The Information Gathering And Accounting And Business Techniques

Published Date: 02 Nov 2017

Introduction:

This report is prepared to analyze the business and financial performance of ‘Lucky cement’ and its competitor ‘Pioneer cement’ for the period of 2010 to2012.

Reasons for choosing the Topic and the company:

It was very difficult and confusing for me to select the topic for my research and analysis project. I consulted the list of topics with my mentor and discussed with him on which topic to choose for analysis. My mentor provided me with all the relevant information and gave me the all the nuts and bolts of all the topics. He suggested me the topic that suits me. The topic for which I had relevant knowledge, information and for which scrutinizing of data would be easy and information gathering would not be complex for me. So, with help of my project mentor I decided to choose topic number ‘8’ "An analysis and evaluation of business and financial performance of an organization". The reason for considering the topic is that evaluation of the business is my favorite area and it is also easy as well. I have recently studied this area in P3 paper of ACCA. Another reason for choosing this topic is ratio analysis as; I studied ratio analysis in T6 paper of CAT, F5, F7 and F9 papers of ACCA.

After the selection of topic there was a big problem in selecting the industry and major company for analysis as there were many options available. After doing the survey I decided to go for cement industry and choose Lucky cement as my major company for financial and business analysis and for comparison, its competitor Pioneer cement. The reason for selecting Lucky cement is that it one of the largest producer and export houses of Pakistan. The other reason for selecting this company for analysis is that it is listed on Karachi, Lahore, and Islamabad and London stock exchange.

Project Objectives:

Following are the objectives that must be consider during research and analysis:

Evaluating the performance of Lucky cement and of industry as well. The results of evaluation are than compared with Pioneer cement.

Evaluating performance by financial means like;

Profitability: ‘Every firm is most concerned with its profitability. One of the most frequently used tools of financial ratio analysis is profitability ratios which are used to determine the company's bottom line and its return to its investors. Profitability measures are important to company managers and owners alike’. (Peavler, n.d)

Liquidity: ‘A class of financial metrics that is used to determine a company's ability to pay off its short-terms debts obligations. Generally, the higher the value of the ratio, the larger the margin of safety that the company possesses to cover short-term debts’. (Investopedia, n.d)

Investment: ‘The act of placing capital into a project or business with the intent of making a profit on the initial placing of capital. An investment may involve the extension of a loan or line of credit, which entitles one to repayment with interest, or it may involve buying an ownership stake in a business, with the hope that the business will become profitable. Investing may also involve buying a particular asset with the intent to resell it later for a higher price’. (The Free Dictionary, 2012)

Working Capital: ‘Current assets minus current liabilities. Working capital measures how much in liquid assets a company has available to build its business. The number can be positive or negative, depending on how much debt the company is carrying. In general, companies that have a lot of working capital will be more successful since they can expand and improve their operations’.

Financial leverage: ‘Gearing focuses on the capital structure of the business – that means the proportion of finance that is provided by debt relative to the finance provided by equity (or shareholders).The gearing ratio is also concerned with liquidity.  However, it focuses on the long-term financial stability of a business’. (Riley, 2012)

For the appraisal of competitive position of Lucky cement following business models will be applied :

SOWT Analysis: ‘A SWOT examines and assesses the impacts of internal strengths and weaknesses, and external opportunities and threats, on the success of the "subject" of analysis. An important part of a SWOT analysis involves listing and evaluating the firm’s strengths, weaknesses, opportunities, and threats’. (Venture Line, n.d)

Porter’s Five Forces: ‘Porter's 5 Forces is an analytical framework for assessing business competitiveness strategies in a particular market. The framework includes an analysis of five concurrent forces that affect a business' ability to compete’. (Investing Answers, n.d)

Research Questions:

Research questions are necessary because they help in setting up the progress of the work according to the given guidelines by Oxford Brooks University (OBU). So, research questions must be kept in mind in order to accomplish the research work:

What type of information should be gathered in order to carry out effective research work?

How the gathered information will be used?

What information will be required sequentially to understand the issue, its reasons and likely solutions?

Does the information gathered is relevant or not?

What type of analysis would be useful in order to understand the analysis outcome?

What possible conclusions can be drawn from the study?

How to simplify the words which are straightforward, similar and definite?

Research Approach:

I already made up my mind in order to look for Oxford Brookes University (OBU) degree in applied accounting. Now I have to move towards the research work in order to complete the RAP under the given and defined guidelines by OBU. Following was my approach towards research work:

For my research project I consulted with my seniors and teachers. I also consulted BPP study guide for OBU. There was a comprehensive direction given in it about list of the topics, industry formatting, word restriction, legitimacy of information gathered and its classification and position and responsibility of a mentor. I wanted that my teacher would act as my mentor. Then I requested my teacher to act as my mentor. He helped me a lot and gave guidance in every area that was ahead of my understanding.

My mentor provided me guidance on information gathering and suggested me some sources as well which were relevant for the research work. He suggested me to visit the official website of LUCKY CEMENT so that I can gain the knowledge of company’s history and profile and can download the financial statements of the company for the period of 2010-2012. He also suggested me some other resources to consult which were relevant to cement sector such as newspapers, other websites and different industrial magazine related to cement sector.

Information gathering process was an easy task as all resources such as internet, library, business journals and newspapers. Information gathering was easy but on other hand categorization of information up to the state was a difficult task. All the financial information was mostly taken from the annual financial statement of LUCKY CEMENT.

For my research work there was a package of information available such as industrial magazine related to cement sector, library, books, internet and other study material. Collection of information was not a problem but the main and the major task was the arrangement of data with regard to relevancy and authenticity.

Most of the information used in financial analysis was taken from available financial statement for the current and previous years. After certain intervals my research work was kept in line by meeting with project mentor. He encouraged and valued my research work. He not only praised me but he also highlighted the areas which were weak. For weak areas he suggested me the ways of improvement. I tried my level best to make my RAP meaningful and result oriented.

2 Information gathering and accounting and business techniques

Sources of information and methods used to collect it

Primary research: ‘When research is conducted to unearth original data, it is called primary research. To do this, an original research plan must be devised which will encompass, data collection, data input and then the production and analysis of the subsequent results. Due to the sometimes lengthy duration of this research it can often be expensive to conduct. However, because the research is original, the results gathered will be more relevant to the needs of the client’. (DJS Research Ltd , n.d)

As it is mentioned above the information used was directly collected from the officials of LUCKY CEMENT. I scheduled time on telephone and told them the reason for meeting and gave the introduction of information required. The telephone operator gave me the appointment. I was able to meet the officials’ authorities i.e. marketing manager, production manager and chief accountant officers. I discussed with the officials and got the information which was required.

Secondary Research: ‘Secondary data is the data collected by someone else other than the researcher himself. This data can be gathered from government records, books, trade associations, national or international institutes, statistics agencies, etc. Research done using this readily available information is called Secondary Market Research’. (ianswer4u, n.d)

Secondary information about LUCKY CEMENT was collected from different sources. Secondary information comprises following resources:

Annual Reports: Data and information required for financial analysis was collected form financial statements of LUCKY cement. These annual reports played significant role in research work.

Books: Books were consulted to get the information which helped me in making my analysis strong. I had an access to library I consulted the relevant books which were necessary for RAP.

Newspapers: For financial analysis I also consulted the newspapers. I collected the relevant information that was necessary. Newspaper provided all the relevant information about the cement sector.

Websites: The official website of LUCKY cement helped me to download the annual report for the current and previous years. Internet was used to gather and analyze the information and different resources and website to reach the end result of RAP.

Articles from ACCA and other study material: Different articles in student accountant magazine helped a lot in collecting information. Other study text of ACCA and other material used to gain understanding and accomplish the purpose of RAP.

Limitations of information gathering:

There were many difficulties and limitations faced during the information gathering process. The difficulties faced during the collection of primary data taking appointment from the officials and company employees. It was difficult to convince them for acquiring the information from them. The preparation of questionnaire was also an issue.

The secondary data collection was also problematic process. The extraction of relevant, accurate, reliable and authentic information was a big issue. The main issue was that more information is available and classification and categorization was difficult and a time consuming process.

Ethical Issues during Information Gathering

While gathering the information the relevance of the IFAC and ACCA code of conduct must be kept in mind. Professional behavior and due care must also be kept in mind while conducting meetings and interviews as a little mistake in my behavior could result in to assertiveness of respondent and this can also affect the information gathering process difficult. On the occasion of information gathering confidentiality was another ethical issue that must be kept in mind. Any information or any assessment which is confidential to the company must be valued and respected. For this type of research work integrity must be maintained. The truthfulness of the research work must be considered as integrity is an important and significant part that must be maintained.

Business techniques used and their limitations:

The ratio analysis:

‘Ratio analysis is a tool brought into play by individuals to carry out an evaluative analysis of information in the financial statements of a company. These ratios are calculated from current year figures and then compared to past years, other companies, the industry, and also the company to assess the performance of the company’. (Ready Ratios, n.d)

Profitability Ratio: ‘A type of measurement that help to determine the ability of a company to generate earnings in comparison to its costs and expenses over a certain time period’. (Investor Words, n.d)

Liquidity Ratio: ‘The calculation of a company's available cash and marketable securities against outstanding debt. The ratio measures the company's ability to pay its short-term debts. A high ratio indicates a company with a low risk of default’. (Business Dictionary, n.d)

Solvency Ratio: ‘Solvency is the ability of a business to have enough assets to cover its liabilities. Solvency is often confused with liquidity, but it is not the same thing’. (Murray, n.d)

Efficiency Ratio: ‘Efficiency ratios are the financial statement ratios that measure how effectively a business uses and controls its assets’. (Bizwiz Consulting, n.d)

Limitations of Ratio Analysis:

Despite of the usefulness of ratio analysis there are some limitations. Following are the demerits of ratio analysis:

1: different companies’ works in different industries and have different environmental conditions i.e. regulations, market structure etc. Due to this reason comparison of two companies from different industries might be misappropriate and misleading as well.

2: Financial accounting is based on estimates and judgments. Accounting standards have different policies, which affects and reduce the effectiveness of comparability so in these circumstances ratio analysis is less useful.

3: Ratio analysis is based on using past information while the users are more anxious about current and future information. (Accounting Explained, n.d)

4: Aggregation: ‘The information in a financial statement line item that you are using for a ratio analysis may have been aggregated differently in the past, so that running the ratio analysis on a trend line does not compare the same information through the entire trend period’.

5: Interpretation: It can be quite difficult to ascertain the reason for the results of a ratio’. (Accounting tools, 2011)

SWOT analysis:

(Business Insurance Quotes, n.d)C:\Users\Acer\Downloads\business-swot-quotes.jpg

‘SWOT Analysis is the most renowned tool for audit and analysis of the overall strategic position of the business and its environment.

Strengths - Strengths are the qualities that enable us to accomplish the organization’s mission.

Weaknesses - Weaknesses are the qualities that prevent us from accomplishing our mission and achieving our full potential.

Opportunities - Opportunities are presented by the environment within which our organization operates.

Threats - Threats arise when conditions in external environment jeopardize the reliability and profitability of the organization’s businesses’. (Management Study Guide, n.d)

Limitations of SWOT analysis:

Flexible but vague: SWOT analysis is a flexible model and its flexibility makes it applicable on numerous settings such as, business, government agencies and other organizations. However its flexibility is a limitation as well. The framework emphasize on strength, weakness, opportunity and threat. But does not provide guidance how organizations can identify them.

Opportunity or Threat: For an organization it is also difficult that in an external environment presents an opportunity or a threat.

Lack of detail: The framework only consist of one or two words to identify strength, weakness, opportunity and threat.

Rank and Prioritize: The SWOT analysis provides a framework in which organizations can identify their internal strengths and weaknesses, as well as assess the external opportunities and threats. However, SWOT provides no guidance for organizations to rank each of the elements under these four headings or set priorities.

Prevention/Solution: SWOT analysis does not reframe threat into opportunities. (Hall, n.d)

Porter’s Five Forces:

C:\Users\Acer\Downloads\Porter.jpg (SEOCUSTOMER, n.d)

‘The Porter's Five Forces tool is a simple but powerful tool for understanding where power lies in a business situation.

Supplier Power: Here you assess how easy it is for suppliers to drive up prices.

Buyer Power: Here you ask yourself how easy it is for buyers to drive prices down.

Competitive Rivalry: What is important here is the number and capability of your competitors.

Threat of Substitution: This is affected by the ability of your customers to find a different way of doing what you do.

Threat of New Entry: Power is also affected by the ability of people to enter your market’. (Mind tools, n.d)

Limitations of Porter’s Five Forces:

‘According to Porter, the five forces model should be used at the line-of-business industry level; it is not designed to be used at the industry group or industry sector level.

Porter's framework has been challenged over three assumptions. Buyers, competitors, and suppliers are unrelated and do not interact, the source of value is creating barriers to entry, and that uncertainty is low, allowing market participants to plan and respond to competitive behavior.

Strategy consultants occasionally use Porter's five-force framework when making a qualitative evaluation of a firm's strategic position’. (Boundless, n.d)

ANALYSIS, CONCLUSIONS AND RECOMMENDATIONS

Company history and profile:

‘Lucky cement was sponsored by well known "Yunus Brothers Group" one of the largest export houses of Pakistan.

Lucky Cement Limited (LCL) is Pakistan’s largest producer and leading exporter of quality cement with the production capacity of 7.75 million tons per annum. The company is listed on Karachi, Lahore, Islamabad and London Stock Exchanges. Lucky Cement is Pakistan’s first company to export sizeable quantities of loose cement being the only cement manufacturer to have its own loading and storage terminal at Karachi Port.

Lucky Cement is an ISO 9001:2008 and 14001:2004 certified company and also possesses many other international certifications including Bureau of Indian Standards, Sri Lankan Standard Institute, Standards Organization of Nigeria, Kenya Bureau of Standards and South African Bureau of Standards’. (Lucky cement, n.d)

Pakistan Cement Industry:

Pakistan cement industry has developed rapidly. ‘In 1947 there were only 4 factories and production capacity of only 0.5 million tons. In 1972 these 4 factories turned in to factories and production capacity increased to 2.5 million tons. Cement industry became nationalized and The State Of Cement Corporation (SCCP) was established. In the period of 1985-86 cement industry was deregulated with establishment of 7 plants, GDP growth rate of 6.5% and high imports of cements. Process of privatization was occurred in 1991. From the year 2000 to 2010 cement production increased production capacity from 16 million to in year 2000 to 44 million ton in year 2010’. (Afridi, 2011)

Main products:

There are four main products of Lucky Cement.

Sulphate resistant cement.

Ordinary Portland cement.

Clinker.

Block cement. (lucky cement, 2012)

Ratio Analysis:

Sales analysis:

Revenue (rs '000')

 

 

 

 

 

 

FY2012

FY2011

FY2010

Lucky cement

 

33,322,535

26,017,519

24,508,793

Pioneer cement

 

6,487,127

 

 

(Source: LCL’s Annual Reports FY2010 – FY2010, Pioneer cement Annual Report FY2012)

Production Sales Volume

 

 

Pioneer Cement

Lucky cement

 

 

FY2012

FY2012

FY2011

FY2010

Clinker Production

 

1,179,000

5,633,811

5,658,353

6,054,713

Cement Production

 

1,178,000

5,935,790

5,779,710

6,461,726

(Source: LCL’s Annual Reports FY2010 – FY2012, Pioneer cement Annual Report FY2012)

(Source: LCL’s Annual Reports FY2010 – FY2012, Pioneer cement Annual Report FY2012)

FY2010-2011:

The sales for the FY2011 have increased as compared to the previous period. The sales revenue has increased by 6.16%. The increase was due to floods in Pakistan. ‘The flooding has made more than 4 million people homeless and an estimated 8 million are in urgent need of humanitarian assistance. There would be a huge-scale reconstruction needed to repair the roads and to rebuild buildings, which were destroyed in the flood’. (Daily times, 2010)

The local sales revenue of the company has increased by 47.4% during the year because of the increase in sales volume and cement prices (Annual Report, 2011). On the other hand exports sales have decreased by 15.6% during the year. The reason for the decline is the ‘Common External Tariff (CET) on import of cement East Africa is likely to be increased by 25% to 35% that may hurt the country’s export’. (Ahmed, 2010)

FY2011-2012:

There is 28.08% increase in sales. The reason for increase was All Pakistan cement Manufacturers Association (APCMA) shows that the overall sector enjoying better margins locally due to better retention prices at home. The cement sales are improving in terms of volume as well. With a growth of 7 percent, year on year, to 14.8 million tons, local sales volumes showed a healthy growth in both the northern and southern region. First, post-flood reconstruction after the floods both this year and the previous one have picked up pace, explaining partly the uptick in local sales. Secondly, an overall increase in construction activities is also claimed to be a significant factor by industry professionals. (Business Recorder, 2012)

The export sales for FY2012 has increased the reason for this increase was due to the opening up of the exports through land routes to India and improved dispatches to Afghanistan. (Business Recorder, 2012)

Competitor:

The revenue of Pioneer cement has increased by 23%, the reason for this increase was due to increase in local demand and high prices of cement (Annual Report, 2012). ‘Cement numbers released by the All-Pakistan Cement Manufacturers Association (APCMA) showed a continuation of the declining trend in export dispatches on a year-on-year basis, while local dispatches continued to show an increase on a year-on-year comparison. During July-April FY12, total cement dispatches were up slightly over 3 percent at 26.6 million ton’. (Business Recorder, 2012)

Gross Profit:

(Source: LCL’s Annual Reports FY2010 – FY2012, Pioneer cement Annual Report FY2012)

FY2010-2011:

The gross profit for the FY2011 has increased by 9.18% as compared to last year. The reason for this increase was due to increase in local demand and increase in cement prices. On the other hand if we look at cost of sales it has been increased by 4.7% the reason for this increase was due to increase in coal, gas and electricity prices. The growing trend in gross profit is mainly attributable to increase in sales price of cement and volume (LCL’s Annual Report, 2011)

FY2011-2012:

The gross profit for the FY2012 has increased by 46%. The reason for this increase was due to increase in cement prices in volume. ‘The cement sector has attracted a lot of attention this fiscal year. Cement manufacturers have benefited tremendously from the bonanza seen in cement prices, with margins of most cement players rising manifold. Domestic cement prices have risen about 20 percent, on average, on a year-on-year comparison so far this fiscal year’. (Business Recorder, 2012)

On the other hand if we look at cost of sales, it has been increased by 19.04%. The reason for this increase was due to increase in raw material price by 21% and increase in fuel and energy cost by 21% (LCL’s Annual Report, 2012). The cement sector is facing losses due to imports of coal as they are not given the freight subsidy by the government. The government has not yet paid the outstanding claims of Rs 287 million it owes to the cement sector in terms of inland freight subsidy. (Imaduddin, 2012)

Competitor:

The gross profit of competitor for the FY2012 has increased by 33.5%. This was due to increase in cement demand and price.

Net profit:

FY2010-2011:

The net profit for the FY 2011 has increased by 26.55%. The reason for this increase was the decrease of finance cost to Rs. 517.79 million. The other reasons for the increase is in profit margins was due to increase in sales prices and sales volume which offsets the increase affect of operating cost of the company. The distribution cost of the Company was decreased due to fall in export sales volumes. The percentage of distribution cost to exports sales was 26.4% for the year ended June 30, 2011 as compared to 22.1% last year. (LCL’s Annual Report, 2011).

FY2011-2012:

The profit margin for the FY 2012 has improved by 70.82%. The reason for this was the decrease in finance cost to Rs. 253.23milllion and decrease in distribution cost of export sales (LCL’s Annual Report, 2012).

The increase in profitability was primarily attributable to significant increase in local prices by 19.1%, lower coal prices and cost savings from energy efficiency measures. The market share of cement export to Afghanistan has considerably increased and is expected to continue, the company said in a post-result statement. Company also earned a surplus from sale of electricity to Hyderabad Electric Supply Company (Hesco) and Peshawar Electric Supply Company and robust cash generation capacity amid lowest debt in the sector will continue to remain the major value drivers for the company. (The Express Tribune, 2012)

Competitor:

The net profit of the company has improved. This improvement was due to reduction in cost. The distribution cost of the company has reduced by 48%, the financial cost has reduced by 8% due to effective working capital and repayment of loan.

Return on capital employed (ROCE):

(Source: LCL’s Annual Reports FY2010 – FY2012, Pioneer cement Annual Report FY2012)

FY2010-2011:

The ROCE of the company for the FY2011 is of 13.42%, which has been improved as compared to the last year. This increase in ROCE is due to the improved operating profit. The average capital employed also increased as compare to last year.

FY2011-2012:

There is a significant increase in ROCE of the FY2012. The ROCE of the company increased to 20.09%. The reason for this increase was mainly due to high profits and high sales volume.

Competitor:

The ROCE of the competitor is of 10.88% which is very low as compared to LCL. This was due to low profits and sales as compared to LCL.

Liquidity Ratios:

Liquidity ratio is the measure of the firm’s ability to meet its short term liability.

(Source: LCL’s Annual Reports FY2010 – FY2012, Pioneer cement Annual Report FY2012)

Current Ratio:

FY2010-2011:

The current ratio of the company has increased to 0.88 times as compared to previous year. The reason for this increase was mainly due to increase in stock in trade by 105% and increase in trade payables by 33%. (LCL’s Annual Report, 2011)

FY2011-2012:

The current ratio for the FY2012 increased significantly as compared to the FY2011. The reason for this increase was due to decrease in current liability of the company by 17%. It shows that company was able to improve its liquidity position. This improvement in current ratio was due to a slight increase in stock in trade by 1.17% and decline in current liability of the company. (LCL’s Annual Report, 2012)

Competitor:

The current ratio of Pioneer cement significantly low as compared to LCL’s ratio. The current ratio of Pioneer cement is 0.43 times which very less compared to 2.64 times.

Quick Ratio:

FY2010-2011:

The quick ratio of the company has decreased to 0.18 times for FY2011.Generally 1:1 is considered as good ratio and LCL’s ratio is below than this. The reason for this decrease that trade debts of the company has decreased to 20% and trade payables increased to 33%.

FY2011-2012:

The quick ratio for the FY2012 has improved a lot to 0.80 times. The reason for this improvement was increase in cash by 104% and decrease in current liability by 17%. The main reason for this increase was increase in cash due to ‘lower distribution costs; which decreased primarily due to a slump in export sales, lower finance costs in the first half this fiscal year, helped Lucky boost its net profit for the period under review to more than double of the tally from 1HFY11; reaching over Rs.3 billion’. (Business Recorder, 2012)

Competitor:

The competitor’s quick ratio is very low as compared to LCL’s ratio. Company is not able to maintain its liquidity position well.

Efficiency Ratio:

Efficiency ratio shows the firm’s ability to use assets and liabilities.

Receivable days:

FY2010-2011:

The receivable days for the FY2011 have improved to 9.8 days from 15.2 days. This means that trade debt of the company paying earlier. The company is performing better in managing its debtors. The sales of the company have increased but company was still able to maintain its receivables.

FY2011-2012:

The receivable days for the FY 2012 remain almost same as it was in last year. The sales of the company have improved and the trade debt of the company has increased. Company debt collection has improved.

Competitor:

The receivable days of Pioneer cement are 1.4 days which are less than LCL, showing that company is controlling its debtor period better than LCL.

Inventory days:

FY2010-2011:

The inventory days for FY2011have increased to 128 days. The reason for this increase was the decline of cement exports due to non-tariff barrier with the Indian government. (The Nation, 2011)

FY2011-2012:

The inventory holding period for the FY2012 has improved to 126 days. The reason for this is increase in volumetric sales of cement. The improvement in inventory days was due to increase in exports of the company. (LCL’s Annual Report, 2012)

Competitor days:

The inventory days of the competitor are 86 days. This shows that company is managing is inventory holding period efficiently as compared to LCL.

Payable days:

FY2010-2011:

The payable days shows the number of days taken by the company to pay its creditor.

The payable days of LCL have increased to 74 days as compared to FY2010. This shows the good performance of the company as it is the source of finance which is free of interest cost. The balance of payables and cost of sales have also increased by 33% and 4.7% respectively.

FY2011-2012:

The payable days of the company for the FY2012 are 65 days. The days have decreased from last year due to decline in trade payable of the company by17% and cost of the sales of the company has increased by 19%.

Competitor:

The payable period of the competitor is 56 days. Payable days are less than LCL. Pioneer cement pays to its competitor earlier than LCL.

Solvency Ratios:

Debt to equity ratio:

(Source: LCL’s Annual Reports FY2010 – FY2012, Pioneer cement Annual Report FY2012)

FY2010-2011:

The gearing ratio of the company has reduced from 6.6% to 2.4%. the reason for this decrease was that company has paid its long term debt have significant portion of equity capital. This shows that company relies on debt than equity.

FY2011-2012:

The gearing ratio for the current year further decreased to 1.2% the reason for this decrease is that company has paid its debt to the investor.

Interest Cover Ratio:

(Source: LCL’s Annual Reports FY2010 – FY2012, Pioneer cement Annual Report FY2012)

FY2010-2011:

The interest cover of the company for the FY 2011 has increased to 9.43 times. This increase in interest cover was due to reduction in finance cost of the company and reduction in debt of the company.

FY2011-2012:

In the current year the interest coverage ratio gets improved significantly to 33.87 times. The reason for this improvement is decline in debt and finance cost of the company.

Competitor:

For the FY2012 the interest coverage ratio is 3.82 times which is very low than LCL.

Investor Ratios:

This ratio measures the evaluation of the company from investor’s perspective.

(Source: LCL’s Annual Reports FY2010 – FY2012, Pioneer cement Annual Report FY2012)

Earnings per share (EPS):

FY2010-2011:

The earnings per share for the FY2011 have increased to Rs.12.28 per share. This increase was mainly attributable to increase in sales and increase in profit margins of the company. (LCL’s Annual Report, 2011)

FY2011-2012:

The EPS of the company has increased to 20.97 from 12.28 in the current year. The reason for this increase was due to high sales price and increase in volumetric sales of the cement. This increase in sales resulted in to high profit margins. (LCL’s Annual Report, 2012)

Competitor:

The EPS of the company is RS.2.65 per share for the FY2012. EPS of the competitor is far more less than LCL.

Dividend per Share (DPS):

FY2010-2011:

The DPS of the company for the FY2011 remains constant. The dividend payout ratio of the company is 41.23%. The company is enjoying high profits and profits are growing over the period.

FY2011-2012:

The dividend per share of the company has increased to Rs.6 per share. The payout ratio for the current year has decreased to 28.61%. The company has retained its profit for the investment in the setup of cement grinding facility in Iraq and to buy an equity stake of 13.8% in Yunus Energy Limited. (The Express Tribune, 2012)

Business Analysis Tools:

SWOT analysis:

Strengths:

LCL has managed to substantially reduce the carbon through its WHR project. (The Nation, 2011)

Due to its innovative and environmental friendly approach, the Company qualified for the Clean Development Mechanism (CDM) under the Kyoto Protocol of United Nations. (The Nation, 2011)

The LCL is a low geared company.

The setup of cement grinding facility in Iraq through joint venture. (The Express Tribune, 2012)

LCL is the largest producer and exporter of quality cement with the production capacity of 7.75 million per annum. (Lucky cement , n.d)

LCL wins the exports award. (Ahmad, 2012)

The company is listed on Karachi, Lahore and Islamabad and London Stock Exchange. (Lucky cement, n.d)

LCL is ISO 9001:2008 and 14001:2004 certified company. (Lucky cement, n.d)

Lucky Cement honored with National CSR Excellence Award. (Daily Times, 2012)

Weaknesses:

Company does not focus in marketing.

10% Import duties on used tyres. (Business Recorder, 2012)

‘Due to lower demand in the country the cement sector is hugely under-utilized and hence almost 70 percent cement plants are in losses’. (BHATTI, 2012)

Opportunity:

‘The federal government is likely to cut Federal Excise Duty (FED) on cement up to Rs. 250 per ton in the upcoming budget for fiscal year 2012-2013’. (BHATTI, 2012) LCL will be able to reduce its costs level.

‘The federal government has announced reduction in import duty on scrap of tyres and rubbers by 50 percent aimed at encouraging its use as alternate fuel in the cement industry. Importers can now import scrap of tyres and rubbers by paying only 10 percent import duty’. (Business Recorder, 2012)

The overall cement sector got fairer share of deal in the annual budget. (Business Recorder, 2012)

The new opportunity for cement industry is Africa and Srilanka.

Improved ties with neighbors help to create new markets. (BHATTI, 2012)

Cement industry allowed using tyre-derived fuel. (Imaduddin, 2011) This will help the company in cement production at the time of shortage of natural gas and increasing cost of oil and coal.

Threats:

The cement sector may have to face tough time after imposition of VAT. (Ahmed, 2010)

Cement exports to India is declining due to non-tariff barrier. (Daily Times, 2012)

The Porter’s Five Forces Model:

Bargaining Powers of Customers

There is excess demand and supply and there are number of cement producer. So, the switching of the customer is low. There is less bargaining power of the customers as the price of the cement is set by the cartels.

For the manufacturing of the cement companies requires coal. Pakistan is the country which is rich in coal. But the coal required for cement production need high sulphur content so, Companies have to import. The suppliers of coal have high bargaining power as there are many numbers of buyers in the market.

Bargaining Power of Suppliers:

The raw material required for cement is easily available as Pakistan is rich in mineral resources. Pakistan has many numbers of local suppliers for limestone, gypsum and sand. So, the switching cost for the companies is very low. The suppliers don not have the bargaining power and they cannot put the pressure on the companies.

The coal required for the manufacturing of the cement needs to be imported. Pakistan is rich in coal resources but still it needs to get imported. There are number of buyers in the market so the bargaining power is with the supplier.

Threat of new entrance:

The threat of new entrance is low as the existing companies have high share in the market and they have achieved economies of scale. So, it will be difficult for the new entrant to achieve that level of economies of scale and market share.

Threat from substitute products:

There is no threat from the substitute product as there are no substitutes of cement are available.

Rivalry between existing competitors:

The competition in cement sector is on the basis of process and innovative ideas. There is no competition on the basis of price as it is set by the cartels.

Conclusion and Recommendation:

Conclusion:

LCL was established in 1993 by Yunus brothers under the company’s ordinance 1984 as public limited company. The company is listed on all three stock exchanges of Pakistan and it is also listed on London stock exchange as well. LCL is the largest exporter and producer of good quality cement. It produces Sulphate resistant cement, Ordinary Portland cement, Clinker, Block cement. FY2012 was the good year for the cement sector earned high profits than previous years.

In the FY2012 company has performed well. The revenues of the LCL showed growth in all three years. The increase in revenue was mainly due to increase in selling price and increase in volumetric sales of the company. There was also growth in export sales of the company due to exports in Afghanistan and India. The sales of Pioneer cement also increased due to high domestic sales. The reason for increase in sales was due to floods, reconstruction and dams.

The profit margins of LCL increased over the three year period. The gross profit of the company has increased to 38% in the FY 2102. The net profit margins also increased over the three year period. The reason for this increase was high selling price, other income and high decline in finance cost of the company. Pioneer cement profit also increased by 9.27% which is less than LCL. ROCE of the company has also improved due to high profitability of the company. ROCE of LCL is better than Pioneer cement.

The liquidity position of the company gets significantly better in FY2012 as compared to previous years. The liquidity position of the company was improved due to effective and efficient management of working capital by the company. The receivable days and inventory days were improved but the inventory days were declining. The liquidity position of Pioneer cement was also good.

The gearing ratio of the LCL was significantly well. LCL a low geared company, its more reliance is on equity. The financial position of the company is very strong. The interest cover ratio of the company for the FY 2012 is 33.87 times this due to low debt level. The gearing level of the competitor is high than LCL.

Over all the performance of the company was very well in terms of both financially and non-financially.

The company worked efficiently to strengthen its position and to gain high market share. LCL also tried to overcome its weaknesses. Company also tried to mitigate the threats and also tried to avail the opportunities. There was no threat of new entrance due to high market share and economies of scale and no threat from the substitute products.

Recommendations:

Following are the recommendations for LCL:

LCL does not focus on marketing so it should develop marketing strategies to increase the sales revenue.

Company should focus to expand its network in small areas.

Company should go in to long term contract with transportation companies to lower down the transportation cost.

The company is largest exporter but it should also pay attention to local market as well

Company should improve its liquidity position and payable days.