afs report- lucky
TRANSCRIPT
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Table of contents
S# Content Pg. 1. Introduction of Lucky Cement 1
1.1 Mission 1
1.2 Vision 1
1.3 Product Line 2
1.4 Competitors 3
1.5 Statement of Production Capacity 4
1.6 Export Contribution to Sales 5
2. Industry Trends 6
3. Financial Highlights 7
3.1Financial Performance 7
3.2Business Prospects 8
3.2.1Projects 8
3.2.2 Investment 9
3.3 Risk 11
3.3.1 Business Risk 12
3.3.2 Financial Risk 13
3.4Unusual Event / Contingency 13
3.5 Audit Report 14
4. Analysis
4.1 Horizontal , Vertical & Trend Analysis of Balance Sheet
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4.2 Horizontal , Vertical & Trend Analysis of Income Statement
4.3 Interpretation of Horizontal and Vertical Analysis
4.4 Ratio Analysis
4.5 Interpretation of Ratio Analysis
5. Conclusion
6. References 14
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1. INTRODUCTION OF LUCKY CEMENT
• Founded by late Chairman Mr. RazzakTabba, Younus Brothers Group - one of
the largest export houses in Pakistan.
• First plant was built in 1996 in Pezu, and LakkiMarwat, and it had a capacity
of 4200 tons/day. As on now, the plants in Karachi and Pezu are rated
amongst the best plants in Asia, and they have a capacity of 24,000 tons/day.
• According to the CEO, Muhammed Ali Tabba, the biggest advantage of having
a plant in Karachi is that you stay close to the largest cement market of the
country, and take advantage of the positioning and availability of the
product.
• Lucky cement is the youngest amongst its competitors, the largest cement
manufacturer, and the largest exporter of cement in Pakistan.
• The company is listed on Karachi, Lahore, Islamabad and London Stock
Exchanges.
1.1 MISSION
“Our Mission is to be a premium cement manufacturer by building a
professional organization, having state-of-the-art technology, identifying new
prospects to reach globally and maintain service and quality standards To
Carter to the international construction needs with an environment-friendly
approach”
1.2 VISION
“We envision being the leader of the cement industry in Pakistan,
Identifying and capitalizing on new opportunities in the global market
contributing towards industrial progress and sustainable future, while being
responsible corporate citizens.”
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1.3. PRODUCT LINE
Product Line for lucky cement is dividing into 6 integrated
cement products which are as under
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1.4. COMPETITORS
Out of 24 companies in the cement sector’s market, 4 of them
hold the majority market share:
Lucky Cement- 20%
DG Khan cement- 15%
Bestway cement- 11%
Maple Leaf cement-10%
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1.5. STATEMENT OF PRODUCTION CAPACITY
OF CEMENT IN PAKISTAN
Lucky Cement has 16.19% of the total cements output capacity of
Pakistan SOURCE: APCMA
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1.6 EXPORT CONTRIBUTION TO SALES
Lucky Cement, the biggest exporter with exports accounting for 38% of total sales
Source: tribune.com.pk (2014)
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2. INDUSTRY TRENDS
CEMENT INDUSTRY IN PAKISTAN
Domestic cement sales are up 9% year-over-year for the first 7 months of Pakistan's Fiscal 2014-15.
The Domestic demand for cement rose by 6 %, but the international demand for Pakistani cement had fallen.
Market capitalization of Pakistani cement companies has jumped 70% last year, about 3 times more than the KSE-100 market index which rose 27% in 2014. This is the third consecutive year that cement companies have outperformed the broader market.
Investors in Pakistan's cement sector have seen 600% rise in the last three years.
Forecasts
With expected GDP annual growth to average 4.5-5.5% over the next 3 years, local cement sales could rise by 9 % on average annually to reach 34 million tons per year by 2017 and exports to 8 million tons per year.
The reason for the rise in the local cement demand is the falling
inflation, the lowering of the interest rates, and the falling of the oil
prices.
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3. FINANCIAL HIGHLIGHTS
3.1 Financial Performance
o LCL has recorded the highest ever profit after tax of Rs. 11.344 billion
(up by 16.4%), reason being: unmatched efficiency and low cost of
production.
o The cost of production has also increased by 6.1% during 2013-14, mainly
due to increase in gas tariff and rise in prices of packaging material. This
was also reflected in Lucky Cement’s gross margin ratio, which fell by
0.9%
Other financial performance indicators (Rs.):
– Revenue: 43.083 billion
– Gross profit: 18.690 billion
– Operating profit: 14.548 billion
– EBITDA: 16.621 billion
– Net profit: 11.344 billion
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3.2 Business Prospects
3.2.1 Projects
– Waste Heat Recovery (WHR) Plants at Captive Power Plants
For a 5 MW WHR plant to be installed at the Karachi captive power
plant, civil and existing structure modification work is in progress and
the plant and machinery is expected to be installed by the end of the
calendar year 2014. For another 5 MW WHR plant to be installed at
Pezu captive power plant, the order for the plant and machinery has
already been placed whereas the civil and mechanical work is expected
to start soon at the plant site and plant and machinery is expected to
be installed by the end of financial year 2015.
– Vertical Grinding Mills at Karachi Plant
Two state-of-the-art vertical grinding mills to be installed at the Karachi
Plant have already been received at the plant site. Civil and local
fabrication work has been completed, whereas erection work at plant
site is in progress. The first mill will become operational by the end of
October 2014, whereas the second will become operational by the end
of December 2014.
– TDF Plant at Pezu
Company had planned to introduce Tyre Derived Fuel (TDF) plant at
Pezu to replace coal. Since the coal prices in the international market
have come down compared to what prevailed last year and are fairly
stable, therefore, your Company has decided to defer the investment
in this project.
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– Electricity Supply to PESCO
Your Company has secured an approval for power generation from
NEPRA for the supply of surplus electricity from its Pezu power plant to
the Peshawar Electric Supply Company (PESCO). Your Company is
currently in the process of negotiation with PESCO
3.2.2 Investments
– Investment in 660MW coal based power plant
Lucky Cement Limited has resolved to recommend to its shareholders
to invest in setting up a 660MW Coal Based Power project in Karachi
through its subsidiary M/s Lucky Holdings Limited (LHL) in which the
Company holds 75% shares.
The CEO and the Board has recommended for the approval of the
shareholders, an equity investment of approximately PKR 20 billion
(US$ 200.0 million approximately) for the above referred project to be
set up by a newly
Formed entity by the name of ‘Lucky Electric Power Company Limited’
(LEPCL). LEPCL will be a wholly owned subsidiary of LHL and a 75%
indirect subsidiary of Lucky Cement.
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– Joint Venture Investment in NYA, a Cement Plant in DR Congo
Furthering its aim of international expansion, Lucky Cement is setting
up a joint venture cement manufacturing plant in Congo, named
NyumbaYaAkiba. Contract for Plant and Machinery of NYA has been
signed with European equipment supplier FLSmidth and down
payment as per the terms and conditions of the contract has been
released to secure timely delivery of Plant and Machinery. Project is
expected to start by June 2016
– Equity Investment in Associated Company in 50 MW Wind Farm
The EPC Contractors have been mobilized at site for the preliminary
works and financial close with the consortium of local banks for project
financing is expected to be achieved by the end of October 2014. The
project is expected to be completed by January 2016.
– Joint Venture Investment in Cement Grinding Facility in Iraq
Al Mabrooka Cement, the joint venture grinding mill in Iraq started
commercial production in February 2014. During the first five months’
operations up to June 2014, the grinding mill achieved cement
production of 142,500 tons and sales volumes of 135,000 tons. Sales
have picked up considerably since June 2014 and plant is expected to
maintain production at 70% - 80% of the capacity over the next
financial year
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3.3 Risks
3.3.1 Business Risks
The primary risk of Lucky cement is that there is no switching cost to the
customer because all the cement companies, due to severe competition,
supply more or less the same quality of cement with more or less the
similar price. The Company is also exposed to foreign currency exchange
rates and interest rates volatility.
• Lucky cement has recognized the followings as threats to its operations:
Law and order situation of Pakistan
Rising input cost of materials.
Rising input cost of energy.
Rising cost of logistics.
Currency risk.
New entrant threats due to high potential market size
The management of Lucky Cement has identified several risks and provided the
strategies its employing to mitigate those risks
Risks Mitigation Strategies
Employee Risk • Commitment towards professional development and training
• Employees are given proper compensation and benefits
• Following employment opportunity program
Risk of Increase in Cost of Raw Material/
Costof production
• Senior management is involved in the pricing of the product
and is monitored on a regular basis.
• Costs are controlled internally as much as possible.
• To ensure profitability, the Company is diversifying into
different markets of the world.
Safety and Security Risk Organized session and training on Basic Life Support
Training for firefighting and drills in case of fire causalities
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Availability of fire extinguishers and safety helmets are
ensured at both the Pants and the Head Office.
Operational Risk • Timely and regular maintenance and examination of plant
machinery, operations and administrative function is carried
out in order to mitigate Operational Risk.
Exchange Rate Risk • Exchange Rate Risk is mitigated due to proportionate balance
between import and export transactions.
Interest Rate Risk • Economic Indicators are monitored in order to better
understand the interest rate trend and the senior
management makes decisions and strategies accordingly.
Compliance/Legal Risk • The Company has departments looking after the legal and
compliance requirements. The Internal Audit/ Compliance
and Legal Departments ensure that the Company does not
face any Compliance/Legal Risk.
Environmental Risk • TDF (Tyre Derived Fuel) Plant is set up to reduce the carbon
emission.
• RDF (Refused Derived Fuel) Plant is also installed to reduce
environmental degradation
• WHR (Waste Heat Recovery) plant has been set up which
uses the heat generated from the production to generate
electricity
Political and Economic Risk • Both Plants are operational almost throughout the year,
despite the political crises
• The Senior Management ensures that the plant remains
operational and production is not curtailed
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3.3.2 Financial Risks
Lucky Cement is completely Debt free and has no leverages. The company has
improved its liquidity significantly and its capital reserve has increased by 23.2% to
Rs.46.6 billion
3.4 Unusual events / Contingency
There has been no such events highlighted by Lucky Cement management in their report
.
3.5 Audit Report
The Audit for the fiscal year 2014had been conducted by Ernst and Young Ford
Rhodes SidatHyder. In the Audit Report provided to the members, we have found that
the Auditor has given a qualified opinion because of the inconsistent accounting
policies adopted by Lucky Cement. The accounting policies in question were;
1. Standards, interpretations, amendment to approved accounting standards that
became effective.
2. Estimation of Staff Retirement Benefits
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4. ANALYSIS
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4.3 Interpretation of Horizontal & Vertical
Analysis
4.3.1 Balance Sheet
As compared to 2010, the Total Non- Current Assets of Lucky Cement has increased by 46.53%
(Rs. 14.6 billion) in 2015. This is mainly due to the increase in the long term investment (Rs. 11
billion change since 2010) and PPE (11.6%/ Rs. 3.6 billion change since 2010). The investments
were made in Alternative Energy projects, acquisition of ICI and other offshore projects in Iraq
and Congo.
As compared to 2010 the total Current assets have increased by 293.19% (Rs. 20.1 billion) in
2015. This significant increase was mainly caused by the increase in Trade debts (162 %/Rs. 1.2
billion).The trends also show that the company is focusing on achieving greater liquidity in its
business.
The trend analysis show that the Reserves (Retain earnings) of Lucky Cement has been
continuously increasing since past 5 years, as of 2015, the Reserves has increased by 156.26%
or Rs. 34 billion as compared to 2010. This is mainly because the company is generating
significant growth in earnings in the past 5 years. The company has also planned to set up
50MW wind Farm and also a 660MW coal based power plant which would require an equity
investment of Rs. 20 billion, hence the company is increasing its retained earnings in order to
finance its investment.
As compared to 2010, the total Current Liability has declined by Rs. 2.2 Billion or -22.3%. This is
mainly due to the decline in short term borrowing (decline of Rs. 6.3 billion/ -100%). This is an
indication that the company is focusing more on Equity financing rather than debt financing.
This is also an indication that company is reducing its financial risk.
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4.3.2 Income Statement
Since 2010, the net income has increased by 296% or Rs. 9.3 Billion in 2015. This is mainly due
to the increase in net sales which have increased by 82.63% or Rs. 20.3 Billion since 2010. This
also explains why Lucky Cement has increased its market share significantly and is now the
market leader in the Cement industry.
As compared to 2010, The COGS has also increased (48.69% or Rs. 8 Billion) but the increase of
COGS is not in the same proportion as the increase in net sales which gives an indication that
the company is managing its COGS very well. This is also reflected in the Gross profit which has
increased by 152% or Rs. 12.2 Billion.
The operating profit has increased significantly in 2015 (280.39% or Rs. 11.9 Billion) this is
because company is managing its distribution and administration expense really well.
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4.4 INTERPRETATION OF RATIO ANALYSIS
Liquidity Ratios
From the trend, we can observe that the gap between the Current and Quick Ratios is declining, this means that Lucky Cement is managing its inventory very well (Horizontal Analysis).
The Declining Current Ratio is facilitated by the increase in Quick and Cash ratio. This
explains that the company is more towards liquidity and will have no trouble fulfilling its
current obligations.
LC has the highest cash ratio compared to its peers (2.21).
Activity Ratios
LC has the highest inventory turnover compared to its peers (x15.27). This explains the high
cash ratio, because it is generating cash from operating activities at a faster rate compared
to its peers.
LC has the lowest receivable turnover compared to its peers. The possible explanation could
be that because of its supreme financial health, LC has a loose credit collection policy for its
customers. DG Khan on the other hand has a receivable turnover of x160, showing a tight
credit receiving policy for its customers.
LC has the lowest payable turnover ratio compared to its peers (x4.65) this means that LC
has been given less strict credit payment policy from its suppliers.
Solvency Ratios
As mentioned in the Director’s report, LC has 0% debt, hence its Debt-to-Equity and Debt-
to- Asset ratios are nil.
LC is works with the lowest financial leverage ratio compared to its peers (1.22). That
means a $1.22 asset is financed by $1 of equity and $0.22 of debt. Hence the debt –to
equity ratio is 18:82. LC has reduced its financial leverage since the past 5 years. This means
that LC is moving more towards equity finance which was confirmed from the balance
sheet analysis in which the total equity has increased by 136% since 2010.
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LC also has the highest interest coverage ratio compared to its peers
(x618.93) which means that LC generates enough net income to pay off its
interest payments 618 times. This is a really strong position and that explains why creditors
confidence in giving LC a loose credit policy. LC is also strong enough to fulfill short term
obligations.
Profitability Ratios
LC has the highest GP margin ratio compared to its competitors (0.45). This means that LC
has managed to control its cost of production (COGS) better than its competitors. This
information is also stated in the Directors report which says that LC is focusing on
alternative energy methods to cut down costs. They are also generating their own
electricity for the production.
The past 5 years trend reveals that the gap between GP margin and OP margin is decreasing
which gives an indication that the company is managing its operating expense efficiently.
But compared to its competitors LC has not managing its operating expense as efficiently as
Attock Cement.
LC has the highest pretax margin compared to its competitors. This means that LC is
managing its other income to a great degree as compared to its competitors. The pretax
margin is also showing an increasing trend since 2010. This is confirmed from the balance
sheet analysis which tells us that LC’s long term investment has increased by Rs. 11 Billion
since 2010.
The ROA of LC has dropped since 2014, this tells us that LC is not using its total assets
efficiently and this it is also observed in the Fixed Asset turnover ratio which has declined
since 2014.
The ROE has also declined since 2014 showing the in managing the total equity. Since the
net income shows no sign of declining, the only possible explanation could be that the total
average equity has increased since 2014; this has also been observed in the horizontal
analysis of the balance sheet which shows that the total equity has increased by 37% from
2014 while net income has increased by 34% since 2014.
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Valuation Ratios
LC has the highest EPS compared to its peers (38.4). This means that the shareholders of LC
are enjoying higher earnings than those of DG Khan and Attock
LC also has the highest P/E ratio compared to its peers (13.5). This means that LC’s market
is ready to pay 13.5 times the EPS for every share of LC.
5. CONCLUSION
The above analysis of the ratios gives a indication that LC has a strong financial
position . The Company has almost tripled its current assets since 2010. LC has also
increased its long term investments by around Rs. 11 billion. The investments were
made in Alternative Energy projects, acquisition of ICI and other offshore projects in
Iraq and Congo. The company has become a 100 % debt free company.
The company will not be facing any signs of short term or long term liquidity crises.
The company is out performing its competitors in terms of sales volume and earnings
and also inventory turnover. The company is also reducing its operating expense and
COGS in order to increase its operating profit. We conclude that LC is one of the
strongest and well managed companies in Pakistan, and they have the capabilities to
grow into a multinational corporation.
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6. References
• http://tribune.com.pk/story/623283/manufacturers-asked-to-search-for-new-markets-
to-stay-competitive/
• http://www.apcma.com/data_productioncapacity.html
• http://www.slideshare.net/aliamjad42/analysis-on-the-cement-industry-in-pakistan
• http://pakobserver.net/detailnews.asp?id=135399