FINAL SEMESTER PROJECT

Investment Screening and selection

Capital Budget Proposal

Budgeting proposal and authorization

Project Tracking

Post Compilation Audit

 Business Establishing Capital
Expansion news Industry Budgeting

Cement
Industry Pakistan
STEP 1
Investment
Screening

Opportunities

Threats
 Opportunities

•Existence of a cartel type arrangement of APCMA.

•Expansion of operations to southern regions.
•Greater budget allocations for PSDPs.
•Reduced tariffs and taxes.
•Pakistan is rich in coal reserves (Thar) whose exploitation can
provide a cheap and continuous source of energy to cement
industry.
•Economy is improving (low inflation rate).
•Improvement in infrastructure spending
 Threats

•Political instability in the country.

•Poor law and order conditions.
•Governmental interference.
•Price volatility
•High circular debt
•Severe power energy shortages
  1. Bargaining Power of Suppliers
 2. Bargaining Power of Buyers
 3. Barriers to Entry in the Market
 4. Threat of Substitute Product
 5. Rivalry among the Existing Competitors

PORTER’S FIVE FORCES MODEL OF CEMENT SECTOR

  the most significant industry among all industries of Pakistan
 these raw materials are natural resources
 Pakistan is abundant in limestone and gypsum resources
 is coal or fuel which contributes approximately 40% cost.

1. BARGAINING POWER OF SUPPLIERS

  structure with more than 50 % share with top five companies
 Secondly formation of cartels has maintained same prices in the
region
 Thirdly it’s difficult for a new company to enter in the market
because of the barriers (but big companies can
 However in winter due to low demand prices could be decrease
but overall bargaining power is low

2. BARGAINING POWER OF BUYERS

  1. High Cost
 2. Absence of Healthy Competition
 3. Nature of Industry

3. BARRIERS TO ENTRY IN THE MARKET

  threat of substitute product for cement is very low
 steel as a substitute could prove very costly
 timber, steel or gypsum which can replace cement we would
come to know that they are best fitted to be used in the regions
of extreme climate.

4. THREAT OF SUBSTITUTE PRODUCT

  29 small and large cement companies which are currently
producing cement.
 people can shift easily from one firm to another due to low
switching cost which increases competition between firms.
 Prices are not competitive advantage
 Brand image would help determine higher prices due to cartel

5. RIVALRY AMONG THE EXISTING COMPETITORS

 Environmental Aspects
 Legal Aspects
 Technological Aspects
 Social Aspects
 Economic Aspect
 Political Aspects

SELECTION
STEP 2
CAPITAL BUDGET PROPOSAL

Method Time
olgy Expecte
d costs
required
 2008 2009 2010 2011 2012 2013
(000)Rs (000)Rs (000)Rs (000)Rs (000)Rs (000)Rs

Sale Price/Ton 4.88 5.34 4.85 5.77 6.94 7.50

V.Cost/Ton 2.80 3.48 3.52 3.78 5.17 4.53

Contribution 2.08 1.86 1.33 1.99 1.77 2.97

Margin/Ton

Fixed Cost/Ton 1.00 0.91 1.02 1.00 1.29 1.44

T.Cost/Ton 3.80 4.39 4.54 4.78 6.46 5.97

M.O.S 34% 61% 25% 39% 43% 53%

PER UNIT COST ANALYSIS OF CEMENT SECTOR OF PAKISTAN

 Cement companies Break-even in Rs. Break-even in units (ton)
Al-abbas cement 762,873 265,955
Attock cement 1,885,682 331,291
Bestway cement 2,694,403 448,737
Cherat cement 1,274,814 249,951
Dada bhoy cement 169,755 37,323
Dewan cement 2,232,315 364,814
Kohat cement 867,772 142,244
Lucky cement 4,996,686 936,576
Maple leaf cement 3,898,648 641,702
Lafarge Pak cement 3,394,987 635,968
Pioneer cement 1,441,959 226,362
Thatta cement 370,535 55,950
Leiner Pak Gelatine cement 327,917 10,499
D.G. Khan cement 7,428,762 1,811,695
Fauji cement 1,895,289 347,654
Flying cement 5,271 (19,027)
Ghareeb Wall cement 1,207,317 232,730
JVDC 203,726 35,991
Average 1,947,706 375,356

BREAK EVEN (A VIEW OF EXISTING INDUSTRY)

  1. Bestway cement
 2. Dewan cement
The Real
 3. Lucky cement compititon
 4. Maple Leaf cement
 5. Lafarge Pak cement
 6. D.G. Khan Cement

ABOVE AVERAGE BREAK EVEN COMPANIES

 S.P/Unit 2008 2009 2010 2011 2012 2013
(000)Rs (000)Rs (000)Rs (000)Rs (000)Rs (000)Rs

Industry 4.88 5.34 4.85 5.77 6.94 7.50

Average

Rate of change of
sales Price

Rate of Change of 2008 2009 2010 2011 2012

S.P/Unit

Industry Average 0.15 0.45 0.20 0.21 0.15

SALES PRICE PER UNIT

 V.C/Unit 2008 2009 2010 2011 2012 2013
(000)Rs (000)Rs (000)Rs (000)Rs (000)Rs (000)Rs
Industry Average
2.81 3.48 3.52 3.78 5.17 4.53

VARIABLE COSTS PER UNIT

 F.Cost/Unit 2008 2009 2010 2011 2012 2013
(000)Rs (000)Rs (000)Rs (000)Rs (000)Rs (000)Rs

Industry
Average
1.00 0.91 1.02 1.00 1.29 1.44

FIXED COST PER UNIT

 T.Cost/Unit 2008 2009 2010 2011 2012 2013
(000)Rs (000)Rs (000)Rs (000)Rs (000)Rs (000)Rs

Industry
Average
3.80 4.39 4.54 4.78 6.46 5.97

COST OF SALE PER UNIT

 Margin of 2008 2009 2010 2011 2012 2013
Safety

Industry 34% 61% 25% 39% 43% 53%

Averages

MARGIN OF SAFETY
  The cost analysis has concluded that sales per unit in 2013 has
increased, cost per unit has decreased resulting in high profitability
so that’s a positive sign for the sector.
 Total variable cost of the sector has decreased in 2013, hence
increasing the contribution margin. This will not only decrease the
break-even point but also increase the profit margin on each unit
after achieving break-even. The sector has a high contribution
margin of 2970 Rs in 2013. This means that after achieving break-
even each ton will give a profit of this amount.
 Margin of safety is 53% in 2013 which means that if industry loses half
of its sales even then it would be safe from going into loss. So that
shows a very good performance of the sector. High Margin of safety
and high contribution margin in 2013 proved very good for the
sector.

CONCLUSION
Table 62: Overview of Cement Sector in F.Y. 2013

Overview of cement sector Financial year 2013

Average total assets

1.68 Billions
Average total liabilities
8.27 Billions
Average total equity
1.04 Billions
Average sales
1.01 Billions
Average EPS
8.14
Average installed cement capacity
1.62 M-Tons
Average actual cement production
1.47 M-Tons
Average installed clinker capacity
1.77 M-Tons
Average actual clinker production
5.96 M-Tons
 Averages in FY 2013 (Billions-Rs.)
18

16

14

12

10

Averages (Billions-Rs.)
8

0
Total assets Total liabilities Total equity Sales
 Averages in FY 2013-M.Ton
1.8

1.6

1.4

1.2

Averages-M.Ton
0.8

0.6

0.4

0.2

0
Installed capacity-cemnt Actual production-cement Installed capacity-clinker Actual production-clinker
 Average total assets of the sector are increasing in recent years which
show positive growth prospective (i.e. sector is growing).
 Cement sector is moving long financing to short term financing.
 Cement sector increased emphasis on cost cutting has enhanced
profitability
 Currently net profit in the sector has turned positive in recent years
because of increased sales and cost control measures therefore the
sector has become attractive.
 Currently sector is utilizing their assets efficiently to generate revenues.
 Cement sector has enough resources to pay short term obligations but
also facing short term liquidity and cash flow problems.

PROPOSAL
  Currently cement sector is more solvent and debt financing is
decreasing.
 Cement sector has less chance of loss and efficient assets
management in earning profits (High net profits) now.
 The total variable cost per unit for the sector has decreased and
the portion of fixed cost in total cost has increased which has
resulted in low breakeven and high contribution margin.
 Sale price per ton of cement sector has increased and total cost
per ton has decreased resulting in high profitability in 2013.
 Margin of safety of cement sector has increased.

PROPOSAL
 Reserve a company name online via the Securities and Exchange Commission of Pakistan (SECP)
E-services website
 Pay the name reservation and company incorporation fees at the MCB Bank
 Obtain a digital signature from the National Institutional Facilitation Technologies (NIFT) system of
SECP
 Complete online registration on the Securities & Exchange Commission of Pakistan (SECP) e-portal
 Apply for a national tax number (NTN) and register for income tax
 Apply for a Sales Tax Number (STN) at the tax facilitation center of the Regional Tax Office (RTO) of
the Federal Board of Revenue (FBR) in Lahore
 Register for Professional Tax with the Excise & Taxation Department of the District
 Register with the Sind Employees Social Security Institution (SESSI)
 Register with Employees Old-Age Benefits Institution (EOBI)
 Register under the West Pakistan Shops and Establishment Ordinance 1969 with the Labor
Department of the District
  THE PROPOSAL AFTER BEING PREPARED AND AUTHORIZED WILL BE
PRESENTED IN A MEETING AND CEO WILL APPROVE IT FOR FURTHER
PROCESSING

APPROVAL
STEP 4
 Fixed cost

 Variable cost

EXPENDITURES
Raw material, direct labor,
variable FOH and variable
selling and distributive
expenses
Variable FOH:
Fuel and power
Stores and spares
consumed
Repair and maintenance
Vehicle running and
maintenance
Indirect material
Communication
Transportation
Traveling and conveyance
Printing and stationary
Other manufacturing cost
Variable Selling and
Distributive Cost:
Salaries and wages
Logistic and related charges
Loading and others
Communication
Traveling and conveyance
Freight
Printing and stationary
Utilities
Vehicles and maintenance
Repair and maintenance
Others selling expense
VARIABLE COST
 Depreciation and amortization
 Insurance Depreciation
 Provision for slow moving spare Security charges
parts Insurance
 Earthmoving machinery Fee subscription and periodicals
 Inspection for electrical installment Advertisement and sales promotion
 Rent, rates and taxes Entertainment
Office canteen
 Mess subsidy
Meetings and conferences
 Technical assistance
 Legal and professional charges
 Fixed Selling and Distributive
Expenses:
 Insurance
 Rent, rates and taxes

FIXED COST
Year 0 1 2 3 4
Sales - 3750000 1680000 1380000 1320000
In dollars
Advertisement Cost - 650000 100000 - -
Material 810000 378000 324000 324000
Fixed Cost 600000 600000 600000 600000
OH 900000 420000 360000 360000
operating cash flows 790000 182000 96000 36000
Tax @30% 237000 54600 28800 10800
Net cash flows 613000 187400 127200 85200
 Cement companies Break-even in Rs. Break-even in units (ton)
Al-abbas cement 762,873 265,955
Attock cement 1,885,682 331,291
Bestway cement 2,694,403 448,737
Cherat cement 1,274,814 249,951
Dada bhoy cement 169,755 37,323
Dewan cement 2,232,315 364,814
Kohat cement 867,772 142,244
Lucky cement 4,996,686 936,576
Maple leaf cement 3,898,648 641,702
Lafarge Pak cement 3,394,987 635,968
Pioneer cement 1,441,959 226,362
Thatta cement 370,535 55,950
Leiner Pak Gelatine cement 327,917 10,499
D.G. Khan cement 7,428,762 1,811,695
Fauji cement 1,895,289 347,654
Flying cement 5,271 (19,027)
Ghareeb Wall cement 1,207,317 232,730
JVDC 203,726 35,991
Average 1,947,706 375,356
Year Cash Flows PV@ 10% In dollars

0 800000 800000
1 613000 0.909 557217
2 187400 0.826 154792.4
3 127200 0.751 95527.2
4 85200 0.683 58191.6
NPV 65728.2
 PV@ Dis.@15 PV
Year Cash Flows Dis @10%
10% % @15%
0 800000 800000 800000

1 613000 0.909 557217 0.833 510629

2 187400 0.826 154792.4 0.694 130055.6

In dollars
3 127200 0.751 95527.2 0.578 73521.6

4 85200 0.683 58191.6 0.482 41066.4

NPV 65728.2 -44727.4

STEP 5
 Ratios analysis
Horizontal analysis
Vertical analysis

Overview of cement sector Financial year 2013

Average total assets 1.68 Billions

Average total liabilities 8.27 Billions

Average total equity 1.04 Billions

Average sales 1.01 Billions

Average EPS 8.14

Average installed cement capacity 1.62 M-Tons

Average actual cement production 1.47 M-Tons

Average installed clinker capacity 1.77 M-Tons

Average actual clinker production 5.96 M-Tons

Average capacity utilization-cement 90.9%