Oxford Brookes University

RESEARCH AND ANALYSIS REPORT

THE BUSINESS AND FINANCIAL PERFORMANCE OVER A THREE

YEARS PERIOD OF
LUCKY CEMENT LIMITED

By: Muhammad Umer Khan Rao

Registration no. 1148976

June 2008

Words:

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Contents
Page No.

1. Project objectives and overall research approach

1.1 Topic & Organization chosen and Reason for selection 3
1.2 Objectives and research questions 3
1.3 An explanation of overall research approach 4

2. Information gathering and accounting / business techniques

2.1 Sources of information to obtain relevent data 5
2.2 Description of methods used to gather information 6
2.3 Limitations of gathering information
2.4 Ethical issues arose during information gathering
2.5 An explanation of accounting/or business techniques & their
Limitations

3. Results, analysis, conclusions and recommendations

3.1 Description and presentation of results 7
3.2 Critical analysis and evaluation of results
3.3 Conclusion 13
3.4 Recommendations

Appendix A – References and Bibliography 16

Appendix B – Urea Market Share 18
Appendix C – Fertilizer Sales Volume (Thousand Metric Tons) 19
Appendix D – Per share Earnings vs. Dividends 20
Appendix E – Balance Sheet and Profit and Loss Account 21
Appendix F – Ratios Sheet 23
Appendix G – Questionnaire and its response

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1. Project objectives and overall research approach

Topic and organization chosen and reason for selection

It was important to identify the topic in which I could apply my best capabilities. Initially every
topic looked easy to me but when I went into its details, it turned into a difficult one. Therefore, I
gave a deep thought in selection of the topic. Though it was hard, but I finally reached at the
conclusion of trying:

“The business and financial performance of an organization over a three year period”

In choosing the topic, the reasons that forced me to select this topic are; Firstly, the topic should
be easily understood and its context should be clear to me. Secondly, I should have the required
capabilities regarding the topic and should not be struck in between the project. Thirdly, the
information should be easily accessible. Fourthly, analyzing the financial situation, performance
measurement and environmental analysis is an integral part of the syllabus for the ACCA
professional examinations for Paper F7 – Financial Reporting, Paper P5 – Advanced
Performance Management, Paper P3 –Business Analysis and Paper P2 – Corporate Reporting. I
have studied all these papers and I thought it would be a good chance to apply the concepts,
which I have learned theoretically.

Then the task was to identify and choose an organization. After thinking deeply, I decided to
work on “Lucky Cement Limited (LCL).”
LCL, being a public limited company with an annual turnover of about Rs. 12.5 billion in the
year 2007 [Annual Report LCL (2007)] provided with an extensive infrastructure consisting of
relevant, accurate, reliable and up-to-date information. Analyzing the financial situation of LCL
operating in this important economic sector enabled me to grasp a better understanding of
Pakistan’s economy. In addition to all above, another strong reason to choose this topic is that
my father is an active investor in Lahore Stock Exchange and has a substantial portion of his
portfolio comprising shares of LCL. He induced me to present him a detailed report on the
company for his decision-making purposes.

1.1 Objectives and research questions

Users of accounting information are interested in a number of concepts, which include

profitability, liquidity, management efficiency, risk and shareholders’ interest. [E Dunn (2001)]

Research questions of this research and analysis project are:

What was the financial situation of the compnay in terms of profitability in short term, medium
term and long term, liquidity position, efficiency ratio, long term solvency and capital structure
and financial risk?

How the investors see the LCL from investor’s perspective, whether its investors friendly or not,
and what rate of return they can expect?

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Whether the company has enough resources and capabilities to compete in envoironment which
it operates both external and internal?

What is the company’s intensity of competetion in the industry in which it operates?

Objectives of this research and analysis project are:

• To analyze expected future position

• To draw meaningful conclusions on the basis of such analysis
• To make practical recommendations for improvements, where there is a scope
• To comment on the treasury and financial risk management policies of the company.
• To assess whether the company is effectively managing its foreign exchange, interest
rate, credit and liquidity risks or not.
• To asses whether company fulfilling investors’ expectations.

After evaluating the ratios and the environment, the next and last part of my report would be to
draw a conclusion regarding the over all performance of the organization based on my analysis.

1.2 An explanation of overall research approach

Information gathering and accounting / business techniques

While researching for my project I had to gather financial as well as non financial data from
numerous resources according to researcher’s terminology this can be bifurcated in to primary
and secondary data.
Both are discussed as follows:

2.1 Primary data:

It can be defined as data collected by researcher himself.
(School of Law and Social Sciences, Glasgow Caledonian University)

I was not able to gather much primary data however telephonic interview with CFO “Mr Omer
Ashraf” had helped me to enlighten some areas of concern. However he also facilitated me by
providing some non financial information along with financial.

2.2 Secondary data:

Secondary data is the data collected by others to be "re-used" by the researcher
(School of Law and Social Sciences, Glasgow Caledonian University)
Sources and their reasons for use in collection of both qualitative and quantitative secondary data
are:

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 ► No doubt annual financial statements were essential and a key source for gathering
financial information’s and than analyzing and interpreting financial position. Almost all
of financial statements of FCCL from FY 2002-2003 up to FY 2006-2007 were available
at company official web site and the same was for competitor MLCFL.

► The internet provided me a platform to initiate my research work and this electronic
information proved very relevant and useful as I stepped forwarded. So I was eventually
able to gather relevant data that facilitated me to analyze FCCL in particular and cement
industry and economy in general.

► BPP text books for papers P-3, P-5 and P-2 have provided me thorough understanding of
the analysis models and appraisal techniques used and I was able to deploy all that
theoretical knowledge in a live practical situation.

► I have studied some business specific news papers and magazines in particular, like
“Business Recorder”, “Pakistan economist” and in general newspapers business segments
i.e. “The Dawn, Daily times” to make my self familiar and informed with cement
industry environment, economy trends and future prospective. These were available at
library of Institute of Chartered Accountants of Pakistan.

► Some industry specific articles by Government of Pakistan i.e. “Digest Of Industrial

Sectors Pakistan”, “Investor Information Guide” also proved a helping hand in
understating over all industrial environment of cement sector.

Some books available at above mentioned library on Interpersonal and report writing skills also
facilitated me and obviously “Oxford Brookes University Research and Analysis Project
Guidelines" along with ACCA Student Accountant articles were critical.

In order to meet above mentioned objectives and answer the research question I have carried out
the financial and non-financial analysis using the following analytical tools and techniques:

• RATIO ANALYSIS: It presents potential user a brief statement which describes the
health of the company. Ratios are simply representatives of a larger figure. It involves
establishing a financial relationship between the components of financial statements.
(Singhvi, Bodhanwala, 2006)

• PROFITABILITY: Even when every segment is absolutely profitable, managers often

want to know which segment is most and least profitable. Relative profitability is
concerned with ranking products, customers, and other business segment to determine
which should be emphasized. (Garrison-Noreen, 2004)

• SHAREHOLDERS’ INVESTMENT RATIOS: To view PTC from the investor’s

perspective, whether its investor friendly or not. These ratios indicate the relationship of
the firm’s share price to dividends and earnings. (BPP, 2006)

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 • LIQUIDITY RATIO: Is the ability of a company to meet its payment obligations on
time. Liquidity also measures the speed at which assets turn over compared with
liabilities. (Pascal Quiry, 2005)

• LONG-TERM SOLVENCY AND STABILITY: To evaluate how much PTC owes in

relation to its size, whether it is getting into heavier debt or improving its situation, and
whether its debt burden seems heavy or light. (FTC, 2006)

• ACTIVITY RATIO: If a business does not use its assets effectively, investors in the
business would rather take their money and place it somewhere else. In order for the
assets to be used effectively, the business needs a high turnover. (Robbins Stephen, 2002)

• COVERAGE: It measures the business capacity to generate enough income to pay the
interest on its loans or measure the ability of a company to pay for its interest costs is
measured through interest cover. (Rees, 1990)

• SWOT ANALYSIS: Is a conducting of internal strengths and weaknesses in the

organization. External opportunities and threats that affect the organization, based on
market and the overall environment in which company operates. The primary purpose of
the SWOT analysis is to identify and assign each significant factor, whether these are
positive and negative, to one of the four categories, allowing you to take an objective
look at your business. The SWOT analysis is a useful tool in developing and confirming
goals and marketing strategy of the business. (www.bplans.com).

• PORTER’S FIVE FORCE ANALYSIS: It will help in identifying the sources of

competition in an industry or sector. Five forces analysis focuses on five key areas: the
threat of entry, the power of buyers, the power of suppliers, the threat of substitutes, and
competitive rivalry.
(Student Accountant, 2006

3. Results, analysis, conclusions and recommendations

Company History, Business & Profile

Lucky Cement came into existence in 1996 with a daily production capacity of 4200 Tons per
day, currently is an omnipotent cement plant of Pakistan, and rated amongst the few best Plants
in Asia.

With production facilities in Pezu (Production capacity: 13,000 Tons per day) as well as in
Karachi (Production capacity: 8000 Tons per day) it has the tendency to become the hub of
cement production in Asia.

In addition, Lucky Cement is aggressively pursuing to develop export markets for cement to
export bulk loose cement from Pakistan to the Gulf Countries, African Markets, and Far East
Region including Nepal & Sri Lanka. Considering sizeable exports potential, Lucky Cement has

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decided to increase the capacity of its Karachi Plant by addition of two more Production lines,
having capacity of 2.5 Million Tons per Annum. The expansion program is likely to be
completed by end 2008.

Lucky Cement Limited has been sponsored by Yunus Brothers Group (YB Group) which is
one of the largest business groups of the Country based in Karachi and has grown up remarkably
over the last 50 years. The YB Group is engaged in diversified manufacturing activities
including Textile, Spinning, Weaving, Processing, Finishing, Stitching and Power Generation.
(www.lucky-cement.com)

Overview of cement sector

Out of a total of 24 cement plants, currently 22 units are operative, 17 companies being listed on
the Karachi Stock Exchange.

The country, at present, has an installed capacity of producing 17.55 million tonnes of cement
per annum, mainly Portland cement. It is envisaged to increase installed capacity to 28.21
million tonnes per annum by 2008.The sector has the potential to export cement worth $1 billion
per year to Saudi Arabia, Central Asian States and other Middle Eastern countries.

Pakistan is fortunately rich in the deposits of limestone, clay and gypsum, which constitute basic
raw materials for manufacturing of cement. In spite of having abundant raw materials and rising
growth in demand of cement, only five cement factories were established during the initial thirty
years of independence, with aggregate capacity of 3.2 million tonnes. Consequently, Pakistan
had to import cement for a long period, which reached to a level of 1.3 million tonnes in the year
1981-82. Import of cement continued from 1971 to 1985. Its scarcity also hampered the
development process in the country. (www.fnetrade.com)

Pakistan’s cement market is divided into two distinct regions, north and south. “All Pakistan
Cement Manufacturer Association” APCMA is a trade association safeguarding the interest of
manufactures.

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Company market share and contribution in sector

LCL successfully has managed an overall market share of 19.16% of the industry for the period
under review. The domestic market share of LCL was 15.13% whereas LC L acquired 45.70% in
overall exports.

RATIO ANALYSIS

The ratios have been calculated and other quantitative financial data has been taken from Annual
Audited Financial Statements of LCL from 2005 to 2007. Competitor: D.G Khan Cement
Company Limited (DGKCCL) FY’07 financial statements have been used to compare with
financials of LCL.

APCMA members set cement prices with agreement through out the country. This sometime
objected as a cartel. Therefore before moving onward a brief but short overview of price
methodology is vital. Generally prices remain standardized; however sometimes the price
fluctuates due to cartel breakdown but this does not prevail for long. In return it brings together
every one again on platform of APCMA.
This trend can be easily traced out in FY-07 when after reaching highs of Rs. 430/bag cement
prices fell sharply during early FY-07. Average cement prices were Rs. 234/bag as on 17th May,
2007 as compared with Rs. 315/bag in Fy-06.

PROFITABILITY AND RETURN:

Ratio DGKCCL LCL LCL LCL

Y.E30/06/07 Y.E30/6/07 Y.E30/06/06 Y.E30/06/05
Turnover (Rs in Million) 6,420 12,522 7,985 3,980
Change in sales % -19.0 56.8 100.6 36.9
Operating profit to sales % 34.3 28.4 32.7 30.9
Gross profit to sales % 31.7 29.3 36.5 34.7
Pre-Tax profit to sales % 26.8 23.6 32.0 30.4
After-Tax profit to sales % 25.3 20.3 24.3 20.8
ROCE % 3.8 14.4 11.2 7.1
ROE % 4.8 27.2 27.4 16.1

(Source: Annual Reports 2007,2006,2005)

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A) Turnover Growth: - It can be further breakdown in to quantitative growth and price change.

PARTIULARS FY-2007 FY-2006 FY-2005

LCL QUNATATIVE SALES

Domestic Sales (Tones) 3,182,942 1,861,187 1,143,101

Export Sales (Tones) 1,457,049 334,864 277,268

Total Sales (Tones) 4,639,991 2,196,051 1,420,369

% GROWTH IN QUANTATIVE SALES 111.3% 54.6% 26.8%

AVERAGE PRICE PER TONE 2698.7 3635.9 2802.2

% GROWTH IN PRICE -25.8% 29.8% 7.9%

TOTAL INDUSTRIAL QUNATATIVE SALES

Domestic Sales (Tones) 21,034,278 16,833,814 14,788,174
Export Sales (Tones) 3,188,424 1,504,959 1,557,999
Total Industry Sales 24,222,702 18,338,773 16,346,173

% GRQWTH IN INDUSTRIAL SALES 32.1% 12.2% 20.0%

LCL SHARE IN INDUSTRY

Domestic- Share 15.1% 11.1% 7.7%
Export- Share 45.7% 22.3% 17.8%
Total industrial share 19.2% 12.0% 8.7%

FY-2007
There has been a robust growth of cement demand seen both in domestic and export markets
during the FY 2007. The industry also achieved a new level of dispatches of 24.22 mtpa against
the last year dispatches of 18.34 mtpa and registered an overall robust growth of 32.1% which is

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the highest in the history of Pakistan cement industry both in terms of percentage and volumetric
growth.
FY 2007 was a great milestone both for the company. LCL has made a land mark achievement
by making a record quantitative sale of 4.64 mtpa during the FY 2007 against the last year sales
of 2.20 mtpa and registered an overall tremendous growth of 111.3%.
Despite reduction in price by -25.8% as compared to last year where price increased by 29.8%,
LCL has made growth in turnover in monetary terms by 56.8% as compared to its competitor
DGKCCL with reduction in turnover by 19.0%.

FY-2006 and 2005

In FY 2006 there has been a tremendous sale growth in monetary terms i.e. 100.6% compared to
FY 2005 with 36.9% of LCL despite the quantitative sales growth stood at 54.6% in FY 2006
and 26.8% in FY 2005. This is due to large price increase by 29.8% as compared to only 7.9% in
FY 2005.
As far as industry is concerned its sales growth in FY 2006 is 12.2% which is lower than FY
2005 i.e. 20.0% this might be because of price increase in FY 2007 discouraging buyers to
postpone their projects due to large budget variances.

B) Operating profit Margin.

FY-2007
There has been drastic increase in operating income by Rs 629.3 million in FY 2007 as
compared with FY 2006 which is only Rs 203 thousands due to large gain from Excise duty
refundable of Rs 538.8 millions. Even then LCL operating profit margin falls to 28.4% in FY
2007, however in FY 2006 it was 32.7%. This happened because there has been large increase in
distribution cost by 381% in FY 2007. Large part of the distribution cost increment consists of
Exports Logistics and related charges, partly because of increase in exports and partly because of
increment in freight and cargo charges due to increased fuel charges.
DGKCCL has greater operating profit margin ratio with 34.3% than LCL in FY 2007, however
this ratio also decreased in FY 2007 as compared to FY 2006 it was 49.1% again this is because
of increment in distribution costs.

FY-2006-2005
In FY 2006 operating profit margin was 32.7% as compared with FY 2005 of 30.9%, however in
FY 2006 there is a reduction in Operating income i.e. Rs 203 thousands in FY 2006 and Rs 1.1
million in FY 2005.

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C) Gross profit Margin.

PARTICULAR S FY-20 07 FY-20 06 FY-200 5

LCL Q U NATATIVE SALES

Domestic Sales (Tones) 3,182,942 1,861,187 1,143,101
Export Sales (Tones) 1,457,049 334,864 277,268

Total Sales (Tones) 4,639,991 2,196,051 1,420,369

AVERAGE CO ST PER TO NE 1,906.62 2,310.42 1,830.92

FY 2007
GP margin has been declined to 29.3% mainly due to reduced sale prices. The cost per ton of
LCL reduced by 17.5% during the year under review because of economy of scale and efficiency
in fuel and power consumption in-spite of increase in the prices of coal and oil in the
international markets. The gross profit of LCL for FY 2007 registered a growth of 23.32% in
terms of value over last year because of volumetric growth in sales and reduction in cost of
production. DGKCCL has GP margin of 31.7% which is a bit higher than LCL which shows
DGKCCL also controlling its cost efficiently. However, higher sales volume growth of LCL
partially offset it.

FY 2006 and 2005

In FY 2006 GP margin of LCL was 36.5% which is much higher than FY 2007, this was due to
high sales prices plays an important role in increasing GP margin. Same trend showed in FY
2005 in which GP margin was 34.7%.

D) Pre and After Tax Margins

FY 2007
In FY 2007 Finance cost increased by 942% due to large increase in Mark-up on long term
finance and short term borrowings and reduce pre-tax profit margin to 23.6%. Current tax
charges increased by 58% due to increase in sales, however deferred tax for FY 2007 decreased
by -86.2% which brings after-tax profit margin to 20.3% there is no brief information available
about why deferred tax reduced drastically. DGKCCL has pre-tax profit margin of 26.8% in FY
2007 which is higher than LCL due very little increase in finance cost i.e. 3.8%. DGKCCL also
has higher after-tax profit margin of 25.3% because of reduced tax expense due to reduction in
sales.

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FY 2006 and 2005
Pre-tax profit margin was 32.0% and 30.4 in FY 2006 and FY 2005 respectively which is higher
than FY 2007 because finance costs are much lower as compared to FY2007. However there is
substantial amount of deferred tax in FY 2006 and FY 2005 as compared to FY 2007 which
brings after-tax profit margin to 24.4% and 20.8% for FY 2006 and FY 2005 respectively.

E) ROCE and ROE

FY-2007
In FY 2007 ROCE increased to 14.4% due to increase in profits and some reduction in long term
debt, there is no issuance of shares in this year. However ROE remains about the same as
previous years at 27.2%, only .2% lower than last year because, however there is an increase in
profits but reserves also increased, i.e. nominator and denominator both increased. DGKCCL has
ROCE and ROE at 3.8% and 4.8% respectively which is way lower than LCL, which shows
LCL giving much more return on its capital employed than DGKCCL.

FY-2006-2005
In FY 2006 ROCE and ROE showed increase 11.2% and 27.4% respectively as compared to FY
2005 with only 7.1% and 16.1% respectively due to boost in profits this causes nomitor to
increase thus increasing ROCE and ROE.

LIQUIDITY RATIO

DGKCCL LCL LCL LCL

Ratio
Y.E30/06/07 Y.E31/06/07 Y.E31/06/06 Y.E31/06/05
Current ratio (X) 2.60:1 0.85:1 0.94:1 0.63:1
Quick ratio (X) 2.56:1 0.74:1 0.85:1 0.57:1

(Source: Annual Reports 2007, 2006, 2005)

FY 2007
The liquidity stance assessed with respect to the current ratio, deteriorated during FY 2007 from
an already weak position in FY 2006. Trade debts have increased substantially in FY 2007.
Again this may reflect a change in the management's credit policy. The cash balances on the
other hand, have declined for the same period. A higher growth in current liabilities resulted in a
decline in its current ratio. One of the most significant reasons for this growth was an increase in
the short term borrowings of the company. Eliminating the closing stock, prepayment, spares and
focusing on near cash and receivables. This ratio shows how quickly a company can pay its
liabilities (Meigs & Meigs, 2005). Quick ratio should be 1:1; in case of LCL again it is lower
than ideal point and declined from last year. DGKCCL performed well in this ratio and both
current and quick ratio is above the ideal point, stock of DGKCCL contributes very little portion

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in current assets and because of this there is no significant difference between current and quick
ratio.

FY-2006-2005
In FY 2006 both current and quick ratio increased to 0.94:1 and 0.85:1 respectively as compared
to FY 2005 where both ratios were 0.63:1 and 0.57:1 respectively, in FY 2006 it shows that
company was improving its liquidity position but this trend does not shown in FY 2007.

ACTIVITY/EFFICIENCY RATIO

Ratio DGKCCL LCL LCL LCL

Y.E30/6/07 Y.E31/6/07 Y.E31/6/06 Y.E31/6/05
Total Assets Turnover
Net Interest Cover (X)
Return on total Assets

(Source: Annual Reports 2007, 2006, 2005)

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