Oxford Brookes UniversityResearch and Analysis Project

The Business and Financial Performance over a Three Year Period Of

Pioneer Cement Limited

December 2008

By: Ahmed AliRegistration number: 1322209

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Words: 6,495

Contents

Topic Page no.

1. Project objectives and overall research approach1.1 Reasons for choosing topic and company 3.

1.2 Project objectives and research questions 3.

1.3 Research approach 4.

2. Information gathered and business techniques used2.1 Sources of information 5.

2.2 Description of method used to gather information 6.

2.3 Limitations of information 6.

2.4 Ethical issues 6.

2.5 Business techniques used and their limitations 7.

3. Analysis and conclusion3.1 Company profile 9.

3.2 Group profile 9.

3.3 Sector analysis 9.

3.4 Ratio analysis 10.

3.5 Porter’s five force analysis 13.

3.6 SWOT analysis 16.

3.7 Conclusion and recommendations 17.

Appendix A: References and bibliography 19.Appendix B: Graph – Net sales 21.Appendix C: Graph – Operating assets 22.

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Appendix D: Graph – EPS 23.Appendix E: Balance sheet and Income statement 24.Appendix F: Ratios sheet 26.Appendix G: Sample questionnaire and its response 27.

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1. PROJECT OBJECTIVES AND OVERALL RESEARCH APPROACH

1.1 Reasons for choosing this topic and company

Among a number of viable topics which I could have selected, the pros of choosing this one outweighed all the others. This topic provided me with a number of potential benefits and opportunities, which is why I chose it.

I was already familiar with the tools that I had to use in order to complete my research and analysis. This included ratio analysis, SWOT analysis and Porter’s five force analysis. Amongst the several options this is the most generalized topic so all the tools used are very flexible and can be used to conduct analysis of other organizations and sectors. I have come across these tools during my course of studies, so I understand their application, uses and limitations to the extent of examination questions. However, using them in a real life scenario for the first time was much more challenging and I took it as an opportunity to enhance my analytical skills.

Another reason is that, this topic extends to give a wholesome view of the organization in relation to its surroundings, along with its ability to survive and thrive in the environment. In the business world an accountant is expected to be able to perform in depth analysis of financial information and evaluate qualitative and quantitative information, which is not only related to the past but also goes to consider the situation in the future. Although, I could have achieved this objective using other topics, this topic provided the most lucrative information which could be analyzed deeply.

Furthermore, during the current year I came across several articles regarding the cement sector and pricing cartels which were a much publicized issue. This became a major reason for my interest in the sector. As I stared researching I realized that the cement sector was a major contributor to the economy of Pakistan. Even though I had several options of companies to choose from amongst the sector, I selected Pioneer Cement Company Limited (PIOC) as it was one of the important market players. PIOC is a well known organization, which is one of the reasons why authentic information related to it is easily accessible.

1.2 Project objectives and research questions

This project evolves around a number of different, these are:

To analyze the current profitability of the organization and the returns that it promises to its shareholders in the future. This involves not only analyzing the current situation of its income but also the ability of PIOC to be able to maintain these in the future (Mainwaring, 2002)

To assess the ability of PIOC to manage its liquidity, cash position and working capital and to be able to satisfy its creditors demands on time. This gives an insight into the company’s ability to continue its operations in the future.

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To be able to comment on the current situation of capital financing of PIOC, its debt repayment structure and whether it will be able to make these payments on time and its ability to generate further capital in future

To explore the impact of the financial position of PIOC on the investors and their reactions to the profitability of the company. Since the company operates in a weak form efficient market, the reaction in some scenarios is rather unusual.

To judge the competitive environment of PIOC and where it stands in the industry. This will give an idea regarding the future potential of the company to grow or survive in the industry

To investigate the opportunities that the environment has to offer to the company and how does it use its strengths to attain benefit from these. Also, to see what are the threats that the company faces and the weaknesses that it has, and what strategies does it take to overcome these drawbacks

Before starting work on my project I had to ask myself a few research questions and the following questions gave me a useful guideline on how to go about my research and have tailored my research work accordingly

What is my research question/title of my project?

What is the current literature on the subject and the underlying theory?

What methods will be used to gather information about the topic?

How will the analysis be carried out?

What conclusions can be drawn from the analysis?

What are the key elements that I should present to my mentor?

What have I learned from the process?

(Johnson, 06 Jun 2005)

1.3 Research Approach

After deciding the topic and company for research, the next step was to decide which tools to use and what methodology to follow in order to carry out the research. I realized that to carry out the research in an effective way I had to go about in a systematic way. Initially I had to gain understanding of the types of information I needed and the sources of that information, so I did a little background research. After doing so I came to the conclusion that I needed to have a combination of sources to conduct the research.

I identified the type of information that I would require in order to conduct my project effectively. After doing so I directed my search in the course on those information sources and picked the most relevant data. I structured a few key words that were necessary for the search and stuck to them while doing the research. After collecting the data, I started sorting it in a logical pattern. I ensured that for all the data that I collected I mentioned the references.

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2. INFORMATION GATHERED AND BUSINESS TECHNIQUES USED

2.1 Sources of information

There are two main sources of information, one resulting in gathering of primary data and the other producing secondary data. Although, both types of sources were invaluable secondary sources were generally easy to get, and I had to use several tactics to be able to get primary data

Primary data: is original data derived from a new research study and collected at source, as opposed to previously published material www.dictionary.bnet.com

Although more difficult to obtain, it is the more reliable type of information.

I had two available sources of primary data. Firstly I had an interview with the chief financial officer (CFO) of PIOC, Mr. Muhammed Saleem. It was a quick meeting as the CFO had very little time to spare so I had to shorten my questions list and enquire only about the most important areas. During this interview I was able to gain information about the future strategies of PIOC and a general idea of why there is a slump in the industry, how is it effecting PIOC and what is PIOC doing to mitigate the risks caused by this slump.

The second source I had was a questionnaire that was filled by assistant manager finance. It provided a useful source in answering the questions I was unable to ask the CFO. It provided me with information regarding changes in major ratios, how the company intended o deal with its cash flow and debt structuring issues, and how it dealt with its strengths, weaknesses, opportunities and threats

Secondary data: is existing primary data that was collected by someone else or for a purpose other than the current one www.businessdictionary.com

It is more easily obtainable, but it becomes less reliable. However, whenever I came across a source of secondary data, I made sure that it was authentic before including it in my project.

There were ample sources for secondary data. Annual reports obtained from the Lahore Stock Exchange were the most important source for calculation of ratios. The internet was a major source for collecting relevant data. I used several search engines such as Yahoo Google and ask.com so that I could search in a wider section of the web and reach my desired links more quickly. Each search engine provided me with a different list of information and mostly with authentic information with valid sources.

Another major source of information was text and reference books. I used my college library to browse through relevant books about the business techniques I was going to use for the analysis. Here the most useful were the ACCA textbooks from BPP and FTC. Although I gained most of the required information from these sources I went one step further and went through the archives of a few trade journals, newspapers and magazines such as Business Recorder and ACCA’s Student Accountant. These provided me with further information

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regarding my approach to the project and the scenario of the company I had selected.

2.2 Description of methods used to gather information

I used several methods to gather information from the above mentioned sources. They are as mentioned below.

While searching on the internet I typed key relevant words and run the search engine this provided me with a number of related links. After browsing through the material found I picked the most relevant information and then I ensured that the information was authentic. To do this I tried to use only well known websites such as the official website of PIOC. However, it was not always possible. So when using a less known source, I ensured the authenticity of information by checking the references mentioned. If there were no references as to where the information came from, I did not use it.

Mostly I found the related material in my college library. The ACCA approved textbooks provided help regarding the application of analytical tools. The particularly helpful ones were the BPP textbooks for papers P2 and P3 as they provided information about how to apply ratio analysis, porters five force analysis and SWOT analysis. I also searched the archives of well-known trade magazines, so that reliance could be placed in the information they provided. One of the major sources for gathering information was the published annual reports of the company, which provided me with valuable information for the analysis.

2.3 Limitations of information

The information collected had several limitations The interview with CFO of PIOC was very short and I could only get limited

information from him The information from internet was not reliable in most of the cases and it took

me lot of time to ensure the genuineness of information To obtain the archives of business recorder I had to visit their office twice as

the relevant files were unavailable. For information related to porters five force analysis I had to find the article

written by Michael E. Porter. It was not available in the college library so I had to search for it elsewhere and it took me three days before I could obtain the required material

2.4 Ethical issues

While collecting information I had to ensure that I was within the ethical parameters as set by ACCA at all times. I had to uphold objectivity, integrity, confidentiality, professional behavior and professional care. The assistant finance manager was a little reluctant to fill the questionnaire, as he was unsure whether he had the authority to disclose the information I required. Respecting the confidentiality of the company, I talked to a senior and ensured that the

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disclosure of this information would not cause any harm, before obtaining this information.

2.5 Business techniques used and their limitations

Ratio analysis: financial ratios quantify many aspects of a business and are an integral part of financial statement analysis. Financial ratios are categorized according to the financial aspect of the business which the ratio measures… Liquidity ratios measure the availability of cash to pay debt... Debt ratios measure the firm's ability to repay long-term debt… Profitability ratios measure the firm's use of its assets and control of its expenses to generate an acceptable rate of return...Market ratios measure investor response to owning a company's stock and also the cost of issuing stock(Groppelli, 2000)

Limitations of ratio analysis: there are several limitations of financial analysis through ratios Profit and capital employed are arbitrary figures. They depend on the

accounting policies adopted by an entity Many businesses produce accounts to a date on which there are relatively

low amounts of trading activity Ratios based on the historical cost accounts do not give a true picture of

trends from year to year. An apparent increase in profit may not be a ‘true’ increase, because of the effects of inflation ( FTC, 2007)

Porter’s five force analysis: the nature and degree of competition in an industry hinge on five forces: the threat of new entrants, the bargaining power of customers, the bargaining power of suppliers, the threat of substitute products or services (where applicable), and the jockeying among current contestants (Porter, 1979)

Limitations of Porter’s five force analysis: the five forces model provides a comprehensive framework for analysis the competitive environment. However, it must be used with caution. Its very comprehensiveness can encourage a feeling of omniscience in those who use it, a sense that all factors have been duly considered and dealt with…Any analysis must pursue as high a degree of objectivity as possible if there is too much subjectivity unfounded complacence will result. (BPP, 2008)

SWOT analysis: It is a tool that identifies the Strengths, Weaknesses, Opportunities and Threats of an organization. Specifically, SWOT is a basic, straightforward model that assesses what an organization can and cannot do as well as its potential opportunities and threats. The method of SWOT analysis is to take the information from an environmental analysis and separate it into internal (strengths and weaknesses) and external issues (opportunities and threats). Once this is completed, SWOT analysis determines what may assist the firm in accomplishing its objectives, and what obstacles must be overcome or minimized to achieve desired results. (www.answers.com)

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Limitations of SWOT analysis: One major problem with the SWOT analysis is that while it emphasizes the importance of the four elements associated with the organizational and environmental analysis, it does not address how the company can identify the elements for their own company. Many organizational executives may not be able to determine what these elements are, and the SWOT framework provides no guidance (www.referenceforbusiness.com)

While using for reducing a large quantity of situational factors into a more manageable profile, the SWOT framework has a tendency to oversimplify the situation by classifying the firm environmental factors into categories I which they may not always fit. The classification of some factors as strengths or weaknesses or as opportunities or threats is somewhat arbitrary. For example a particular company culture can be either strength or a weakness. A technological change can be an either a threat or an opportunity. Perhaps what is more important than the superficial classification of these factors is the firm’s awareness of them and its development of a strategic plan to use them to its advantage. (www.netmba.com)

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3. ANALYSIS AND CONCLUSION

3.1 COMPANY PROFILE

PIOC was incorporated in Pakistan as a public company limited by shares on February 09, 1986. Its shares are quoted on all stock exchanges in Pakistan. The principal activity of the Company is manufacturing and sale of cement. The Company’s products include Ordinary Portland cement (OPC) and sulphate-resistant cement (SRC) (www.pioneercement.com).

3.2 GROUP PROFILE

PIOC is a part of the Noon group, which employs about 2,000 personnel throughout Pakistan Manufacturing facilities are located at Bhalwal, District Sargodha and Chenki, District Khushab. The Group is managed by Noon family duly assisted by qualified and experienced technical and business professionals as working Directors and Senior Executives. (www.noonsugar.com).

First National Equity Ltd holds 10% and the directors and members of their families own 44.8% of the company's total 162.48 million paid-up shares of Rs 10 each. Local shareholders own 13.8% and financial institutions own 10% of the company's stock (Correspondent, December 28, 2006)

3.3 SECTOR ANALYSIS

Cement industries in Pakistan are currently operating at their maximum capacity due to the boom in commercial and industrial construction within Pakistan. Consumers face a tough decision with regards to prefer which brand over which because of the similar pricing of cement industry. The formation of cartel by the cement manufacturers have exploited local consumers a lot and this has led to the concentrated degree of oligopoly, where the firms are acting as a single unit to perform their monopoly. Their combined market power is simply a diluted version of the dominance that a single firm with a monopoly market share can exert.

The cement association is less of a trade group and more of an unnamed cartel. All members are assigned capacity utilization and none can increase their capacity without prior permission. Prices are set by the cartel and everyone shares profits amicably, except when an unsatisfied member threatens to leave the cartel. (Mangi, December 23, 2004)

The demand of Pakistani cement is expected to continue to grow at the rate of 20% for approximately four years to come. It may then follow conventional growth rate of 7% per year. Announcement of major dams will dramatically increase this demand. The current demand in the market is approximately 25mln metric tons of cement. Government development expenditures count for one-third of total cement consumption.

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3.4 RATIO ANALYSIS

The sources used to analyze the ratios are annual accounts of PIOC for FY’05 to FY’07. While commenting on the feasibility of the each ratio industry averages were also looked into. See Appendix-F for detailed calculation of the ratios.

3.4.1 SALES ANALYSIS

The turnover growth, in general, presents a very worrying picture. Even though there has been a growth of 1.8% in FY’07 it is minimal as compared to the growth of 50% and 54.6% in FY’06 and FY’05 respectively.

The turnover from in FY’06 as compared to FY’05 has grown by 50% from Rs. 2,045mln to Rs. 3,076mln. Of which 34% was contributed by a drastic increase in selling prices and 16% was because of increase in sales volume of cement. The contribution made by local sales towards total sales has increased from 87% to 90% in FY’05 to 90% in FY’06. It means that PIOC is concentrating more on local sales as compared to exports.

The turnover during FY’07 has shown very little growth of only 1.8% from Rs. 3,076mln to Rs. 3,131mln. The company saw an unusual growth in quantities of cement sold which increased from 835,000 metric tons in FY’06 to 1,267,000 metric tons in FY’07. This represents an approximate 51.8% increase in sales volume this was mostly due to high demand in the market due to construction of housing societies and the earthquake in northern areas of Pakistan; however this was offset by a substantial decrease in sale prices. A massive decline of 35% was recorded in average prices of cement in the domestic market during FY’07, over the year which adversely affected the operating results of Company. Due to fierce competition prevailing in the cement market, the price of cement continued to remain highly volatile, compelling the Company to make adjustments in the prices almost on daily basis. A price war prevailed during the FY’07 which caused a decline of about 50% in the net price of cement. It seems that the sales prices have fallen throughout in the cement sector, even though there is a dire increase in demand for cement.

PIOC exported 132,284 tons of cement in FY’07 as compared to 118,028 tons of cement exported in the previous year and registered a rise of 12%. However, due to a decrease in sale prices the exports generated only 8% of the total turnover in FY’07 as compared to 10% in FY’06.

3.4.2 PROFITABILITY ANALYSIS

Gross Profit margin:

The gross profit margin had been gradually increasing over some years until FY’07 when it saw sudden downfall. In FY’06 the gross profit ratio increased to 40% as compared to 32.9% in FY’05. This is contributed mainly to the increase in average retention prices of cement over the year. There was an increase in the cost of sales of 34% from Rs.1,372mln to Rs.1,845mln. The only atypical change was in salaries and wages which increased by 79.8%

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In FY’07 the gross profit margin took a downturn and fell to 10.2%from 40% in FY’06. This was because of two reasons, the first being a decline in sales prices which led to an inadequate turnover growth and second being a 52% increase in cost of sales from Rs.1,845mln in FY’06 to Rs.2,813mln in FY’07. Fuel and power constitutes more than 50% of the total cost of sales. The rise in international fuel costs has caused an increase in the cost of sales. However PIOC was able to mitigate the impact of fuel prices on its profit in FY’07 as it started using 80:20 blend of imported and local coal that helps reduce its energy cost and impact the margins positively (www.pacra.com). Another reason for increase in costs is the increase in depreciation charge. The escalation was caused by the expansion project of PIOC and increased investment in non current assets

Net Profit margin:

The net profit margin increased commendably from FY’05 to FY’06 from 19.3% to 30%, mainly due to increase in gross profit. There has not been any major cost cutting in distribution or administration costs. However there was an unusual increase in “other operating income”. Finance cost amplified in FY’07 to 2.5 times its original size in FY’06. This was mainly due to a gain made on derivatives, and reversal of unrealized loss on fair value of those derivatives. Distribution costs also fell leaving a reasonable increase in net profits.

FY’07 was a difficult year for PIOC since its net profit ratio fell from 30 % in FY’06 to a net loss percentage of (5.9%). The low gross profit primarily contributed to the loss occurring, but even with a nominal gross profit, the condition of the net profit margin would not have been so abysmal had the finance costs not increased by 86.8% from Rs.197mln in FY’06 to Rs.366mln in FY’07. The major reason for such abnormal fluctuation is that most of the long term loans are acquired at a floating rate.

Return on capital employed (ROCE):

The return on capital employed had increased from 8.6% in FY’05 to 14.7% in FY’06. Overall FY’06 had been a good year for PIOC. As it showed a reasonable increase in turnover and profits, it was predictable that there would be an increase in ROCE. Without any further employment of resources the ROCE would have been even better, however due to the expansion undertaken in the plant the capital employed has increased by 28% from Rs.5,995mln in FY’05 to Rs.7,665mln in FY’06

On the other hand FY’07 presents a picture quite to the contrary. The ratio falls to 2.3% from 14.7% in FY’06, not only due to falling profitability but also because most of the capital employed has been used for extension of the plant it is acceptable that it did not generate profit in the current year as it will be of benefit in the long term. There has been little increase in capital employed since FY’06 which grew by only 1%. It seems the expansion has not yet brought about the bounties that were expected from it.

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3.4.3 LIQUIDITY ANALYSIS

Although consistent, the liquidity conditions of PIOC are not particularly impressive. An average current ratio of 0.45:1 is way below the industry average of 1:1. It means that PIOC will be unable to pay its current obligations when they fall due. Mostly the current liabilities consist of current portion of non-current liabilities. They compose approximately 50% of the total current liabilities.

In the past three years, the liquidity position of the company has not improved or worsened much. It deteriorated a little in FY’06 to 0.44:1 as compared to FY’05 when it was 0.47:1. But it position strengthened a little in FY’07 to 0.48:1.

The quick ratio represents an even more worrying picture. In FY’05 it was 0.12:1 which fell further in FY’06 to become 0.10:1. However, the quick ratio improved in FY’07 to 0.20:1 mainly because the cash flow conditions improved as PIOC acquired new long term loans. Had PIOC only relied on operating cash flows, the quick ratio would have worsened. Other than cash there are no major additions to the current asset side of the quick ratio.

3.4.4 WORKING CAPITAL MANAGEMENT

PIOC operates in a sector where sales are on cash basis so it does not require debtor management. Ideally this figure should not exist in the financial statements. The small number of debtor days could be because of limited credit terms offered to old customers.

However PIOC needs to improve its creditor management. Due to appalling liquidity conditions the management is using trade creditors as a source of short term finance. Conversely this would cause discontent and loss of goodwill amongst creditors. In FY’05 PIOC was paying its creditors at an average of 212 days and this situation worsened in FY’06 when it increased to 265 days on average. It is quite likely that the creditors would not have liked this. So the situation improved in FY’07 as the creditor days reduced to 131 days. Even though it is it is still very high it is still quite an improvement. PIOC has been rated as an A2 in the short term by Pakistan credit rating agency limited (PACRA, 2007). It means that the company is reasonable capable to pay its current obligations subject to the market conditions in which it operates.

The most consistently managed portion on the working capital is inventory days. There were 15 days in FY’05 and 19 days in both FY’06 and FY’07. The stock is repurchased after every 2-3 weeks. This implies that the company has efficiently reduced the risk of a stock out without engaging too much capital in the inventory. Generally PIOC has a negative operating cycle so they have to maintain enough cash to be able to pay trade creditors on time

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3.4.5 MARKET RATIOS

The weighted average number of shares has been restated for the years FY’06 and FY’05 since there was a bonus issue in all three years. The earning per share (EPS) of PIOC saw an improvement from FY’05 to FY’06 as it approximately doubled from Rs. 1.95 to Rs.3.98, the reason being a higher net profit achieved in FY’06. This situation worsened in FY’07 when there was a loss per share of 0.55. Even though the profit before interest was worse, the tax relief in FY’07 improved the conditions of PIOC to some extent.

The dividend per share (DPS) figure shows that the company only paid out dividends in FY’06 probably due to the exceptionally high profits. Although, since the liquidity conditions of PIOC are not up to the mark, it may not have been feasible to pay a dividend in FY’07. Generally the way PIOC is operating it suggests that they intent to promising their investors long term capital gains rather than regular cash flow in form of dividend. The expansion project is one of their policies to indicate long term benefits.

The market value per share presents a varying picture. It varies with markets’ expectation about the prospects of the company. As expected the expansion project’s completion has increased investors expectation for the company future and resultantly the market value shot up to Rs.45.65 in FY’06 from Rs.20.35 in FY’05. The market value fell to Rs.37.40 in FY’07 due to poor performance (www.kse.com.pk)

The price to earnings (P/E) ratio reflects the investors’ confidence in the company. This ratio was 10.4:1 in FY’05 and increased to 11.5:1 in FY’06. This increase in confidence was probably due to the brighter future prospects of the cement industry. However since there was loss in FY’07 it gives a P/E ratio of negative 66.7:1. This is more a mathematical value than a meaningful comparison.

Since dividend was only paid in FY’06 the yield is 2.2% on the market value which is pretty low. Yet, the company does not seem to have a strict dividend policy. The dividend yield does not seem to affect the investors’ confidence

3.4.6 CAPITAL DEBT STRUCTURING

The gearing of the company is currently high. This is mainly due to the expansion project. The debt to equity ratio remained almost constant in FY’05 and FY’06 at 62.4:37.6 and 61.8:38.2. However, this increased to 65.6:34.4 in FY’07. PIOC has acquired further loans in all three years. The amount of long term debt increased by 26% from Rs.3,745mln in FY’05 to Rs.4,739mln in FY’06 and increased further by 7% in FY’07 to Rs.5,091mln, but the gearing did not change since the company had issued bonus shares in all three years. This means PIOC has not raised any capital from issue of equity.

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Even after having a number of loans deferred there are quite a few loans approaching maturity and currently PIOC does not have enough funds to be able to repay them. This indicates a liquidity crisis in the future. Given the current maturity pattern of these obligations, it is imperative that PIOC raise funding to restructure its borrowings. The debt restructuring is expected to synchronize the debt repayment with emerging cash flow patterns

The interest cover situation has worsened dramatically. It increased in FY’06 to 5.7 times from 4.3 times in FY’05, mainly due to increase in gross profit in that year. In FY’07 the plight worsened and interest cover fell to 0.5 times. Two things caused such a drastic impact. Firstly, the decrease in profits contributed to fall in interest cover and secondly the increase in finance costs of 86.8%. This increase, as mentioned in the net profit margin analysis was because of loans acquired on floating interest rates which are on the rise during the year.

3.5 PORTER’S FIVE FORCE ANALYSIS

3.5.1 New market entrants:

The possibility of new market entrants in the industry depends upon several factors. Barriers to entry such as strict government policy could hinder entrance of new companies. High capital investment requirements of the cement industry, oligopolistic competition, economies of scale achieved by existing manufacturers and existence of cartels among larger firms could act as hindrance for new entrants.

However, lucrative business, prospects for increase in demand and encouraging government policies in the cement sector could act as a welcoming sign for new entrants. The plant of PIOC is located in the north of Pakistan where there is already a lot of competition, so the likelihood of a new entrant in the Punjab market is very less.

3.5.2 Competitive rivalry:

There are twenty seven cement manufacturers in Pakistan cement sector of which PIOC falls in the top five players of the market. It holds 5.5% of the market share. The cement industry has oligopolistic competition the competitors do not differ on the basis of product range since all of the manufacturers make, more or less, the same type of cement.

The rivalry becomes more emphasized due to high exit barriers and abandoning costs and the fact that due to industry wide expansion projects and takeovers production capacity of most of the manufacturers has extended and the companies are fighting to achieve the desired capacity utilization or otherwise report losses. This rivalry is reduced by the fact that brand identities are not predominant in the cement sector and the large manufacturers can use cartel mechanism to induce a monopolistic effect, even though these cartels are not very long lasting.

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3.5.3 Suppliers’ bargaining power:

Suppliers can be divided into two types one being suppliers of raw material for example limestone and second being the suppliers of fuel and power. Mostly plants for manufacturing of cement are established in areas where there is easy access to limestone ridges. And a very extraction is stared on long term contracts with minimal royalties being paid. In this way the bargaining power of suppliers of raw material is very low.

As for the bargaining power of suppliers of fuel it is also low, since coal, which is the source of fuel for the cement industry, is abundantly available and has an open market. However the recent hike in coal prices internationally may indicate a contrary picture. The quality of coal does matter which is precisely why PIOC has started importing coal rather than using the local one due to its sulphate impurity content. The cost of switching suppliers is also low to the manufacturers this further reduces the bargaining power of suppliers.

3.5.4 Customers’ bargaining power:

Even though the cost of switching to other companies in not high for the customer and they are not affected by the brand loyalty, the bargaining power of customers is low. Mostly this is due to the existence of cartels in the cement industry and the fact that there are no alternative products that can be used instead of cement. The product is of high importance to customers and even though quality of cement used is important to them smaller consumers can not measure it. Since the cement industry has several buyers, companies are not likely to be affected by switching of a few customers.

However, there are some buyers who have the equipment to test the quality of cement and are buying in such large quantities that they become very important to the manufacturers this gives them some bargaining power. Mostly these include contractors for large dams, commercial buildings and housing societies as a whole.

3.5.5 Product substitutes:

Here the sector is at an advantage, since cement has no alternatives so far. It is the only material of its kind. So it is highly unlikely that the need for this product will die down in the future.

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3.6 SWOT ANALYSIS

Strengths:

Lowest expansion cost (www.businessplus.tv )

Timely completion of expansion

Conversion to low cost fuel

ISO 9000-2000

ISO 14000-2001

Brand of the year awards 2006 (www.brandsaward.com)

5.5% market share

SRC considered of best quality in the market

Weaknesses

Second hand Chinese plant

Falling capacity utilization

Low dividend payout

Opportunities

Rising export market especially India

Potential to cover lower Punjab

Dam constructions

Robust domestic demand

Threats

Supply glut and price war

Increase in interest rates

Liquidity crisis

Political instability

Economic downturn

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3.7 CONCLUSION

Profitability in recent years:

PIOC has gone through major ups and downs in the past few years. It improved tremendously in FY’06 as compared to FY’05. However it did not show the profits expected from it during FY’07, mainly because it operates in a very volatile market. PIOC has sold larger volumes of cement. However, due to the persistence of a price war throughout the year it was not able to derive lucrative revenues, thus leading to a fall in net profit, gross profit, return on capital employed and investor ratios. However the increase in sales volume over the past 5 years is a good sign.

The profitability of the company has been further depressed by rising finance costs. The reason for this increase is the substantial amount of loans acquired and thus the additional financial risk. This is, however, only in the short term and it is expected that as soon as the cartel is restored the company will become profitable again and the expansion project will start generating fruitful returns for the company

Liquidity and working capital management:

The liquidity ratios although consistent in all three years are way below industry average which places the company in constant risk and since there are many long term loans reaching maturity very soon PIOC needs to manage it liquidity risks. The cash position of PIOC is very alarming since all its sales are cash based. PIOC needs to take drastic measures to improve its liquidity and decrease its current liabilities

The working capital management in wake of efficiency ratios is well balanced. There is not much debtor management involved, and PIOC is managing its inventory very efficiently. The only area where there seems to be some strain is the creditor days’ management. PIOC is putting a lot of stress on one of its most valuable short term credit lines. However, this situation has improved in FY’07.

Capital and debt structuring:

The gearing position of PIOC reflects that there is high financial risk in the company. There has been an improvement in the gearing position of the company since FY’05 as compared to the earlier seven years when the entire cement industry was facing continuous losses. This left the company with depleted revenue reserves. Even though PIOC has recovered from this situation in the past three years there is still a lot to be done to improve its capital situation. PIOC needs to restructure its debts and generate enough profits to be able to report a decent interest cover. Since PIOC is exposed to the currently rising interest rates it needs to manage its financial risk

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Porters five force analysis:

The possibility of new market entrants is analyzed on basis of entry barriers to the industry, capital investment requirements, competition environment and government polices in the sector. It seems that chances of new market entrants are high. The effect of competitive rivalry was assessed using the number of competitors, position of PIOC among the companies, type of competitive environment and trading mechanism, exit barriers, importance of brand identities and demand and supply in the market. It turns out that competitive rivalry is high as well.

However, customer bargaining power is low as demonstrated by the factors of brand loyalty, alternative products, number and significance of customers and importance of quality to customers. The suppliers bargaining power is also low due to brand loyalty, alternative products, number of suppliers in the market, cost of switching suppliers and importance of quality of fuel, moreover since no product substitutes for cement currently exist here the threat to the cement industry is low so overall PIOC has a very competitive position.

SWOT analysis:

PIOC has several strengths and has been using them astutely and has been trying to overcome its weaknesses alongside. It also recognizes the several opportunities that it can avail and is working towards utilizing these while mitigating the threats that it faces

Prospective Outlook:

An encouraging scenario which has recently emerged is a tremendous growth in demand of cement in the neighboring countries. Export prices have shown an impressive recovery during April-07 due to shortage of cement in the region including India. Profitability of the PIOC is likely to improve if export to India is allowed by the government.

The local demand is likely to rise as Government of Pakistan in the budget for FY’08 has allocated Rs.543.26 million for Annual Development Projects. Price hike of coal however, continues to remain a disturbing factor in the wake of dramatic escalation in the international prices of coal. The restoration of the cement cartel in FY’08 is crucial to the performance of PIOC.

Recommendations:

The company should make efforts to reduce creditors’ days.

PIOC should improve liquidity ratios by arranging credit lines from banks/ financial institutions to prevent possible default.

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APPENDIX A: REFERENCES AND BIBLIOGRAPHY

Mainwaring (2002), Strategic Business Planning and Development, FTC publishing London, UK

Shane Johnson (06 Jun 2005), How not to rap, Student Accountant, ACCA publications, UK

http://dictionary.bnet.com/definition/primary+data.html?tag=content;col1

http://www.businessdictionary.com/definition/secondary-data.html

Groppelli, Angelico A, Ehsan Nikbakht (2000) Finance 4th Ed, Barron's Educational Series, Inc., 433. ISBN 0764112759

FTC (2007), ACCA Paper P2, corporate reporting, Kaplan publishing Foulks Lynch, UK

Michael E. Porter, How competitive forces shape strategy, Harvard business review 1979

BPP (2008), ACCA Paper P3, business analysis, BPP learning media Ltd. London UK

http://www.answers.com/topic/swot-analysis

http://www.referenceforbusiness.com/management/Pr-Sa/SWOT-Analysis.html

http://www.netmba.com/strategy/swot/

www.pioneercement.com

http://www.noonsugar.com/groupprofile.htm.

Correspondent (December 28, 2006), Cement: PIONEER CEMENT LIMITED, Business Recorder

Naween A. Mangi (December 23, 2004), Comment: Are flourishing cartels reason enough to shut down the impotent MCA? Daily Times

http://www.pacra.com/pdf/PCL_R07.pdf

http://www.kse.com.pk/kse4/index.html

www.businessplus.tv/Programme/pdf/Pioneer%20Cement%20Report.pdf

http://www.brandsaward.com/2008/survey%20pioneer-cement.html

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George Kieffer (1988), the Strategy of Meetings, Warner books

Maureen Guirdham (1990), Interpersonal Skills at Work, Prentice Hall International Ltd. UK

http://en.wikipedia.org/wiki/Interpersonal_skills

Jeni Wilson, Lesley Wing Jan (2003), Focus on Inquiry, Publisher Curriculum Corporation. Victoria.

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APPENDIX B: GRAPH – Net sales

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APPENDIX C: GRAPH – Operating assets

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APPENDIX D: GRAPH – EPS

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APPENDIX E: BALANCE SHEET AND INCOME STATEMENT

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APPENDIX F: RATIO SHEET

FY’07 FY’06 FY’05

Sales analysis

Turnover growth 1.8% 50.4% 54.8%

Profitability analysis

Gross profit margin 10.2% 40.0% 32.9%

Net profit percentage (5.9%) 30.3% 19.3%

Return on Capital Employed (ROCE) 2.3% 14.7% 8.6%

Liquidity analysis

Current ratio 0.48:1 0.44:1 0.47:1

Quick ratio 0.20:1 0.10:1 0.12:1

Working capital management

Debtor days 4 days 1 day 3 days

Creditor days 131 days 265 days 212 days

Inventory days 19 days 19 days 15 days

Market ratios

Earning per share (EPS) Rs.(0.55) Rs.3.98 Rs.1.95

Dividend per share (DPS) N/A Re.1 N/A

Market value per share Rs.37.40 Rs.45.65 Rs.20.35

P/E ratio 66.7:(1) 11.5:1 10.4:1

Dividend yield N/A 2.2% N/A

Capital debt structure

Gearing ratio 65.6:34.4 61.8:38.2 62.4:37.6

Interest cover 0.5 times 5.7 times 4.3 times

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APPENDIX G: SAMPLE QUESTIONNAIRE AND ITS RESPONSE

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