Applied Financial Analysis

Final report
Ali Masood
Mohammad Saad Alamgir
Hafsa Ashfaq
Hamda Shahid
Talha Asif Patel

[Year]

Contents
Introduction ............................................................................................................................................ 3
Cement Industry of Pakistan ................................................................................................................... 3
Why we chose Cement industry and DG khan cement? ......................................................................... 3
Data collection methods ......................................................................................................................... 4
Research Methods and Analysis to be performed.................................................................................. 4
ANALYSIS ............................................................................................................................................. 5
Common Size Analysis ........................................................................................................................ 5
Balance Sheet .................................................................................................................................. 5
Profit and Loss analysis ................................................................................................................... 7
Production: ......................................................................................................................................... 9
TREND RATIO ANALYSIS ........................................................................................................... 10
Profitability ................................................................................................................................... 10
Liquidity........................................................................................................................................ 12
Acitivity ........................................................................................................................................ 13
Solvency........................................................................................................................................ 14
Conclusion .................................................................................................................................... 15
Adjustments for further analysis ...................................................................................................... 16
Capital Commitments: .................................................................................................................. 16
Operating Lease Classification Adjustment .................................................................................. 16
Borrowing Cost ............................................................................................................................. 18
Employee Benefits ........................................................................................................................ 19
Competitor Analysis .......................................................................................................................... 19
Valuation Ratios ................................................................................................................................ 24
Report Conclusion and Recommendation ............................................................................................ 26
APPENDIX .............................................................................................................................................. 27
Profit and Loss Adjusted ................................................................................................................... 27
Adjusted Balance Sheets ................................................................................................................... 27
Ratios Adjusted ................................................................................................................................. 30
Ratios Unadjusted ............................................................................................................................. 31
Sales Pro-forma ................................................................................................................................. 32

Introduction
DG Khan Cement Company Limited (DGKC) is a unit of Nishat Group. It is a producer and seller of ordinary
portland and sulphate-resistant cement. 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 programme of the government. (DGKC)
With a production capacity of 14,000 tons per day (4.200 million tons/annum), D.G. Khan Cement Company
Limited (DGKCC) is amongst the largest cement manufacturers of Pakistan. It has three cement plants: two
plants located at Dera Ghazi Khan and one at Khairpur District Chakwal. All the plants are based on the latest
Dry Process Technology.
It has a countrywide distribution network and its products are preferred on projects of national repute both
locally and internationally due to the unparalleled and consistent quality (DG khan Cement.)

Cement Industry of Pakistan

The cement industry is a highly important sector that is an essential indicator of the level of soci-economic
development. Throughout its history, the Cement industry of Pakistan has undergone various highs and lows.
The cement industry has shown a drastic progress since Independence with the number of cement companies
increasing from 4 at independence to 29 today. 26 of these companies are listed on the stock exchange.
Currently, the cement sector is approximately utilizing only 50% of its installed production capacity of 45
million tonnes. In recent years, the performance of the cement industry has been dismal with only a handful of
companies succeeding to make a profit while others are drowned in losses. This bleak situation can be traced to
various causes such as the low Public sector development, high cost of energy, heavy taxation, declining share
of the international market and foreign competition. (The contribution of cement industry in the economic
development of Pakistan)

Why we chose Cement industry and DG khan cement?

DG khan is one of the few companies making profits in the very recent quarters. Due to its size and importance
in the sector we have chosen this company as we believe it will provide us with useful insights into the workings
of the cement industry of Pakistan. We, through our financial analysis, want to highlight and understand the
reasons for the performance of the chosen company and the cement industry as a whole. We will analyse how
the stated factors that affected the cement sector influenced the financial performance of DKCL. Also, we want
to critically analyze the various ratios of the company and predict the future outlook from an investors point of
view. Furthermore, we will make a comparison in the performance of DGKC with that of Pioneer Cement to
identify the similarities and differences between the two companies.

Data collection methods

We based our analysis on the annual report of DG Khan Cement and its peer companies. Apart from the annual
report we used various articles written specifically on the cement industry in the various newspapers and online
journals. Another important source were the few research reports available online written by various securities
research companies on the cement industry of Pakistan. We looked into the analyst expectations and whether the
company successfully met or fell short of them. As we will be conducting a competitor analysis, we will
critically analyse the annual report of Pioneer cement and also consult a few personnel for the emerging trends.

Research Methods and Analysis to be performed

The primary method of research used to analyse DG Khan Cement is secondary research. Most of our analysis
will be based on the past financial data along with the data about stock prices. The focus of our project is to
perform a fundamental analysis of DG Khan Cement to be able to understand and assess the value of the
company.
Our analysis of the financial statements involves ratio analysis, common size analysis, trend analysis, vertical
analysis and horizontal analysis. Market ratios will be given special emphasis in our report as we try to link the
financial performance to the stock price. While doing our analysis the income statement will be split into above
the line and below the line items. From this analysis we will find an estimate of the recurring income and cash
flow which we can use in determining the future outlook of the company. We will recalculate the ratios from an
analysts perspective after the necessary adjustments in the financial statements have been made. The ratios will
then be compared across time for a trend analysis to measure the changes in the companys financial
performance, liquidity, solvency and utilization of assets. A cross sectional analysis will also be done by
comparing DG KHANs ratios with its peer company Pioneer Cement. This cross sectional analysis will help us
differentiate between the changes in the ratios caused by the market related factors and the firm specific factors.
Once the ratios will highlight the areas of concern we will dig in deeper to find reasons for the concerns spotted.

ANALYSIS

Common Size Analysis

Balance Sheet
Non-Current Assets
NON-CURRENT ASSETS

2012

2011

2010

2009

2008

Property, plant and equipment

53.64%

52.28%

53.79%

56.99%

44.19%

52%

Assets subject to finance lease

0.00%

0.00%

0.00%

0.00%

0.01%

0%

Capital work in progress

0.15%

0.00%

0.99%

4.10%

4.79%

2%

Investments

9.60%

10.58%

9.98%

7.43%

13.07%

10%

Long term loans, advances and deposits

0.24%

0.27%

0.34%

0.39%

1.01%

0%

63.62%

63.13%

65.10%

68.90%

63.07%

65%

Total non-current

Mean

Analysing the Non-current assets as a percentage of total assets it can be seen that on an average 65% of the
companys assets are Non-current with Property Plant and equipment comprising of nearly 52% of the total
assets. This is in align with the demands of the industry in which DGKL is operating. Cement industry is
inherently capital intensive and investment in Property, Plant and Equipment is required to maintain and
improve capacity. As per policy, the company has invested in latest and upgraded manufacturing equipment
which can be seen from the increase in their year wise capitalisation. The vertical and horizontal analysis hence
indicates that the investment in Non-current assets and specifically Property, Plant and equipment have shown
an increasing trend:
Horizontal Analysis
NON-CURRENT ASSETS

2012

2011

2010

2009

2008

Property, plant and equipment

1.18

1.13

1.10

1.06

1.00

CURRENT ASSETS VERTICAL ANALYSIS

2011

2010

2009

2008

Mean

2012

Stores, spares and loose tools

8.16%

7.13%

6.41%

6.87%

4.42%

7%

Stock-in-trade

1.88%

1.73%

2.20%

2.11%

0.86%

2%

Trade debts

0.63%

0.92%

0.65%

1.20%

0.70%

1%

Investments

21.95%

24.40%

22.83%

18.22%

29.01%

23%

2.91%

2.29%

2.31%

2.13%

1.50%

2%

0.85%

0.40%

0.49%

0.57%

0.44%

1%

36.38%

36.87%

34.90%

31.10%

36.93%

35%

2012

2011

2010

2009

2008

Stores, spares and loose tools

1.80

1.54

1.31

1.28

1.00

Stock-in-trade

2.14

1.93

2.33

2.02

1.00

Trade debts

0.87

1.25

0.83

1.40

1.00

Investments

0.74

0.80

0.71

0.52

1.00

Advances, deposits, prepayments and other

1.89

1.45

1.39

1.16

1.00

Cash and bank balances

1.89

0.87

1.02

1.08

1.00

Total Current Assets

0.96

0.95

0.85

0.69

1.00

Advances, deposits, prepayments and other

receivables
Cash and bank balances
Total Current Assets
CURRENT ASSETS HORIZONTAL

Mean

ANALYSIS

receivables

Current Assets, on an average, account for 35% of the total Assets of the firm. An interesting insight can be
found about the cement industry by looking at the Trade Debts that only constitute to about 1% of the Total
Assets of the firm. This is consistent with the general workings of the Cement Sector in which Sales are
customarily not made on credit.
Investments, on the other hand, make the most substantial part of the Current Assets and account for about 23%
of the total assets. This line item represents the investment in Available for Sale securities and Related Parties.
These Investments have remained fairly stable in value in recent years with the value of investment before fair
value adjustment being Rs 479,066 in both 2012 and 2011. However, the cumulative fair value gain accounts for
the differences in the value over these two years. The increase and decrease in value of these investments can be
attributed to fair Value changes of the investments. Through horizontal analysis it can be seen that there was a
significant drop in the investments from 2008 to 2009. This can be attributed to the liquidating of the investment

by the company in order to provide for the need of cash as the cement industry as a whole was facing a downfall
in 2008-2009.

Profit and Loss analysis

2012.00

2011.00

2010.00

2009.00

2008.00

Sales net

1.84

1.49

1.31

1.45

1.00

Cost of sales

1.47

1.35

1.29

1.17

1.00

Gross profit

3.92

2.29

1.41

2.97

1.00

2012

2011

2010

2009

2008

Sales net

100.00%

100.00%

100.00%

100.00%

100.00%

Cost of sales

-67.29%

-76.40%

-83.38%

-68.51%

-84.61%

Gross profit

32.71%

23.60%

16.62%

31.49%

15.39%

Horizontal Analysis

Vertical Analysis

The growth in the profitability of the company can be attributed to the significant increase in cement prices in
the FY 2012. According to the Management Discussion, there was a significant growth in local sales dispatches
which remained at 8.84 % as compared to negative growth of 6.64% last year. However negative growth trend
continue in export dispatched which remained at negative 9.12% as compared to negative 11.47% in 2011.

Due to the rising Sales and fuel and other input prices the cost of production have increased in comparison to the
base year. However, in 2012 the cost of sales as a proportion of Sales Revenue have decreased. This can be

attributed to the Budget announcement by the government which implemented policies to help the cement
sector. These policies include:
1) Government introduced a scheme whereby FED was reduced from Rs700 per ton to Rs500 per ton and
eventually has to be phased out till the end of June 2014.
2) Reduction of 10pc duty on rubber scrap

Production:
2012

2011

2010

2009

2008

PRODUCTION Data

2007

(M.Tons)

Compounded
annual 5 year
growth rate of
clinker production
Clinker
Percentage growth

3,773,948

3,738,404

4,684,379

3,946,101

4,142,764

0.95

(20.19)

18.71

(4.75)

70.24

155.09

153.63

192.50

162.16

170.24

is 9.17%

2,433,428

Relative Production to the

base year 2007

Compounded
annual 5 year
growth rate of
Cement production
Cement
Percentage growth

4,004,458

4,176,733

4,908,593

3,877,296

4,227,767

(4.12)

(14.91)

26.60

(8.29)

79.99

170.49

177.82

208.98

165.07

179.99

2,348,829

is 11.26%

Relative Production to the

base year 2007

Clinker production shows a 55% increase in production in 2012 as compared to the base year 2007. However, a
deeper insight reveals that it has actually decreased after 2008. The major boom in production occurred in 2008
in which the production increased by 70% compared to the previous year. In 2009, production was lower than
2008. In 2010, there was again a substantial growth in production (18.7% as compared to previous year) but
2011 showed a heavy decrease in production. In 2012, clinker production remained fairly the same as in 2011.
Cement production shows a very similar trend as of Clinker production. There was a major boost in production
in 2008. In 2009, like Clinker production, Cement production decreased. 2010 again showed a substantial
growth in production. In 2011, there was a decrease in production of around 15% as compared to the cement
production in the previous year. In 2012, production as compared to the previous year decreased slightly (4%).

TREND RATIO ANALYSIS

Profitability
35.00%
30.00%
25.00%
Net profit margin
20.00%
15.00%

Operating profit
margin

10.00%

Gross profit margin

5.00%
0.00%
2012

2011

2010

2009

2008

-5.00%

The fact that the cement industry is out of its dark phase is evident through the ratios we have
calculated. Overall the profitability ratios follow a similar trend. Both gross profit margin and
operating profit margin increased from 2008-2009 then decreased for a year. The main reason for this
decline was the fact that input prices were rising exponentially and the companies were facing
decreased demands especially exports. After 2010, these both follow a steep upward trend which can
be expected to continue due to the increase in overall domestic demand of the cement sector in
Pakistan. However, rising energy prices pose a serious threat to these margins in the future. As shown
by the graph net profit margin is following a similar trend though less pronounced. The steeper
increase in net profit margin can be explained by the significant reduction in finance costs in 2012.
15.00%
10.00%
ROA

5.00%

Operating ROA

0.00%
2012

2011

2010

2009

2008

-5.00%

We have divided the ROA into composite ROA, which takes into account other operating income and
expenses, and operating ROA which is the ROA generated through pure operations of the company.
Both these ratios mirror each other expect for a few minor differences. At all points operating ROA is
greater than composite ROA, which is expected, due to the inclusion of other expenses in composite
ROA. Both these ratios initially increase from 2008-09, then decrease for a year and then continue to
10

increase. The initial rise can be explained by increase in profits from 2008-09 and also by a large
decrease in investment by 7,296 Million causing total assets to decrease significantly. In 2010 the
sales fell so the profit fell and hence both the ROA decreased. Interestingly from 2010-2011 operating
ROA increased whereas composite ROA decreased. One of the reasons for this could be the fact that
the tax more than tripled due to various minimum tax laws. From 2011 onwards both the ROA and
composite ROA follow a steep rise which is expected to continue.
200.00%

150.00%

Tax burden
100.00%

Interest Burden
EBIT Margin
Financial Leverage
Asset Turnover

50.00%

ROE

0.00%
2012

2011

2010

2009

2008

-50.00%

DuPont analysis provides us with insights into the factors driving the ROE. On its own ROE seems to
be almost flat over the period with an increase in 2012. Using the 5 step ROE decomposition, we can
see that EBIT margin and Asset turnover are relatively stable over the period.
The main changes are in Tax burden and interest burden. The tax burden initially rises for the first
year, remains constant for a year, then falls steeply in 2011 to rise steeply in 2012. These fluctuations
are due to the fact that the company was facing troubled years and was paying minimum tax. The tax
burden was high as the company was unable to recognise all of the extra tax as a deferred tax asset
due to the expectation that not all will reverse. This significantly increased the tax expense compared
to income. Therefore, initially the tax burden was low. In 2012 it has made profits and has started to
get tax credits decreasing the tax burden significantly and causing the graph to rise steeply. Interest
burden has consistently increased over the period as shown from the graph. This is due to the decrease
11

in interest expense over the period. Retained earnings and equity is increasing at a faster rate than
total assets therefore the financial leverage is falling. This falling leverage reduces the volatility of the
companys earnings which is a positive sign.
EBIT margin and Asset turnover as relatively stable over the period. From 2008-2011 the EBIT
margin is very stable around 14%. It almost doubles to 28% in the 2012 due to a large decrease in
COGS and an increase in price. Asset turnover is nearly constant. These two ratios show that the
company has continued to operate efficiently with very little change in operations.
Overall, the outlook for ROE is positive. The financial risk of the company has decreased and the
ROE has increased from sustainable good factors.

Liquidity
1.80
1.60
1.40
1.20
1.00
0.80
0.60
0.40
0.20
0.00

Current ratio
Acid test ratio

2012

2011

2010

2009

2008

Both the current ratio and the acid test ratio follow a similar pattern. Both decrease initially for a year
and then steadily increase from 2009 onwards. The initial decrease can be explained by the large
decrease in investments of 7,296 million. The quick ratio is above the 1 for 1 threshold. The current
ratio is around 2 for 1 threshold. These ratios suggest the liquidity position of the company is not
something to be worried about and is improving over time.

12

Acitivity
Activity ratios highlight the asset utilization and efficiency of the company. They indicate how
efficiently the company is using its assets.
1.20
1.00
0.80

Total assets turnover

0.60
Fixed assets
turnover

0.40
0.20
0.00
2012

2011

2010

2009

2008

Total asset turnover and fixed assets follow a similar pattern. They both decrease initially due to
decrease in investments and then rise slowly over 4 years. Fixed assets turnover is higher than total
assets turnover at all points due to a smaller numerator. These ratios suggest that the turnover is
relatively stable.

Days sales in
receivables (DSO)

2.00

2012

0.00

No. of
days to
inventory
2008

4.00

No. of days
in
receivables
(DSO)

2009

6.00

2010

8.00

30.00
25.00
20.00
15.00
10.00
5.00
0.00
2011

10.00

Days inventory on
hand

The DSO increases from 2008-2010 and then decreases. It is pretty low around 6 days showing that
the company does not make credit sales consistent with the practises of the cement industry in
Pakistan. Initially, the inventory days increase from 2008-2010 after which they start to decline.
Together these two days add together to make operating cycle which is low for this company showing
good utilization.

13

Solvency
100.00%
90.00%
80.00%
70.00%
60.00%

Debt-to-Asset Ratio

50.00%

Debt-to-Capital Ratio

40.00%

Debt to equity ratio

30.00%
20.00%
10.00%
0.00%
2012

2011

2010

2009

2008

The graphs of Debt-to-asset ratio, Debt-to-Capital ratio and Debt-to-equity ratio mirror each other.
Debt-to-Equity and Debt-to-Capital have a more pronounced movement than Debt-to-Asset ratio.
Overall, all three of these ratios initially increase from 2008-2009 showing lower solvency but
decrease steadily 2009 onwards showing improved solvency. The overall debt has decreased due to
better cash flow planning, repayment of long term loans and efficient utilization of export refinance
scheme.
4.00
3.50
3.00
2.50
2.00

Interest coverage ratio

1.50

CFO coverage ratio

1.00
0.50
0.00
-0.50

2012

2011

2010

2009

2008

-1.00

Both Coverage ratios follow a similar pattern. Overall, they increase from 2008-2012 with a slight
decrease from 2010-2011 fiscal year due to a higher interest cost with a similar EBIT.

14

Looking at the solvency ratios again we can see that as with other ratios, the overall position of the
company is improving.
Conclusion
Overall all the ratios seem to indicate the fact that the company on a whole is towards recovery
improving its financial performance. The trends of the ratios highlight the improvement of the cement
sector of Pakistan as a whole. This is consistent with the world manufacturing sector starting to
improve after being severely affected by the global recession.

15

Adjustments for further analysis

To gauge the true economic position and performance of the company we made adjustments to the financial
statements reported by the management. The audited statements are free from material misstatements from an
accounting perspective but not from an economic perspective. After the adjustments, the ratios are re-calculated
and analysis is performed again.

Capital Commitments:
The company has contract commitments for the purpose of capital expenditure in the future. In the past 2 years
the company has had the following contracts for capital expenditure:
2012: 156.170 Million
2011; 113.639 Million
2010: 115.335 Million
The capital commitments will be adjusted according to their degree of risk. These contractual commitments
represent a probable future outflow of economic resources as well as an increase in fixed assets. Therefore, these
capital commitments have been added in the fixed assets and liabilities have been increased by the amount
owing to these expenditures as cash in 2011 was insufficient to provide for the commitment and maintain the
liquidity of the business.

On the other hand: Letters of credit when analyzed according to their risk exposure were not included in the
analysis as it is highly unlikely that these commitments will default.

Operating Lease Classification Adjustment

The company is using operating leases as a source of off balance sheet financing. We, as analysts, are interested
in bringing everything that is related to the financials of the company on its statements. So instead of expensing
the operating lease rentals we will recognize a liability for them and treat them exactly as a finance lease. We
started from the disclosure of the operating lease in 2010 for valuing the lease.

>Not later than 1 year

331

>Later than 1 year but not later than 5 years

1,488

>Later than 5years

6,833

8652

16

To convert this lease to finance lease first we estimated the total duration of the operating lease. It came out to
be 26 years ((6833/331)+5). No finance lease was present so we were unable to find an interest rate implicit for
the leases. After thorough analysis of different rates we estimated the borrowing cost to be 10%.

Balance sheet effect

The present value of the payments was taken which amounts to 3.032 million. Therefore, we will increase the
assets and increase the liability by 3.032 million in 2010. This is then treated and depreciated as a finance lease
for the 3 years under analysis:
Liability amortization schedule:
Interest Expense

Payment

Principal repayment

Closing

28

3,004

Opening
331

Y0-2010
3,032

303

3,004

300

331

31

2,974

2,974

297

331

34

2,940

Y1-2011

Y2-2012

Income statement
From I/S 0.331 million charged as operating expense will be added back as we are reclassifying it as a finance
lease. On the value of 3.032 million of liability an interest expense of 0.3023 million will be recognized in 2010.
Depreciation of 0.147 million will be charged to the Operating Income in 2010.
Income Statement Effect

Interest expense added back

Interest expense Charged

Increase in depreciation expense

Net effect on Income

2010

2011

2012

331

331

331

-303
(300)

(297)

(146.30)

(144.82)

-148

-120

-116

-111

Cash Flow
From operating cash flow 0.331 million will be added back to remove the cash outflow charged due to operating
lease. The interest of 0.303 million will be treated as an outflow from CFO and the difference between interest
expense and payment i.e. 0.028 million will be taken to CFF:

17

Cash Flow From Operating:

2,010

2011

2,012

331

331

331

(303)

(300)

(297)

28

31

34

(28)

(31)

(34)

Add Back Previous rental expense

Subtract new interest expense on finance lease

Net Effect on CFO

Cash Flow from Financing:

Principal Repayment

(Due to unavailability of information, tax effects have been ignored)

Borrowing Cost
Borrowing costs of Rs 6.014 Million relevant to the construction of the Plant and equipment has been included
in the cost of the asset during the year 2012.An approximate depreciation charge of 4.87%(Average of 4.764.98) per annum is applicable on the qualifying asset. For analytical purpose all of this borrowing cost has been
expensed in 2012. For carrying this adjustment the following steps have been performed:
1) Reduce Property Plant and equipment by 6.014 Million to take out Borrowing Cost
2) Increase the Book Value of Property Plant and Equipment by the depreciation deducted for the
capitalized borrowing cost= 0.293 Million
3) The Financing Cost in the income statement has been increased by 6.014 Million
4) The effect of the depreciation has been removed from the following components according to the ratio
of depreciation allocation as shown in the following table
Allocation to

Percentage Allocation

Adjustment

Cost of Sales

98.75%

289

Administrative Expenses

1.06%

Selling and Distribution expenses

0.19%

5) CFI has been increased by the amount of Finance cost of 6.014 million and CFO has been decreased by
this amount.
The expensing of borrowing cost will particularly affect the interest coverage ratio and will be analyzed in the
next phase.

The tax implications for these adjustments have been ignored due to insufficient data about the computation of
the taxable income and the applicable tax laws.

18

Employee Benefits

The company has both a defined contribution plan and defined benefit plan. Due to its complex nature pension
expense requires various analytical adjustments. We started off by finding the economic pension expense for the
year.
Economic Expense

2012

2011

2010

Current service cost

21,783

21,409

15,583

Funded Status

PBO
Interest Cost

17,228

8,784

35

38,976

30,188

22,303

(FV of assets)
Economic Expense

2011

2010

167,467

127,935

75,264

47,857

39,931

14,515

82

332

394

215,242

167,534

89,385

6,725
unamortized losses

(Actual return)

2012

Funded Status

Balance Sheet
The balance sheet in each year will be adjusted so that it represents the funded status by removing the smoothing
adjustments allowed under IRFS. In all the 3 years the company had reported a liability lower than the funded
status. So in-order to increase the liability the OCI was debited and a deferred tax asset was recognized. The
following entries will be made in each of the years presented:
2012

2011

OCI

62,214

DTA

33,500

Liability

95,714

2010

OCI

51,910

DTA

27,951

Liability

79,861

OCI

18,660

DTA

10,047

Liability

28,707

Income Statement
We begin with reclassifying the pension expense into operating expenses and interest cost. Firstly, we will add
back the pension expense calculated by the company. In the operating expenses we will take current service cost
and we will classify the interest cost under the interest expense head.

Cash flow effect

In all the years the contribution is less than the economic pension expense. The excess will be treated like
borrowing and will increase cash flow from financing activities. Following are the increase in CFF:

Cash paid
CFF Increase

(20,205)

(19,793)

(11,368)

6,570

3,638

3,827

Competitor Analysis
DG Cement being one of the leading cement producers faces competition from many other firms. We,
for comparison purposes have chose Pioneer Cement as its prime competitor. Both the firms have
similar sales and cost drivers hence we can classify them in the same peer group for our analysis.
19

Pioneer Cement was incorporated and listed on the stock exchange in the year 1986. Although its total
market share is smaller than DG Cements market share, but still its financials provide a useful basis
for competitor analysis.
In our competitor analysis we have pre dominantly focused on the ratio comparisons for both the
firms. As they are both operating on different scales the ratio analysis will remove the affects of firm
size and make our analysis more objective.
The first ratio that we have chosen for comparison is the inventory turnover ratio. This will tell us
about the efficiency of the operations as well as form a part of the comparison of liquidity positions.
Both the firms have experienced a declining trend in the inventory turnover ratio. The ratio for
Pioneer started at a higher level but both of them converged to an almost equal value in the year 2012
which shows that the decline in the ratio for Pioneer was much greater than that of DG Cement of the
period under observation. . This fact is exhibited in the graph below. The dip in the inventory turnover
for DG khan was over in the year 2010 and over the past two years it has seen an improvement in this
ratio which shows that it is doing better inventory management than Pioneer and the ratio is expected
to exceed Pioneer over the year 2013. This shows improving efficiency for DG as well as better
liquidity prospects as the days of inventory in hand will decline.
50.00
40.00

Inventory
turnover
Pioneer

30.00
20.00

Inventory
turnover

10.00
0.00
2012 2011 2010 2009 2008

The next ratio that we will analyze is the receivables turnovers. This ratio is shown graphically in the
figure below and exhibits the companys ability to turn its receivables into cash. It is an important
ratio for efficiency and liquidity analysis of both Pioneer and DG Cement. After declining in the first
two years the ratio has had a sharp spike in the last three years for Pioneer cement while on the other
hand it has remained relatively stable for DG cement. The receivable turnover ratio for DG shows that
the company has on average taken around 6 days to convert its debtors into cash while on the other
hand Pioneer after the sharp spike is converting average receivables into cash in less than 2 days
which is pretty low as compared to the industry standards. What we can say that both companies are
maintaining relatively high inventory turnover ratios which show good cash management and efficient
20

use of resources but it is having an adverse impact on the sales for both of them. Relaxation given in
credit terms as per the industry norms can result in a rise in sales and the overall profits.
300.00
250.00
Receivables
turnover

200.00
150.00

Receivables
turnover
pioneer

100.00
50.00
0.00
2012 2011 2010 2009 2008

Another important ratio with regard to a companys cash management and efficient resource
utilization is the creditor turnover ratio. It shows how quickly a firm pays its creditors. The creditor
turnover ratio has remained relatively consistent for Pioneer at around 6 which means that it takes
around 60 days on average to pay its creditors while DG cement has seen a decline in the ratio over
the past 5 years and is currently paying its creditors 8 times which means on average 45 days credit
period is availed by DG. Solely looking at this ratio we can say that Pioneer in doing better cash
management as it is delaying cash outflows as compared to DG but this can cast an adverse impact on
the companys goodwill in the market and the ease with which it can get trade credit in future.

18.00
16.00
14.00
12.00
10.00
8.00
6.00
4.00
2.00
0.00

Creditors
turnover
Creditors
turnover
pioneer
2012 2011 2010 20092008

With the help of the three ratios discussed above we can reflect on the cash conversion cycle of both
the companies. At present Pioneer cement has a smaller cash conversion cycle. The inventory
turnover is the same, the receivable turnover is higher for Pioneer and the creditor turnover is lower
for Pioneer. So cash enters Pioneer more quickly and the outflows are delayed as compared to DG
which shows a better cash conversion cycle for Pioneer Cement.

21

A ratio without which the liquidity analysis of any company will be incomplete is the current ratio. It
shows a relationship between the current assets and liabilities of a company. This ratio for both
Pioneer and DG Cement is exhibited below. Pioneers current ratio has increased from around 0.25 in
2008 to 0.45 in the year 2012 while on the other hand after facing a dip in the ratio in the year 2009
DGs current ratio has been consistently rising. Pioneers ratio shows that the companys current
assets are not even half of its current liabilities, showing a negative working capital. This shows a
poor liquidity position for Pioneer. While on the other hand DGs liquidity position is much better.
With an exception of the year 2009 DG has shown a greater than 1 current ratio thorough out, which
shows a positive working capital for the company. The current ratio at present is close to 1.5 the
management would ideally want to improve it to 2 and then maintain that level in the coming. But still
at present DG is not facing a liquidity crisis like Pioneer cement.
2.00
1.50
Current ratio
1.00
Current ratio
pioneer

0.50
0.00
2012 2011 2010 2009 2008

The next ratio which will form a part of our competitor analysis is the total assets turnover ratio. This
efficiency measure shows sales as a ratio of the companys total assets. An analysis of this ratio can
tell us how well a company is using its total assets to generate revenue. This ratio has improved for
Pioneer cement from 50 percent in the year 2008 to 65 percent in the year 2012. While for DG it
declined from 50 percent in the year 2008 to 40 percent in the year 2010 and then improved to 45
percent in the year 2012. Both the companies are showing a positive trend with regard to this ratio but
pioneer is doing much better at present. Although the turnover has been relatively stable in fact it has
shown an increasing trend in the recent years for DG the decline in the ratio is due to the increase in
investment in assets for the company.

22

0.80
Total assets
turnover

0.60
0.40

Total assets
turnover
pioneer

0.20
0.00
2012 2011 2010 2009 2008

Moving on to the profitability analysis we have a look at the net profit margins for both the forms.
This ratio is a very important profitability measure and shows that what proportion of the companys
sales is converted into profits after meeting all the expenses. In the graph below the red line shows the
net profit margin for Pioneer cement. The company was making a net loss in the year 2008 which
improved to a small positive margin in the year 2009 but dipped again to the lowest point over the 5
year period in the year 2010. Since then the net profit margin for pioneer I showing a positive trend
and has improved to 13 percent in the year 2012. On the other hand over the same time horizon the
net profit margin for DG started from a small negative figure in the year 2008 then improved to a
small positive figure in the year 2009, dipping close to 0 again in 2011. But over the past one year it
has improved many folds which is indeed a positive trend. The decline in the net profit margins can be
explained by increasing input costs especially rising fuel cost and falling export demand around the
year 2010. The improvement in the ratio over the last year can be attributed to a decline in the
financing costs.
20.00%
10.00%

Net profit
margin

0.00%
2012 2011 2010 2009 2008
-10.00%
-20.00%

Net profit /
(loss) after tax
to sales

-30.00%

23

Valuation Ratios
DG Cement ( Fig 1):
100.00
Basic EPS Rs.

50.00
0.00
-50.00

2012 2011 2010 2009 2008

Price/BV per
Share Rs.

-100.00
Price / earning
ratio (after tax)
Times

-150.00
-200.00
-250.00
Pioneer Cement(Fig 2):
100.00
80.00

Basic EPS

60.00
40.00

Price/BV per
Share

20.00
0.00
-20.00

2012 2011 2010 2009 2008

Price / earning
ratio (after tax)

-40.00

The figure 1 illustrated above shows a plot of the valuation ratios of DG Khan Cement. The price earnings ratio
due to the negative earnings of the company in the year 2008 was pretty much useless for valuation purposes.
This however changed when the company was able to generate positive earnings in the year 2009 and the
positive trend carried on till 2011 when the ratio hit the highest point over this time horizon, dipping again in
2012. In order to make more sense of this ratio we will compare it to the Pioneer cements ratio illustrated on
figure 2. Considering the fact that both Pioneer and DG are peer companies we can use the PE ratio to see how
they are priced in the market. Throughout the period Pioneer cements price earning multiple was greater than
that of DG. We can draw two hypotheses from this, although we cannot say with utmost certainty, that in the
eyes of the investors the trend is going to be bullish for Pioneer and on the other hand we can say that Pioneers
stock is overvalued.

24

The basic EPS for DG Cement has remained consistently close to zero from years 2008 to 2011 but has spiked
to 9.38 in the year 2012 which shows a positive trend. Pioneer Cement has shown has had similar EPS figures
from year 2008-2011 but its EPS failed to show a positive in the last year too. Negative or very low positive
EPS can be attributed to poor market conditions faced by both the companies. Major problems faced by both
the companies were rising fuel costs, falling export demand and falling local demand due to a decline in
development activities.
Another important valuation measure is the Price to Book value ratio which is shown in the graphs plotted
above for both the companies. The price to book value ratio has remained relatively constant for both the firms
and has had only small deviations around the 0.5 mark. This price to book value shows that the share price for
both the firms is close to half of its book value. A low price to earnings ratio for both the companies reflects
their poor earnings performance over the past years, they have the assets but have been earning poor returns on
them hence their shares are not high on demand in the market. This ratio can be turned around if the companies
start giving positive earnings results to the market and start beating the markets expectations consistently.

DG Khan (Fig 3):

30.00
20.00

Price/Cash
Flow per Share

10.00
0.00
-10.00

2012 2011 2010 2009 2008

-20.00

Retention
RATE
Sustainable
Growth Rate

-30.00
Pioneer Cement (Fig 4):

25

15.00
10.00
Cash Flow per
Share

5.00
0.00
2012 2011 2010 2009 2008
-5.00
-10.00

Retention
RATE
Sustainable
Growth Rate

-15.00
Figures 3 and 4 shed further light on the valuation ratios of both the firms. The retention rate for both the firms
has remained constant at 1 throughout the period with an exception of year 2012 for DG cement in which it
dropped to 0.84. This shows that both the companies have been retaining all the income and havent paid
dividends. This is partly due to the negative earning in the earlier years. Generally the low dividend paying
companies retain funds to convert them into growth but this has not been the case for pioneer cement. Despite
retention of all the earnings it has shown negative growth for the period 2008-2011, this trend however changed
in 2012 when the sustainable growth rate turned positive. The negative sustainable growth rate has been mainly
due to negative earnings in most of the years in the time horizon under analysis. DG Cement on the other hand
has shown a sustainable growth close to zero which improved to around 10 percent in 2012. This shows that
although DGs earnings were positive hence the sustainable growth rate was positive but it was so low that the
company cannot reasonably expect to fund growth with internal funding. The trend has improved in the year
2012 when DG paid a 16 percent dividend as well as showed a positive sustainable growth rate of around 10. As
the cement industry improves we can expect both of the companies to show a positive trend with regard to
sustainable growth.

Report Conclusion and Recommendation

As discussed throughout the report, the cement sector of Pakistan is on the verge of a recovery. Overall, the
manufacturing sector is experiencing exponential growth as the world comes out of recession. Particularly in
Pakistan the prospects of cement industry as a whole are expected to improve further after the elections in 2013.
Being a major company in the cement industry DG cement will enjoy the increased sales of the cement industry.
Using our pro-forma profit and loss statement we estimate the earning per share to be around 11.23. Using the
price multiples approach the stock price comes around 55 which is a 20% return. All ratios suggest the company
is improving and coming out of its dark phase. Therefore, it is our recommendation to buy this stock as the
graph of this company has only one way to go and that is up.

26

2012

2011

2010

Adjusted Balance Sheets

APPENDIX
Profit and Loss Adjusted
Sales - net
Cost of sales

W2, W3

Gross profit

2012

2011

2010

22,949,853

18,577,198

16,275,354

(15,442,952)

(14,192,373)

(13,570,140)

7,506,901

4,384,825

2,705,214

(267,703)

(211,364)

(172,438)

(2,202,900)

(2,470,599)

(994,418)

(500,835)

(37,964)

(189,015)

W1

1,187,971

1,134,135

911,677

Profit from operations

W1,W3

5,743,398

2,689,699

2,268,709

Finance cost

W1,W2,W3

(1,693,992)

(2,087,899)

(1,909,457)

4,049,405

601,800

359,252

55,652

(430,231)

(125,381)

4,105,057

171,569

233,871

9.37

0.39

0.64

Administrative expenses

W2, W3

Selling and distribution expenses

W2

Other operating expenses

Other operating income

(118,836)

Impairment on investment

Share of loss of associate

Profit before tax
Taxation
Profit for the year
Earnings per share - basic and diluted

27

2012

2011

2010

EQUITY AND LIABILITIES

CAPITAL AND RESERVES
Authorised capital
950,000,000 (2009: 950,000,000) ordinary shares of Rs 10
each
50,000,000 (2009: 50,000,000) preference shares of Rs 10
each

9,500,000

9,500,000

9,500,000

500,000

500,000

500,000

10,000,000
4,381,191
23,500,398
4,981,108

10,000,000
4,381,191
24,905,471
878,711

10,000,000
3,650,993
22,141,817
707,750

32,862,697

30,165,373

26,500,560

4,788,193
68,355
280,830
1,632,569

4,997,192
70,893
219,074
1,679,935

5,207,846
81,138
132,736
1,455,913

6,769,947

6,967,093

6,877,633

2,108,894
162,931
6,733,467
2,165,561
35,090

1,674,226
284,511
8,691,982
2,001,566
35,090

1,679,749
346,425
9,585,642
2,139,283
35,090

11,205,943

12,687,375

13,786,189

50,838,587

49,819,842

47,164,382

26,099,024
2,974

Long term loans, advances and deposits

27,336,175
2,940
73,808
4,864,945
120,342

5,259,416
133,219

25,422,637
3,004
465,650
4,696,922
158,677

Total non-current

32,398,210

31,494,633

30,746,890

Cash and bank balances

4,137,262
954,645
317,970
11,126,051
1,476,008
428,441

3,543,034
862,141
459,300
12,126,349
1,136,564
197,821

3,017,742
1,036,876
303,949
10,740,972
1,087,161
230,792

Total Current Assets

18,440,377

18,325,209

16,417,492

50,838,587

49,819,842

47,164,382

Issued, subscribed and paid up capital

Reserves
Accumulated profit
NON-CURRENT LIABILITIES
Long term finances
Long term deposits
Retirement and other benefits
Deferred taxation

W1
W2

W3, W4
W1
W1

CURRENT LIABILITIES
Trade and other payables
Accrued markup
Short term borrowing - secured
Current portion of non-current liabilities
Provision for taxation

Total equity and liabilities

ASSETS
NON-CURRENT ASSETS
Property, plant and equipment

W2, W4

Assets subject to finance lease

W3

Capital work in progress

Investments

CURRENT ASSETS
Stores, spares and loose tools
Stock-in-trade
Trade debts
Investments
Advances, deposits, prepayments and other receivables

28

Cash generated from operations

Finance cost paid
Retirement and other benefits paid
Taxes paid
Net increase/ (decrease) in long term deposits
Net cash generated from operating activities

W3

6,162,821

2,826,095

3,194,627

(1,792,708)

(2,113,592)

(2,088,107)

(20,205)

(19,793)

(11,368)

(335,702)

(312,120)

(260,492)

(2,538)

(10,245)

7,373

4,011,668

370,345

842,005

(2,751,451)

(1,672,612)

(1,079,494)

30,300

39,439

Cash flows from investing activities

Capital expenditure including purchase of property, plant and equipment
Proceeds from sale of property, plant and equipment

16,785

Investments - net
Net decrease in long term loans,advances and deposits
Dividend received
Interest received
Net cash used in investing activities

(249,445)
12,877

23,693

8,489

1,058,707

951,354

766,398

52,735

42,146

2,555

(1,596,832)

(615,980)

(534,712)

1,460,398

1,216,998

Cash flows from financing activities

Proceeds from issuance of share capital
Proceeds from long term finances

1,906,382

1,850,000

3,050,000

Repayment of long term finances

(2,132,083)

(2,204,073)

(5,104,411)

Repayment of liabilities against assets subject to finance lease

Dividend paid

(1)

(25)

Net cash used in financing activities

(225,701)

1,106,324

(837,410)

Net decrease in cash and cash equivalents

2,189,135

860,669

(530,117)

Cash and cash equivalents at the beginning of year

(8,494,161)

(9,354,850)

(8,824,733)

Cash and cash equivalents at the end of year

(6,305,026)

(8,494,181)

(9,354,850)

29

Ratios Adjusted
2012

2011

%
%

32.71%
25.03%

23.60%
14.48%

%
%
%
%

17.64%
17.89%

3.24%
0.92%

17.64%

3.24%

Return on Investments
Operating ROA
ROA
Return on equity (after tax)
ROA (before tax)
Return on capital employed
Return on equity (before tax)

%
%
%
%
%
%

11.41%
8.16%
13.03%
8.05%

5.55%
0.35%
0.61%
1.24%

12.85%

2.12%

Liquidity ratios
Current ratio
Acid test ratio

Times
Times

1.65
1.16

1.44
1.06

Activity / turnover ratios

Inventory turnover
No. of days to inventory
Receivables turnover
No. of days in receivables (DSO)
Creditors turnover
No. of days in payables
Operating cycle
Net operating/cash cycle
Total assets turnover
Fixed assets turnover
Working capital turnover

Times
Days
Times
Days
Times
Days
Days
days
Times
Times
Times

17.00
21.47
59.05
6.18
8.16
44.71
27.65
-17.06
0.46
0.86
3.17

14.95
24.42
48.68
7.50
8.46
43.13
31.92
-11.21
0.38
0.72
3.30

Solvency ratios
Financial leverage
Debt-to-Asset Ratio
Interest coverage ratio
CFO coverage ratio

Times
%
Times
Times

1.60
27.06%
3.39
3.64

1.71
31.64%
1.29
1.35

9.37
46.31
0.88
0.62
4.94

0.39
22.35
0.53
0.32
57.07

Profitability ratios
Return on Sales
Gross profit margin
Operating profit margin
Net profit / (loss) before tax to
sales
Net profit margin
EBITDA to sales
Pre tax margin

Investment valuation ratios

Basic EPS
Share price
Priceto Sale Ratio
Price-to-book value per Share
Price / earning ratio (after tax)

Rs.
Rs.
Rs.
Times

30

Ratios Unadjusted
2012

2011

2010

2009

2008

32.71%
24.94%
17.66%
17.90%
31.31%
17.66%

23.60%
14.43%
3.24%
0.92%
22.12%
3.24%

16.62%
13.89%
2.20%
1.43%
22.43%
2.20%

31.49%
18.76%
4.31%
2.91%
26.33%
4.31%

15.39%
12.11%
-2.02%
-0.43%
23.03%
-2.02%

11.40%
8.18%
13.01%
8.07%
17.66%
12.83%

5.54%
0.35%
0.60%
1.24%
0.75%
2.12%

5.04%
0.52%
0.98%
0.80%
1.07%
1.51%

7.14%
1.11%
2.06%
1.64%
2.68%
3.05%

5.80%
-0.20%
-0.35%
-0.97%
-0.22%
-1.67%

1.65
1.16
0.60
-17.06

1.44
1.06
0.31
-11.21

1.19
0.87
0.25
-6.68

0.84
0.56
0.34
-12.66

1.59
1.33
0.48
-2.93

17.00
21.47
59.05
6.18
8.16
44.71
27.65
-17.06
0.46
0.86
3.17

14.95
24.42
48.68
7.50
8.46
43.13
31.92
-11.21
0.38
0.72
3.30

14.01
26.05
39.80
9.17
8.71
41.90
35.22
-6.68
0.36
0.66
6.19

18.37
19.87
40.99
8.90
8.81
41.43
28.78
-12.66
0.38
0.76
-7.08

23.62
15.45
67.98
5.37
15.37
23.75
20.82
-2.93
0.48
1.08
1.74

9.38
46.31
0.88

0.45
22.35
0.53

0.70
27.28
0.61

1.63
33.16
0.56

-0.21
49.47
1.01

Profitability ratios
Return on Sales
Gross profit margin

Operating profit margin

Net profit / (loss) before tax to sales

Net profit margin

EBITDA to sales

Pre tax margin

Return on Investments
Operating ROA

ROA

Return on equity (after tax)

ROA (before tax)

Return on capital employed

Return on equity (before tax)

Liquidity ratios
Current ratio

Times

Acid test ratio

Times

EBITDA to current Liabilities

Times

Cash conversion cycle

Days

Activity / turnover ratios

Inventory turnover

Times

No. of days to inventory

Days

Receivables turnover

Times

No. of days in receivables (DSO)

Days

Creditors turnover

Times

No. of days in payables

Days

Operating cycle

Days

Net operating/cash cycle

days

Total assets turnover

Times

Fixed assets turnover

Times

Working capital turnover

Times

Investment valuation ratios

Basic EPS

Rs.

Share price

Rs.

Priceto Sale Ratio

31

Price-to-book value per Share

Rs.

Price-to-break up value
Price/Cash Flow per Share

Rs.

Price / earning ratio (after tax)

Times

Retention RATE
Sustainable Growth Rate

0.62
1.05
5.06
4.94
0.84
10.93%

0.32
0.54
26.44
49.67
1.00
0.60%

0.38
0.73
11.83
37.89
1.00
0.98%

0.48
0.83
8.79
20.34
1.00
2.06%

0.42
1.18
-20.56
-235.57
1.00
-0.35%

1.59
26.83%
29.22%
41.29%
3.42
2.40

1.71
28.02%
34.11%
52.72%
1.29
0.18

1.89
32.10%
38.92%
65.02%
1.19
0.44

1.86
32.89%
46.64%
89.94%
1.30
0.44

1.73
31.63%
38.42%
63.61%
0.86
-0.35

Solvency ratios
Financial leverage

Times

Debt-to-Asset Ratio

Debt-to-Capital Ratio

Debt / equity ratio

Interest coverage ratio

Times

CFO coverage ratio

Times

Dupont Analysis
Tax burden
Interest Burden
EBIT Margin
Financial Leverage
Asset Turnover
ROE

101.37% 28.44% 65.02% 67.65% 21.21%

70.81% 22.43% 15.85% 22.96% -16.64%
24.94% 14.43% 13.89% 18.76% 12.11%
158.97% 170.52% 189.24% 185.72% 172.85%
45.72% 38.40% 36.26% 38.09% 47.88%
13.01%
0.60%
0.98%
2.06%
-0.35%

Sales Pro-forma

Profit & Loss Analysis

2013

2014

25,933,334

29,304,667

Cost of sales

(17,450,701)

(19,719,292)

Gross profit

8,482,633

9,585,375

Administrative expenses

(261,784)

(295,816)

(2,276,652)

(2,572,617)

Other operating expenses

(655,365)

(740,562)

Other operating income

1,282,971

1,385,609

6,571,803

7,361,989

(1,708,683)

(2,085,171)

Sales net

Selling and distribution expenses

Impairment on investment
Profit from operations
Finance cost
Share of loss of associate
Profit before tax
Taxation
Profit for the year
Earnings per share - basic and diluted

4,863,119

5,276,818

55,652

(1,055,364)

4,918,771

4,221,455

11.23

9.64

32