capital budgeting process
TRANSCRIPT
FINAL SEMESTER PROJECT
CAPITAL BUDGETING PROCESS
Investment Screening and selection
Capital Budget Proposal
Budgeting proposal and authorization
Project Tracking
Post Compilation Audit
Cement Industry Pakistan
Business Expansion
Establishing news Industry Capital Budgeting
STEP 1
INVESTMENT SCREENING
AND SELECTION
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
PORTER’S FIVE FORCES MODEL OF CEMENT SECTOR
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
1. BARGAINING POWER OF SUPPLIERS
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.
2. BARGAINING POWER OF BUYERS
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
3. BARRIERS TO ENTRY IN THE MARKET
1. High Cost
2. Absence of Healthy Competition
3. Nature of Industry
4. THREAT OF SUBSTITUTE PRODUCT
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.
5. RIVALRY AMONG THE EXISTING COMPETITORS
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
SELECTION
Environmental Aspects
Legal Aspects
Technological Aspects
Social Aspects
Economic Aspect
Political Aspects
STEP 2
GENRATE THE PROPOSAL
CAPITAL BUDGET PROPOSAL
Methodolgy Expecte
d costs
Time required
PER UNIT COST ANALYSIS OF CEMENT SECTOR OF PAKISTAN
2008(000)Rs
2009(000)Rs
2010(000)Rs
2011(000)Rs
2012(000)Rs
2013(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 Margin/Ton
2.08 1.86 1.33 1.99 1.77 2.97
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%
BREAK EVEN (A VIEW OF EXISTING INDUSTRY)
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
ABOVE AVERAGE BREAK EVEN COMPANIES
1. Bestway cement
2. Dewan cement
3. Lucky cement
4. Maple Leaf cement
5. Lafarge Pak cement
6. D.G. Khan Cement
The Real compititon
SALES PRICE PER UNIT
S.P/Unit 2008(000)Rs
2009(000)Rs
2010(000)Rs
2011(000)Rs
2012(000)Rs
2013(000)Rs
Industry Average
4.88 5.34 4.85 5.77 6.94 7.50
Rate of Change of S.P/Unit
2008 2009 2010 2011 2012
Industry Average 0.15 0.45 0.20 0.21 0.15
Rate of change of sales Price
VARIABLE COSTS PER UNIT
V.C/Unit 2008(000)Rs
2009(000)Rs
2010(000)Rs
2011(000)Rs
2012(000)Rs
2013(000)Rs
Industry Average 2.81 3.48 3.52 3.78 5.17 4.53
FIXED COST PER UNIT
F.Cost/Unit 2008(000)Rs
2009(000)Rs
2010(000)Rs
2011(000)Rs
2012(000)Rs
2013(000)Rs
Industry Average
1.00 0.91 1.02 1.00 1.29 1.44
COST OF SALE PER UNIT
T.Cost/Unit 2008(000)Rs
2009(000)Rs
2010(000)Rs
2011(000)Rs
2012(000)Rs
2013(000)Rs
Industry Average
3.80 4.39 4.54 4.78 6.46 5.97
MARGIN OF SAFETY
Margin of Safety
2008 2009 2010 2011 2012 2013
Industry Averages
34% 61% 25% 39% 43% 53%
CONCLUSION
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.
Table 62: Overview of Cement Sector in F.Y. 2013
Overview of cement sector Financial year 2013
Average total assets1.68 Billions
Average total liabilities8.27 Billions
Average total equity1.04 Billions
Average sales1.01 Billions
Average EPS8.14
Average installed cement capacity1.62 M-Tons
Average actual cement production1.47 M-Tons
Average installed clinker capacity1.77 M-Tons
Average actual clinker production5.96 M-Tons
Average capacity utilization-cement90.9%
Total assets Total liabilities Total equity Sales0
2
4
6
8
10
12
14
16
18
Averages in FY 2013 (Billions-Rs.)
Averages (Billions-Rs.)
Installed capacity-cemnt Actual production-cement Installed capacity-clinker Actual production-clinker0
0.2
0.4
0.6
0.8
1
1.2
1.4
1.6
1.8
Averages in FY 2013-M.Ton
Averages-M.Ton
PROPOSAL
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.
CEMENT SECTOR HAS SHOWN GOOD FINANCIAL
POSITION, PERFORMANCE, PROFITABILITY, EPS
AND GROWTH IN CURRENT YEARS DUE TO
WHICH IT HAS BECOME ATTRACTIVE FOR
INVESTORS
STEP
3
Budgeting Approval and Authorization
LEGAL REQUIREMENTS
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
AUTHORIZATION
Finance department
HR DEPARTMENT
MARKETING DEPARTMENT
Other RELATED DEPARTMENT
APPROVAL
THE PROPOSAL AFTER BEING PREPARED AND AUTHORIZED WILL BE PRESENTED IN A MEETING AND CEO WILL APPROVE IT FOR FURTHER PROCESSING
STEP 4
PROJECT TRACKING
EXPENDITURES
Fixed cost
Variable cost
VARIABLE COST
Raw material, direct labor, variable FOH and variable selling and distributive expensesVariable FOH:Fuel and powerStores and spares consumedRepair and maintenanceVehicle running and maintenanceIndirect materialCommunicationTransportationTraveling and conveyancePrinting and stationaryOther manufacturing cost
Variable Selling andDistributive Cost: Salaries and wages Logistic and related chargesLoading and othersCommunicationTraveling and conveyanceFreightPrinting and stationaryUtilitiesVehicles and maintenanceRepair and maintenanceOthers selling expense
FIXED COST
Depreciation and amortization
Insurance
Provision for slow moving spare parts
Earthmoving machinery
Inspection for electrical installment
Rent, rates and taxes
Mess subsidy
Technical assistance
Legal and professional charges
Fixed Selling and Distributive Expenses:
Insurance
Rent, rates and taxes
DepreciationSecurity charges InsuranceFee subscription and periodicalsAdvertisement and sales promotionEntertainmentOffice canteen Meetings and conferences
ESTIMATING CASH FLOWS
Year 0 1 2 3 4
Sales - 3750000 1680000 1380000 1320000
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
In dollars
BREAK EVENS
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
PRESENT VALUE
Year Cash Flows PV@ 10%
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
In dollars
IRR
Year Cash Flows Dis @10% PV@ 10%
Dis.@15%
PV @15%
0 800000 800000 800000
1 613000 0.909 557217 0.833 510629
2 187400 0.826 154792.4 0.694 130055.6
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
16%
In dollars
STEP 5
POST COMPLITION AUDIT
Ratios analysisHorizontal analysisVertical 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%
THAN
K YO
U..
Saman Khurshid