for the completion of this project?(Johnson, 2005)

1.4 RESEARCH APPROACH

After setting the project aims objectives and stating my research questions I adopted the following research approach to carry out the RAP:

I set a time outline for my project; consideration was made for the collection of data, estimated time, meetings with my mentor, the final deadline for my project completion, and the anticipated hurdles.

As I entered the implementation stage of my project I started doing the required actions to complete my research project within the specified time.

I made a strategy for my project; first of all gathering data about the company, then the industry, the economy and then started carrying out most crucial part of the project – the analysis.

My research work had exceeded the words constraints so I obtained my mentor’s advice on to which areas I should put more significance and which areas can be shortened and putting more concentration on my analysis work.

I decided on the format in which to report the conclusions and reviewed the conclusions reached against the information gathered.

After drawing conclusions I gave some time, almost three days, to review my work and presented it to my mentor in the final meeting.

I noted down all the references by using Harvard Referencing System and prepared a separate appendix attached with this research report.

B. INFORMATION GATHERING AND ACCOUNTING/BUSINESS TECHNIQUES

2.1 SOURCES OF INFORMATION

I used two sources for the information gathering i.e. primary sources and secondary sources.

Primary sources: "Information collected for the specific purpose at hand."

Secondary sources: "Information which already exist somewhere, having been collected for another purpose."(Kotler and Armstrong, 2006)

Most of the times there was less information that I could have gathered from primary sources in comparison with the secondary sources as I arranged only one interview session with the Manager Accounts. But I did carry out open discussions with various company employees to get information other than the required quantitative data. This was helpful to quiet an extent and I got some information about what the company is looking forward to in the future. I also sent a questionnaire to one of employees in sales department in MLCFL. As compared to the primary sources, a huge set of information acquired as a result of secondary sources.

2.2 DESCRIPTION OF MEHODS USED FOR INFORMATION GATHERING

Interview was conducted with Manager Accounts of MLCFL to gather primary data. This interview gave an insight into the company affairs, its competitive position in the industry in which it operates as well as the company’s corporate structure, pattern of shareholdings and statistical information. The interview was also aimed at discussing the financial highlights of the company. Answers to the questionnaire were provided by the employee which also provided the information regarding business profile, cement quantity sold, revenue, and internal strengths and weaknesses of MLCFL.

The several secondary data sources used included:

Annual reports of MLCFL for three years and annual report of DGKCL for FY10(a close competitor of the company) were a major source of information. These reports proved to be the most reliable and dependable source for extracting financial information and analyzing company’s performance over the years. I obtained these reports from the Karachi Stock Exchange.

Internet proved to be vital in providing market trends and overall situation of a cement industry. It broadened the focus to sector crises and its effects on the overall economy. The search engines used for this purpose included Google and Yahoo. The company’s official website was also proved to be helpful in providing an overview of the company’s operations and capabilities.

Daily newspapers were used to get the latest information about the cement industry and its role in the national economy. I obtained these newspapers from public libraries.

Numerous books and journals and business magazines on this subject available at college libraries were also used to further support the framework of this report and to give a detailed understanding of the situation at hand.

ACCA textbooks including FTC and BPP textbooks were used for a thorough understanding of the numerous techniques available for analysis. The ACCA Student Accountant magazine assisted in improving both the technical and non technical skills needed to prepare the research and analysis report.

Analyst’s reports also proved to be very supportive to have an opinion of experts regarding a particular situation of a company and an industry.

2.3 LIMITATIONS OF INFORMATION GATHERING

Information pertinent to the research topic is either not available, or is only available in insufficient quantities.

Some data may be of questionable accuracy and reliability. Even government publications and trade magazines statistics can be misleading.

Data may be in a different format or units than is required by the researcher.

Much data is several years old and may not reflect the current market conditions. Trade journals and other publications often accept articles six months before appear in print. The research may have been done months or even years earlier.

2.4 ETHICAL ISSUES

Gathering the relevant information was one of the most prolonged and important parts of the projects and for this purpose I had to go out and interact with people other than my class mates and peers. It required me to maintain a proper ethical stance with people and behave professionally. I had to make sure that I maintained integrity, objectivity, confidentiality, professional behavior and professional competence and due care which are the five principles of ACCA’s code of ethics for all students and members to follow.(FTC, 2009)

One of the issues that I faced was that MLCFL staff was reluctant to fill the questionnaire due to confidentiality. Being an ACCA student not only am I to hold up my ethical standards but to respect those of others. So I took permission from the Managing Director to make them more comfortable. Although my friend has been working there but I even didn’t inform him about this RAP, and uphold our integrity and confidentiality.

2.5 THE ACCOUNTING AND BUSINESS TECHNIQUES

Accounting ratio is used to describe significant relationships which exist between figures shown in balance sheet, income statement, in a budgetary control system or in any other part of the accounting organization. Ratio analysis is a very powerful analytical tool for measuring performance of an organization.(Kishore, 2005)

LIMITATIONS OF RATIOS:

Following are some of the limitations of ratio analysis:

Ratios that use balance sheet figures as being representative of the whole year are open to abuse.

Comparison of both ratios between different companies is unsafe if adjustments have not been made for their different choices of accounting policy.

Companies may buy or sell parts of the businesses, thus affecting comparisons over time.

Exchange rates and inflation rates can have distorting effects, depending on which countries a business invests in.

Related party transactions can have a severely distorting effect.(Past-year paper, 2005)

SWOT is an acronym that stands for Strengths, Weaknesses, Opportunities and Threats. It is a careful evaluation of an organisation’s internal strengths and weaknesses as well as its environmental opportunities and threats.(Griffin, 2008)

LIMITATIONS OF SWOT:

The assessment of strengths and weaknesses may be unreliable, being bound up with aspirations, biases and hopes. Therefore, it is important for strengths and weaknesses to be defined in the context of a situation.

The SWOT framework has a tendency to oversimplify the situation by classifying the firm's environmental factors into categories in which they may not always fit. The classification of some factors as strengths or weaknesses, or as opportunities or threats is somewhat arbitrary.

Because it is so simple, people have a tendency to use it without a great deal of thought, so that the results are often useless.(Mintzberg, 1990)

Porter's five forces model is a simple but powerful tool for understanding where power lies in a business situation. This is useful, because it helps to understand both the strength of the current competitive position, and the strength of a position an organization is looking to move into. The analysis assumes that there are five important forces that determine competitive power in a situation. These are:

Supplier Power

Buyer Power

Competitive Rivalry

Threat of Substitution

Threat of New Entry(Mindtools.com n.d.)

LIMITATIONS OF FIVE FORCE ANALYSIS:

There are some limitations of porter’s five forces model which comprise:

It is best applicable for analysis of simple market structures but is difficult to use in analyzing complex industries. It assumes a relatively static market structures in today’s dynamic environment. The model was designed for analyzing individual business strategies. It does not cope with synergies and interdependencies within the portfolio of large corporations.

Its focus is on the external environment of the company and does not look inside the company.(Themanager.org)

C. ANALYSIS, FINDINGS AND RECOMMENDATIONS

3.1 COMPANY HISTORY AND PROFILE

The Kohinoor Maple Leaf Group (KMLG) was born from the trifurcation of the Saigol group of companies and is a reputable and leading manufacturer of textiles and cement. KMLG comprises of Kohinoor Textile Mills Limited and MLCFL. Both companies are incorporated in Pakistan. MLCFL was incorporated in Pakistan on 13 April, 1960 under the Companies Act (1913) as a public company limited by shares and was listed on stock exchanges in Pakistan on 17 August, 1994. The Company is engaged in production and sale of cement (Questionnaire).

Presently MLCFL has 9% of the market share of Ordinary Portland Cement and is a leading brand in Pakistan with a diverse customer base. It is also the largest producer of White Cement in the country. (Cement Pakistan Company, 2008) MLCFL has also developed a niche market for specialized cement such as SRC(Sulphate Resistant Cement), Low Alkali Cement and Oil Well Cement. MLCFL is the only local Cement manufacturer producing Oil Well Cement(Pakistan Credit Rating Agency, 2009)

3.2 INDUSTRY OVERVIEW

The industry comprises of 29 firms (19units in the north and 10units in the south), with the installed production capacity of 44.09million tons.  The north with installed production capacity of 35.18million tons, while the south with installed production capacity of 8.89million tons, compete for the domestic market of over 19million tons. There are four foreign companies, three armed forces companies and 16 private companies listed in the stock exchanges.(Kazmi, 1996)

The industry is divided into two broad regions, the northern region and the southern region. The northern region has around 80% share in total cement dispatches while the units based in the southern region contributes 20% to the annual cement sales. Cement manufacturers are playing a vital role in the building up the country’s economy and contribution towards growth and prosperity.(Rohail, 2008)

3.3 RATIO ANALYSIS

SALES GROWTH

MLCFL’s sales raised considerably during FY09 by 95.15% to Rs.15,251million from Rs.7,815million in FY08. If analyze the break-up of this tremendous increase in sales then 52.34% enhancement was witnessed in local sales whereas 175.12% rise was witnessed in export sales compared to the last year. The reason of increased local sales was partly because of increase in selling rates of cement(Kundi, 2009). Sales volume was recorded at 3,165,770M.tons as against 2,534,220M.tons an increase of 25% in comparison with FY09. The upsurge in sales volume was due to high production as a result of expansion in production capacity of the company. In the light of weak domestic demand MLCFL was more concentrated on building export volumes for the better retention prices in the region(Shehzad, 2011). However, overall capacity utilization of various plants at MLCFL was registered at 85% during FY09compared to 75% in the previous year.

In FY10 the situation was reversed when the sales revenue of the company lessen by 10.63% from Rs.15,251million to Rs.13,630million. Sales volume increased by 6.28% to 3,364,025M.tons in both local and export markets. On the other hand, the sales revenue declined despite volume increase which clearly indicated the lower cement prices that prevailed during FY10 on account of severe competition in the domestic market, that has reduced the retentions accordingly as there was excess supply(Chughtai, 2011). In general, the capacity utilization of the company was same 85% during FY10. The cement prices were also depressed in the international market because there was slowdown in construction activities in the Middle East countries(Zaidi, 2010). The sales of DGKCL were declined by 9.77% in FY10, which is almost exactly the same percentage than that of MLCFL. The quantity sold of DGKCL grew by 27.34% but the sales revenue did not grow as a result of lower cement prices in the country.

PROFITABILITY ANALYSIS

Gross margin: The gross margin of the company increased by 274.36% from 16.94% to 32.48% in FY09 and this was as a result of growth in gross profit due to 95.15% rise in sales revenue during the year. This high increase in sales was also coupled by 59% increase in cost of goods sold and the major chunks that caused such high increment in cost of goods sold for MLFCL were increase in fuel costs by 57.31% and increase in packing material consumed were 94.07% as these two items mainly comprised of 78% of the total costs. The country in which MLCFL operates witnessed extraordinary power shortages over the period under review(Jang, 2011). This has adversely affected the operations of the cement sector. Despite the drop in international prices of oil, there was not a drop in Pakistani market because of removal of subsidy on oil and devaluation of the local currency. This removal was because of conditions imposed by IMF for bestowing loan to Pakistan(Bukhari, 2011). These unfavorable effects had immensely increased the costs for MLCFL. But, the higher selling prices compensated the manufacturers in the form of higher gross margin during FY09.

MLCFL’s gross margin sharply dropped to 21.55% in FY10 compared to 32.48% during FY09, largely because of fall in selling price per unit attributed to supply glut existed in the country. The sales revenue declined conversely cost of sales increased by meagerly 3.84% in FY10. Further reduction in margins were observed due to higher cost of sales mainly due to fuel and power which constituted a greater portion of total cost of sales. Other heads of cost of sales witnessed inflationary increases during the year such as raw material cost and packing material cost were also augmented by 23.65% and 4.13% respectively compared to the last year(Rizvi, 2009). Consequently, these adverse effects have deteriorated the company’s gross profit margin. The gross profit margin of DGKCL was 16.62% in FY10, despite higher sales its gross profit ratio was lower than that of MLCFL, which is because MLCFL manages its production costs more efficiently.

Net margin: During FY09 MLFCL regardless of increase in sales was incapable to improve its net profits. Once again profit before tax margin showed a negative sign although, the situation had improved from (17.45%) to (6.36%), but the condition is still not good. The financial charges had increased enormously by 87.77% because of surging interest rates. This interest rate was quite high because of conservative approach adopted by State Bank of Pakistan(Ahmed, 2010). Therefore, the major factor that shows lack of correspondence in profit margin and gross profit margin was the higher finance cost. Although the distribution costs of MLCFL also increased extremely by 180% but this colossal increase was justified on account of higher export sales during FY09.

During FY10 MLCFL’s net margin further deteriorated to (18.84%) and this decline was witnessed due to huge loss before tax incurred by the company compared to FY09. The distribution cost of the company remained high and boosted by 34.75% on account of freight and forwarding charges due to increase in oil prices(Dawn, 2011). The finance cost of MLCFL though decreased compared to the prior year but remained very high as company was not capable to settle it as lack of operating profits. The other operating expenses though increased compared to the last year but these make up only a small portion of the total costs. The net margin of DGKCL was a much better percentage of 2.20% mainly because the selling and distribution expenses of MLCFL were quite higher than DGKCL. Because even though its export sales were more than MLCFL its distribution costs were only Rs.994million, which means that MLCFL did not carefully plan its freight costs. However, there was not a major difference in the finance costs of both the competitors in FY10.

Return on capital employed: The return on capital employed was decreased to (6.25%) in FY09 as compared to (2.38%) in FY08. It was because of marginal decline in net earnings during the year. The company repaid its long term loans and finances by obtaining redeemable capital and syndicated finances due to which the total capital employed was remained almost the same in FY09. The huge decline in return on capital employed to (15.41%) in FY10 from (6.25%) in FY09 was due to the decrease in net profit of MLCFL as a result of low sales, and the increase in total capital employed as more long term loans and finances acquired though the equity reduced as a result of accumulated losses generated(Hussain, 2011). DGKCL also produced a lower return on capital employed but more impressive than MLCFL at 0.69% during FY10.

Return on assets: The return on assets of the company during FY09 was also less at (4.81%). The company’s assets were exactly the same as in the prior year but due to lower profits the company could not achieve better returns. This ratio depicted a very distressing picture. This ratio decreased from (4.81%) in FY09 to (12.27%) in FY10. This drop was both due to a decrease in profits and an immaterial increase in assets of the company because of very small additions in plant and machinery. The return on assets of DGKCL was 0.92% during FY10 which was higher than MLCFL showing that the company produced good results in the form of earnings.

LIQUIDITY ANALYSIS

Current ratio: Due to accumulated losses by the company during FY09, the liquidity of MLCFL was also affected badly. The current ratio of the company was even more weakened in FY09 to 0.52:1 as compared to 0.81:1 in FY08 because of 13.01% reduction in current assets whereas 34.95% growth in current liabilities during FY09. MLCFL increased short term borrowings by 30.05% compared to FY08 in order to meet the liquidity requirements of the company(Annual Report, 2009). The ratio was at an alarming level depicted that MLCFL was unable to pay off its current liabilities and faced short term difficulties.

The current ratio of MLCFL was more or less same at 0.54:1 in FY10 compared to 0.52:1 in FY09. The reason for this was that both current assets and liabilities decreased in similar proportions. The major current asset of the company was ‘Stores, spares and loose tools’(Annual Report, 2010). The small decline in current assets was mainly on account of it along with the stock in trade while the decline in current liabilities was mostly due to short term borrowings. Generally a current ratio of more than 1:1 is considered to be satisfactory. As a result, the current ratio was at an alarming level indicated that MLCFL was incapable to settle its current liabilities over the years (Pakistan Today, 2011).

Quick ratio: The quick ratio also shows that the company’s liquidity position is more worsened during FY09 on yearly basis due to lower liquid assets. The ratio was 0.16:1 in FY09 which is at a dangerous level and showing poor liquidity position. The quick ratio of MLCFL was remained constant at 0.22:1 in FY10 as compared to 0.20:1 in FY09, because MLCFL is not investing any money in liquid assets and this situation does not seem to have changed in this year. The liquidity position of DGKCL was also not too good but it was comparatively much better than its competitor in FY10 whose liquidity ratio was at a dangerous level.

GEARING ANALYSIS

Long term debt to equity ratio: Out of the total capital of MLCFL the debt proportion was 55% in FY08. This ratio changed slightly to 57% in FY09 due to accumulated losses during FY09; this has led to reduction in shareholder's equity by 19.65% and the company entered into a financing agreement for a Waste Heat Recovery Plant worth Rs.1,160million that also increased the debt portion. Besides taking new loans MLCFL also keep retiring old loans so the debt to equity ratio remains balanced. (Annual Report, 2009)

During FY10 the debt to equity ratio further deteriorated as the company has increased its reliance on the long term financing as depicted from the ratio 67:33. So MLCFL had not any potential to be able to acquire more loans in future years. On the other hand the equity base of the company reduced due lack of profits retention over the years under review (Annual Report, 2010). DGKCL has lower proportion of long-term debts with a gearing ratio of 21%. The high level of gearing suggested that MLCFL has consumed all its credit lines and may not be able to take more debt financing if required, while this is not the case with DGKCL.

Interest cover: The interest cover of the company was 0.25times in FY08 and it increased to 0.73times during FY09. Firstly, it is acknowledged that MLCFL have done robust activities for sales and increased MLFCL's operating profits by 453.45%. However, due to high loans, the financial charges also surged up by 87.57% (Ahmed, 2011). The finance costs increased drastically but the ratio improved as a result of huge increase in sales during the year that mitigated the effect for instance as it improved in comparison with the last year but in real scenario company is not in a position to settle its finance costs in full out of the operating profits earned.

However, the situation worsened rapidly in FY10 as the interest cover fell to (0.24times). An interest cover ratio of less than 1times means that the finance costs are depleting the reserves of the company. Although finance costs of MLCFL decreased, the interest cover plummeted due to abysmal conditions of profitability (Annual Report, 2010). The interest cover ratio of DGKCL was encouragingly good, and also much better than MLCFL at 1.19times. This is because DGKCL has lower debt gearing and short-term borrowings than MLCFL.

WORKING CAPITAL ANALYSIS

Stock turnover period: The inventory turnover period was more or less maintained in FY09 with a slight reduction of just 2days however it depicted the stable demand of company’s product and efficient utilization of stock. The stock levels were increased slightly as the company anticipated higher sales in the next year, particularly for exports (Business Recorder, 2010).

During FY10, the inventory days fell again to 17days due to reduction in inventory levels, however they did not increase and not in line with the production activities of the company which depicted that MLCFL hold its inventory items for a shorter period and converted into sales immediately (Questionnaire). DGKCL took a longer period while converting its inventory into cash as the company holds excess stock to avoid any shortage during FY10.

Creditor payment period: In FY08 the creditors were paid at an average time of 24days and maintained at 25days during FY09. These creditors are in respect of raw material, packaging material and fuel and power. The company sustained the payment period as it was already generating loss and suppliers felt reluctant to provide their products on exceeding credit limits that’s why MLFCL made efforts to reduce this time period to the maximum possible extent for the continuous delivery of required material, despite increases in fuel and power costs.

During FY10 the creditor payment period increased to 40days as the payment time was too long, which might have ruined the company’s goodwill. MLCFL should be able to reduce the payment period to some extent. The creditor days of DGKCL at 22days are very low, as it may be trying to create exceptional relations with its suppliers, when all the cement manufacturers in the country face liquidity problems (APCMA, 2010).

Debtor collection period: In an attempt to recover from MLFCL's FY08 loss, the company employed ingenious techniques. MLFCL is now getting accounts receivable quickly and this improvement is by about 19days as depicted by debtor collection days that improved from 35days to 16days during FY09. A reason for this quick conversion was export-oriented approach as the government of Pakistan has made it mandatory to do transactions in foreign countries via Letter of credit( Interview). This allowed them to get money before maturity and hence MLFCL's receivables are being collected sooner.

The period showed an erratic trend as the debtor days have increased from 16days in FY09 to 20 days during FY10. It seems that MLCFL is offering credit facilities to some of its customers. However MLCFL should have solid ground to allow credit terms because they are providing an incentive to retain their customers owing to the lower demand and incase of cement industry the switching cost of customers is quite low(Interview). DGKCL collected the payment from its debtors quite earlier than MLCFL as its debtor collection period was 8days which was more in line with the industry’s standard.

INVESTOR ANALYSIS

Market price of share: The share value decreased from Rs.11.02 in FY08 to Rs.5.00 in FY09. The main reason for this decrease was a fall in profitability of the company. The share value fell even further to Rs.3.54 in FY10 as the profitability fell further and this was the third consecutive year in which MLCFL did not pay any dividends, bonus shares or rights issue. The share price of DGKCL was higher at Rs.25.79 as it is a more stable company(KSE, 2011).

(Loss)/Earning per share: The trend of incurring loss continued in FY09 therefore the loss per share increased to Rs.2.78 compared to (Rs.1.96) in FY08. The slump in the stock market led to the fall of stock prices of all the cement manufacturers due to economic uncertainty and poor law and order situation in the country(Ahmed, 2010). The price to earnings ratio shows the confidence levels of investor in the company and this can only be assessed in case of profits so it would be meaningless for MLCFL.

In FY10, the company generated a loss per share of (Rs.7.08) as compared to the loss per share of only (Rs.2.78) in FY09. This increase in loss per share was only due to loss suffered by the company in absolute terms, as the number of ordinary shares remained the same over the three years. DGKCL’s better profitability in comparison with MLCFL led to a earning per share of Rs.0.72 during FY10 (Annual Report, 2010).

Dividend per share: No dividend has been paid by MLCFL in all the three years under review(Director’s report to MLCFL’s shareholders, 2010). So the dividend yield becomes irrelevant in all the three years. Such low dividend payout is not likely to please the shareholders. However, even DGKCL did not pay any dividend in FY10, due to low profitability.

3.4 SWOT

STRENGTHS

MLCFL established in 1956, this long time span has helped it earn customer loyalty all over Pakistan.

Higher production capacity makes MLFCL, the third largest capacity wise player in Pakistan. (MLCFL, 2011)

MLCFL is the only cement factory that produces both grey and white cement. (Interview)

MLCFL has developed a niche market by being the only manufacturer of oil well cement in Pakistan.

MLCFL, having a good brand image, has the advantage to charge their customers at a higher price than the other competitors.

Wide distribution network both in domestic and export markets

The price of MLCFL is high in the international market as compared to its local competitors who are involved in the exports as well. (Questionnaire)

MLCFL along with one more company in the sector, are the only two companies to obtain the BIS certification from India.

WEAKNESSES

Weak environmental controls.

Low capacity for SRC manufacturing, which is high in demand in South region of Pakistan. (Interview)

The PACRA has assigned negative outlook to the ratings of MLCFL (entity ratings; long-term: BBB+; short-term: A2 and secured sukuk issue: A-).(Daily Times, 2009)

The cost of freight charges reduces the retention price of the cement as the factory is located in a remote area, hampering the profitability of the company.

OPPORTUNITIES

The government had allocated Rs.663billion under public sector development program (PSDP) with a GDP target of 4.5% in the Federal Budget 2010-11. (Cement China, 2009)

Increase in demand of cement in the local market is expected due to severe flood in Pakistan as the damage to housing and infrastructures have been enormous.( Ghalib, 2010)

It is expected that soon trade between India and Pakistan will commence through ‘Wahga Border- Lahore’ thus opening the door for the Pakistan’s cement industry to market with huge potential and MLCFL is the biggest beneficiary (Questionnaire).

The subsidies by the Government of Pakistan to the cement industry have boost exports such that it is threatening East Africa’s producers. (CemWeek, 2010)

Construction of small and medium size dams and reconstruction activities in flood as well as army operation affected areas will provide the required imputes to the ailing cement industry. (Kirmani, 2009)

THREATS

The cartel restricts the quota of each manufacturer to sell in the domestic market based on its market share.

High interest rates, fuel costs, inflation and substantial decline in rupee value have taken a toll on the industry. (Mirza, 2010)

Highly unstable political environment, deteriorating law and order situation and constant revision of government policies is affecting the performance of the businesses.(BBC News, 2008)

In the coming years the cement industry of Pakistan would face tough competition in the export market when Indian, Iranian and Saudi Arabian plants would come on stream and enter the exports market. (Tasleem, 2009)

3.5 FIVE FORCES ANALYSIS

THREAT OF NEW ENTRY

There are many entry barriers in the industry. Due to which there are less chances of a new entrant. Some of them are as follows:

Licensing requirements from the government

Highly capital intensive industry

Existing organizations are enjoying economies of scale

Vast distribution network needs to be established like MLCFL

Existing organizations have brand loyalty. So the new entrant would not take risk to enter in this market

THE POWER OF CUSTOMER

Bargaining power of customer is much low because of the fact that there are millions of customers who buy small quantity. So, they have no bargaining power. Mostly the customers can not even compare the qualities of different products and brand identity does not matter in most of the cases.

THREAT OF SUBSTITUTES

There was no threat from the substitute of cement faced by MLCFL.

COMPETITOR RIVALRY

Almost all the cement manufacturers have increased their production capacity. That is why supply of cement is increased but the demand is low because of less construction work in the country. Every organization including MLCFL is trying to gain maximum market share so there is very tight competition in cement industry. Positive factor is some of the organizations are trying to explore new markets due to demand of Pakistani cement but due to political factors; import of cement from Pakistan is banned in some countries like India.

THE POWERS OF SUPPLIERS

Pakistan is a country that is wealthy in cement raw material. In cement manufacturing raw material required is always present in rough form. The basic component of cement is limestone which is extracted directly from ridges which exist in excess quantities in Pakistan. Thus the bargaining power of suppliers of limestone is low. In addition, the bargaining power of the suppliers of power and fuel is low as they cannot exercise too much force upon MLCFL as fuel is traded on an open market. On the other hand coal is also traded openly with a large number of suppliers worldwide so its suppliers have low bargaining power (Questionnaire).

3.6 CONCLUSION

COMPANY AND INDUSTRY

MLCFL is one of the pioneers of cement industry in Pakistan. MLCFL owns and operates three production lines for grey and three production lines for white cement. The plants are located at Daudkhel District Mianwali (MLCFL, 2011). Domestic prices of cement remained extremely depressed as several manufacturers with deep pockets opted to adopt grasping pricing policies with a view to blowing away some of the competition. Export markets did provide a safety regulator but prices continued to recede as the poor effects of the financial meltdown spoiled economic growth in the Middle East.

SALES

The turnover growth has been very volatile, growing at high rates in FY08 and FY09 whereas declined during FY10. Quantities of cement sold have increased considerably in all the three years under review but cement retention prices has been showing an erratic trend and took a major plunge in FY10 in both local and export markets.

PROFITABILITY

The gross profit ratio took a major slip in FY10 due to increase in fuel and power costs and a price war going on between cement manufacturers. The gross profit ratio has yet recovered from the higher selling prices of cement during FY09. MLCFL has been running in huge net losses over the three years under comparison. This was on account of increase in distribution costs, finance costs. The ROCE and ROA also suffered due to the losses occurred during the years, as the company was unable to provide any returns. Profitability of DGKCL is better than MLCFL even though its turnover growth is the same.

LIQUIDITY

The current ratio of MLCFL has been very low in all three years, being the lowest in FY09 and FY10. MLCFL has very low liquidity mainly due to low cash generation from operations on account of higher distribution costs although it expanded its production capacity. The quick ratio is even lower at 0.22times in FY10. MLCFL has high proportion of inventory, stores and spare tools and very low cash reserves. Unlike DGKCL whose liquidity position is much better, MLCFL has very high chances of default payment to its creditors.

CAPITAL AND DEBT STRUCTURING

The debt gearing did not change considerably in FY08 and FY09. In FY10 however debt gearing increased mainly because equity value declined on account of revenue reserves as a result of losses of the company. Interest gearing was highly unsafe in all three years under review, thereafter the interest cover fell below 1times which is at an utmost dangerous situation when MLCFL did not have any profit to cover the finance costs. DGKCL has lower gearing thus higher interest cover.

WORGING CAPITAL MANAGEMENT

The debtor management of MLCFL is almost similar to that of DGKCL as both have higher debtors days which is not generally expected from the cement companies but they allow these limits to retain their customers in this difficult times. The inventory days of MLCFL, however, are lower than DGKCL but there are no chances of stock-outs. MLCFL took longer period to settle its creditors on account of its poor liquidity and lack of cash balances.

INVESTOR ANALYSIS

The investor’s ratios are also very low. No dividend has been paid in the years. Investors are losing confidence in the company as share price is falling and earnings have turned into losses.

SWOT ANALYSIS

MLCFL actively manages its strengths and weaknesses and seeks to avail opportunities and avoid threats that it faces.

PORTERS FIVE FORCE ANALYSIS

The rivalry in existing firms of the cement industry is rather intense. The threat of new entry to the cement industry is low. The customers have low bargaining power. Threat of substitute products to cement is low. The bargaining power of suppliers of limestone is very low but power of coal suppliers is also low though relatively higher than that of limestone. Overall, the competitive position of cement companies is high.

3.7 SUGGESTIONS

MLCFL should improve its liquidity and pay dividends to its shareholders to improve company’s attractiveness.

MLCFL should manage its transportation system along with its distribution costs sensibly.

MLCFL should improve its operating cycle. It can do so by reducing the level of inventory held by opting just-in-time system and making payments to suppliers on time.

MLCFL should reduce its gearing level because highly geared company is seen as a highly risky company with the point of view of investors.