LEASIN & INSURANCE FINANCE FINAL PROJECT LEASE PROPOSAL OF DG KHAN CEMENT FOR BOARD OF DIRECTORS Submitted to:

Prof. Tehseen Mohsin Submitted By: Somia Ibrahim Saira Javed Mahmood Amin L1F08BBAM2039 L1F08BBAM2132 L1F08BBAM2208 Bilal Asif Date of Submission: 18th May, 2012

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COMPANYS HISTORY:
D.G. Khan Cement Company Limited (DGKCC), a unit of Nishat group, is the second largest cementmanufacturing unit in Pakistan with a production capacity of 13,400 tons clinker per day. It has a countrywide distribution network and its products are preferred on projects of national repute both locally and internationally due to the unparallel and consistent quality. It is list on all the Stock Exchanges of Pakistan. NISHAT DGKCC was established under the management control of State Cement Corporation of Pakistan Limited (SCCP) in 1978. DGKCC started its commercial production in April 1986 with 2000 tons per day (TPD) clinker based on dry process technology. Plant & Machinery was supplied by UBE Industries of Japan.

Group history:
Nishat Group is one of the leading and most diversified business groups in South East Asia. With assets over PRs.300 billion, it ranks amongst the top five business houses of Pakistan. The group has strong presence in three most important business sectors of the region namely Textiles, Cement and Financial Services. In addition, the Group has also interest in Insurance, Power Generation, Paper products and Aviation. It also has the distinction of being one of the largest players in each sector. The Group is considered at par with multinationals operating locally in terms of its quality of products & services and management skills. Mian Mohammad Mansha, the chairman of Nishat Group continues the spirit of entrepreneurship and has led the Group successfully to make it the premier business group of the region. The group has become a multidimensional corporation and has played an important role in the industrial development of the country. In recognition of his unparallel contribution, the Government of Pakistan has also conferred him with Sitara-e-Imtiaz, one of the most prestigious civil awards of the country.

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Vision Statement
To transform the Company into modern and dynamic cement manufacturing company with qualified professionals and fully equipped to play a meaningful role on sustainable basis in the economy of Pakistan.

Mission Statement
To provide quality products to customers and explore new markets to promote/expand sales of the Company through good governance and foster a sound and dynamic team, so as to achieve optimum prices of products of the Company for sustainable and equitable growth and prosperity of the Company.

Products of DG Khan Cement Company:

Two different products are produced at DGKCC namely Ordinary Portland Cement and Sulphate Resistant Cement. These products are marketed through two different brands:

DG brand & Elephant brand Ordinary Portland Cement DG brand Sulphate Resistant Cement

Products:
Ordinary Portland Cement Sulphate Resistant Cement

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LEASE PROPOSAL OF DG KHAN CEMENT FOR BOARD OF DIRECTORS

NAME OF THE ORGANIZATION: NATURE OF BUSINESS: STATUS OF THE ORGANIZATION: REGISTERED OFFICE ADDRESS:

DG KHAN CEMENT CEMENT Products Public Limited Company Nishat House, 53-A, Lawrence Road, Lahore-Pakistan Phone: 92-42-36367812-20 UAN: 111 11 33 33 Fax: 92-42-36367414 Email: info@dgcement.com web site: www.dgcement.com

IAT
DATE OF INCORPORATION:

1978. 223444-09

NTN OF COMPANY:

TERMS & CONDITIONS OF LEASE

TYPE OF LEASE: DESCRIPTION OF ASSET: LEASE AMOUNT: SECURITY DEPOSIT [10%]: RESIDUAL VALUE [10%]:

SALE AND LEASE BACK *MACHINERY. RS. 35,448,679 RS. 3544867.9 RS. 3544867.9 **16%. RS. 904,162.97 RS. 354486.79

IRR:
LEASE RENTALS MONTHLY: PROCESSING FEE @ 1%:

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COMMITMENT FEE @ 1% PER ANNUM OR PART THEREOF ON UNDISBURSED AMOUNT COMMENCING 30 DAYS
FROM THE APPROVAL OF THE LEASE FACILITY.

DOCUMENTATION CHARGES: PAYMENT TERMS: LEASE TERM: SECURITY:

RS. 10,000
IN ARREAR ON MONTHLY BASIS.

04 YEARS
A. PERSONAL GUARANTEES OF DIRECTORS.

I. II.

MR. NAZ MANSHA (CHAIRPERSON) MR. INAYAT-UL-ALLAH NIAZI (CHIEF FINANCIAL OFFICER)

B. CORPORATE GUARANTEE OF ASSOCIATED CONCERN

I. II. MCB BANK NATIONAL BANK OF PAKISTAN

C. 35-POST DATED CHEQUES. *MACHINERY. Description. Crushing MACHINERY Qty. 01 Amount (Rs). 35,448,679

The present market and forced sale value of machinery is determined for rupees 37,000,000 and 35,448,679 by LAP approved valuator (copy of valuation report attached) ** The rentals calculated are indicative / tentative, actual rentals will be calculated and shall be fixed as FLOOR on the date of agreement according to the KIBOR prevalent at that time and will be revised every six months according to the KIBOR prevalent seven days before the expiry semi annually. -

REFERENCES
CIB Report: as the lease proposal is for a corporate therefore Corporate Information Report is generated and according to the report results the specific perspective customer is clear form overdue as its credit history has revealed. Creditors: Dg Khan Cement Company is clean as per the letter received from MCB bank and letters from other creditors are awaited

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Suppliers:

From the suppliers of the company the company has good payment schedule and never got late in terms of payments

INTRODUCTION Establishment:
DG Khan Cement Company Limited (DGKCC) was established under the management control of State Cement Corporation of Pakistan Limited (SCCP) in 1978 as private limited company. DGKCC started its commercial production in April 1986 with 2000 tons per day (TPD) clinker based on dry process technology.

Acquisition by Nishat:
Nishat acquired DGKCC in 1992 under the privatization initiative of the government. After privatization the company was listed on Stock Exchanges in September 1992. Standard Certifications Obtained for Export (different countries) DG Khan Cement Co. Ltd. is ISO 9001:2008 & ISO 14001:2004 certified systems

Following are the group concerns of DG KHAN CEMENT.

POWER GENERATION PIPE SECTOR: NISHAT POWER LIMITED (200 MW)

Construction was started in April 2008. Its gross capacity of production is 200 MW and plan out put is 195.260 MW. Power generation agreement is of 25 years.

Nishat Chunian Power Limited(200MW)

Nishat Chunian Power Limited (NCPL) is a public limited company incorporated in February 2007. It is listed on both Karachi and Lahore Stock Exchanges. The Company is established as a

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power generation project having gross capacity of 200 Mega Watts under a 25 year take or pay agreement with National Transmission & Dispatch Company Limited (NTDCL). The project has been commissioned under 2002 Power Policy of GOP and has been granted a generation license by the National Electric Power Regulatory Authority (NEPRA) in September 2007. The company started its commercial operations on July 21, 2010.

Lalpir Power Limited

(362MW)

Lal Pir (Pvt.) Limited owns and operates Lal Pir Thermal Power station, most efficient power plant in Pakistan, Located near "Muzaffargarh". Lalpir is one of the world's leading power companies. Generate and distributes electric power in 26 countries through an array of world class power business. Electricity is mainly used to drive supercomputers, cutting edge industrial technologies, hospitals, homes schools and businesses.

Pak Gen Power Limited 365MW)

Pakgen power Limited is 365 MW fuel oil based power plant with a net generation capacity of 347MW, located in Muzaffargarh, Pakistan. Pakgen had achieved commercial operation date on Feb 0198 and has an operating life of 35yrs with a 30yr power purchase agreement. The PPA was signed between Pakgen and WAPDA on Sep 0595 after which it was granted a generation license with an implementation agreement with the GoP.

TEXTILES SECTOR

Nishat Mills Limited (The largest composite Unit in Pakistan)

Nishat Mills Limited is the flagship company of Nishat Group. It was established in 1951. It is one of the most modern, largest vertically integrated textile company in Pakistan. Nishat Mills Limited has 198,120 spindles, 655 Toyota air jet looms. The Company also has the most modern textile dyeing and processing units, 2 stitching units for home texitle, one stitching unit for garments and Power Generation facilities with a capacity of 89 MW. The Companys total export for the year 2011 was Rs. 36.015 billion (US$ 416 million). Due to the application of prudent management policies, consolidation of operations, a strong balance sheet and an effective marketing strategy, the growth trend is expected to continue in the years to come. The Company's production facilities comprise of spinning, weaving, processing, stitching and power generation

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 Nishat (Chunian) Limited (The largest composite Unit in Pakistan)

Nishat Chunian Group has an enviable business history of over two decades. From a modest start in 1990 with a spinning mill of only 14,400 spindles, the group today has a vertically integrated textile company which prides itself of being the fourth largest textile company in Pakistan (in terms of turnover). In 2007, the group diversified into the power sector by setting up a 200 MW Independent Power Producer. Today, Nishat Chunian Group contains two companies Nishat Chunian Limited (a textile company) and Nishat Chunian Power Limited (a power generation company).

FINANCIALS AND INSURANCE

MCB Bank Limited (The 3rd largest Bank in Pakistan)

Adamjee Insurance Company Limited (The largest insurance business)

Security General Insurance Co. Limited

OTHERS

Nishat Hotels & Properties Limited Nishat Developers (Pvt.) Ltd. Pakistan Aviators & Aviation (Pvt.) Ltd.

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Directors Information:
Following are the directors of the DG KHAN CEMENT (Pvt) Limited. Name Mrs. Naz Mansha Mian Raza Mansha Mr. Khalid Qadeer Qureshi Mr. Zaka-ud-Din Mr. Farid Noor Ali Fazal Mr. Inayat Ullah Niazi Status Chairperson Chief Executive director Director Director Chief Financial Officer

Ms. Nabiha Shahnawaz Cheema

SHARES HELD PERCENTAGE

Shares held

Percentage

Directors, Chief Executive Officer, And their spouse and minor children

18,709,311

4.27

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PESTS ANALYSIS
Political factors include government regulations and legal issues and define both formal and informal rules under which the firms operate. The rule and regulations that the cement industries follow are as follows: According to the tax memorandum 2008, the cement industries have to abide by the following rules:

The tax rates on telephones will be collected at the rate of 10 % of the amount exceeding Rs. 1000.

General sales tax is enhanced from 15 % to 16 % including sales tax on services under the Provincial Sales Tax Ordinance, etc.

Due to the increase in the general rates of sales tax, the rate sales tax on the natural gas has been increased from 24 % to 25 %.

Duty on cement (that includes Portland cement, aluminous cement, slag cement, super sulphate cement and similar hydraulic cements, whether or not colored or in the form of clinkers) has been enhanced from Rs. 750 to Rs. 900 per metric ton.

The government has put special excise duty of 1 % as well.

Duty on the services such as goods insurance, fire Insurance, theft Insurance, marine Insurance, other Insurance, non-fund services provided by banking companies or non-banking companies has been enhanced from 5 % to 10 %.

The rate of tax for the collection at the import stage for all imports of goods has been reduced to 2 % from 5 %.

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According to the tax memorandum 2008, the importer will not be taxed at the importing stage of goods such as mineral fuels, mineral oils and products of their distillation

Under SRO 575 (I)/ 2006, raw materials, machinery, components &equipments etc. were exempted from the whole of the sales tax and subjected to the custom duty at 0 to 5 per cent, with the condition that such imported goods were not locally manufactured. Now the condition of not being locally manufactured for the import of capital goods worth US $50 million or above for setting up of new industrial projects has been removed.

Employment Laws:
The labor policy issued by the Government of Pakistan lays down the parameters for the growth of trade unionism, the protection of workers' rights, the settlement of industrial disputes, and the redress of workers' grievances. The policy also provides for the compliance with international labor standards ratified by Pakistan. At present, the labor policy as approved in year 2002 is in force. The minimum wages for unskilled worker is Rs. 2,500. The minimum threshold of income for taxation of salaried individuals has been enhanced from Rs. 150,000 to 180,000 per annum.

Environment regulations
At present Pakistan industries follow the Pakistan Environmental Protection Act, 1997. The Pakistan government has now become conscious of the environmental pollution. It has set some specific laws that all the manufacturing industries have to follow according to the Pakistan Environmental Protection act, 1997.

Political stability
The present situation regarding the political stability is negative in Pakistan. This political instability has been in process since the fate full attack of9/11, 2001.

This instability has affected the businesses adversely.

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The poor security situation and uncertainty leading up to the parliamentary elections in February have caused a capital flight from Pakistan, and its rupee currency has fallen 13% against the US dollar since January 2008.

However, the stepping down of Pervaiz Musharraf as president has shown some hope for the reviving of the political stability. According to the survey conducted by IRI (international republican institute), 52 % of the people expected that the things will get better now that there is a new government But still there are many factors that are prevailing up till now and are the cause of the unrest. More over, the geographical region where Pakistan is located, having the neighbors such as India and Afghanistan, and the pertaining international situation regarding the war against terrorism, not only the direct investors have stepped back even the investors who have made investments in the country are backing up.

The demonstrations, social unrest, suicidal attacks and terrorists attacks on different areas as well are highest risks to the companys operations

Economic factors
Economic factors affect the purchasing power of potential customers and the firms cost of capital. Following are the factors affecting the macro economy:

Economic growth
According to the report of UN Economic and Social Commission for Asia and the Pacific Pakistan maintained its momentum in 2007, slightly more than the 6.6 % for 2006. The manufacturing sector growth continued 8.4 % in 2007, which is slightly more moderate than 10 % for the year 2006

The industry also suffered from a drastic decline in profitability as industry profits declined by 56% from Rs 12.3 billion in FY06 to Rs 5.3 billion in FY'07. Growth in Pakistans exports and imports slowed sharply in 2007: the rate for exports fell to 3.4%, for imports to 6.9%.

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Pakistan has formulated sound macro economic policies that will help the Pakistani economy to grow stronger but the recent political violence and uncertainties could slow down the growth.

However according to the report, including all the sectors Pakistans economic growth is expected to remain strong at 6.5 % in 2008

Inflation rate
Pakistan, with a population of about 16 million people has undergone a remarkable macroeconomic growth during last few years, but the core problems of the economy are still unsolved. Inflation is one of these core problems. The inflation in year 2008 has recorded to be the highest according to the Federal Bureau of Statistics. Consumer Price jumped to 17.21% in March 2008 according to the statistics given by Federal Bureau of Statistics. In April 2008, the Pakistan inflation accelerated at it fasted pace and the inflation is still increasing. The reason behind this is that in April 2008 food prices rose 25.5percent from a year ago fuel prices climbed 8.6 percent and the among the political leaders the and tension

Interest rates
The monetary policy of Pakistan is controlled state bank of Pakistan. The state bank, in order to control the inflation has taken measures and tightened up the monetary policies. Pakistan has raised its main interest rate by 1 percentage point to 13 % to help fight inflation. by the

Exchange rates
The exchange rates of Pakistan with respect to the U.S. dollar, has declined .The Pakistani rupee has depreciated since the proclamation of emergency rule in November 2007. In other words we can say

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that the value of the rupee has fallen as the time passed by. In figure we can see the rise in the value of dollar in the month of July. Minimum was recorded as Rs. 71.2556 and maximum as Rs. 76.2183

Social factors
Health consciousness Health consciousness among the people of Pakistan has been increasing day by day. The citizens of Pakistan are getting aware of their duties in order to maintain the healthy environment. Government is taking several steps in order to educate, how important it is for the people to live in the healthy environment. The government discourages the operation of the industries with in the city by charging these factories with environmental charges.

In spite of this discouragement, there are many factories that are running inside the city, discharging poisonous gases and chemicals. By the passage of time, the people as well along with the government are discouraging such activities and demand for clean environment.

Technological factors Automation

This is the era of high competition The Pakistani industries not only have to compete among them selves but with the international market as well. Pakistan is steadily automating particularly its development sectors to stir quality production and ensure skilled management, as it would ensure a good place for the country in the global competitive market. The ERP is being implemented or is in the phase of being implemented in the cement industry.

Technology incentives
According to the report issued by the ministry of technology, the government will invest in various fiscal and non-fiscal incentives to nurture, develop, and promote the use of IT in organizations, to increase their efficiency and productivity.

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The strategies focus on promotion of venture capital industry through incentives, recognition of software development as a priority industry for financing by the banks and DFIs, creation of investment friendly environment, and building investors confidence.

Rate of technological change

In recent years, technology has been seen to be progressing at very fast rate all over the world It has helped to raise income and alleviate poverty in the developing countries. The change in technology can be seen in the Pakistani industries as well

or auditing an organization and its environment. It is the first stage of planning and helps marketers to focus on key issues. SWOT stands for Strengths, weaknesses, opportunities, and threats. Strengths and weaknesses are internal factors. Opportunities and threats are external factors.

G Khan Cement Co. is as following:

Strengths:
1. Availability of Raw Material. 2. DG Cement is a well-known brand in Pakistan and it has good image in the market. People rely on this cement. The customer demands for the DG Cement. They have good positioning through their slogan, which represents durability. 3. Imported Machinery and plants in most of companies, which provide better quality to over all process. 4. Pakistan has been ranked 5th in the worlds cement exports after a jump of 47 percent in exports during last fiscal year, the Global Cement Report shows. ( Daily Times Saturday,
August 01, 2009)

5. The compressive strength is a very important factor of cement. The Portland cement achieves its maximum strength in 28 days. The Pakistan standard PSS 232-1883 (R) & British Standard BS 12: 1978 provides for 28 days strength of 5000Psi and 5950Psi respectively for mortar cubes. 6. Cement industries in Pakistan are currently operating at their maximum capacity due to the boom in commercial and industrial construction within Pakistan.

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7. Housing demand to grow: Following indications have showed a considerable demand of cement in Pakistan: Housing projects consume roughly 40% of cement demand Currently 0.3mn houses are built annually against demand of 0.5mn Low interest rates, post 9/11 remittances inflow, and real estate boom have helped housing sector growth Easy mortgage availability and announcement of low cost housing schemes will determine housing sector growth in the long-run. 8. Governments development spending shall continue to rise due to: Government development expenditures count for one third of total cement consumption Increase in development expenditures has helped cement demand to grow at very high rates Increase in PSDP- as announced in Medium Term Development Framework 200510 will help cement demand to grow in the country Infrastructure development in a region triggers private development projects having even positive impact on cement demand.

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9. Pakistan cement industry is one the largest exporter in Asia, major markets are of Afghanistan and Iraq will be after peace. Its increased GDP by exports, providing cements in Large Dams Project and earthquake rehabilitations projects. 10. Laboratory testing facilities meeting all American and European standards and Vertical cement grinding mills. 11. Today, we find a relatively better scenario as compare to past. Most of the cement plants, that used to operate on furnace oil, have now been converted into coal and gas system, which has substantially reduced cost of production. 12. The most modern selection of production equipment possible in every major department of the plant. 13. Cement export to India through railway Most of the cement export to India is through railway. In order to facilitate cement export to India, the railways has doubled its cement capacity and increase its frequency of trains to India from Pakistan. This step has been taken by Pakistan Railways in order to increase cement export to India. This is regarded as a highly profitable market. 14. Use of Coal 15. Coal is found in all the four provinces of Pakistan. The country has huge coal resources, about 185 billion tones, out of which 3.3 billion tones are in proven/measured category and about 11 billion are indicated reserves, the bulk of it is found in Sindh. 16. At present most of the cement companies have switch to coal or gas as their basic fuel; the process has been completed in the last 6 to 7 years. According to the data of the All Pakistan Cement Manufacturing Association of mid-2007, the cost of cement production per ton by furnace oil was around Rs2, 083 whereas the cost of production per ton by coal was Rs8, 68, saving Rs1, 215 per ton. Similarly, the saving per bag was Rs60.75, which is a huge difference. Reserves of coal can become strength for Pakistani cement industry if Pakistan import sulphur washing plant from European country than Pakistan cement industry is able to utilize local coal to meet its energy requirement 17. Cheaper labor The labor of Pakistan is very cheap. This is the important strength of the cement industry as the cement companies of Pakistan has to pay less to their labor which

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result in saving of their income which later on can be utilized in the expansion of cement plant. Which will increase the cement production? 18. Good Domestic and Foreign Market The export reached to $ 500 million during 2008. Data for the first quarter of FY08 shows that Afghanistan is Pakistans largest cement export market. The prospects for cement exports seem bright in the medium term due to rising domestic as well as regional cement demand. 19. Good Government Policies Government policies are in the favor of cement sector. Due to the government favorable policies the cement sector gets the highest growth rate of 21.11% among all the industries of Pakistan in year 2006-07. The total industry installed capacity is expected to reach 49.1 million tons per annum by FY10 20. High Quality of Cement Pakistan produces good quality of cement. This is the main reason due to which recently Russia is offering high price for Pakistani cement. Globally Pakistan is recognized for producing good quality of cement due to which countries like Afghanistan, India, Middle East and some African countries prefer to import cement from Pakistan.

Weaknesses:
1. The stage of industrial development, in most of the segments, is still at a very low level of technology and the existing industrial base is very narrow and consists of very basic industries such as cement, sugar, textile, cigarette, edible oil, fertilizer, soda ash, caustic soda, PVC etc. 2. Since cement is a specialized product, requiring sophisticated infrastructure and production location. So, most of the cement industries in Pakistan are located near/within mountainous regions that are rich in clay, iron and mineral capacity. Structure of Cement industry in Pakistan is as such that there is not much substitutability to buyers. Which shows that the Cross elasticity of demand is negligible.

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3. The customer has no choice at all to switch between two brands of cement due to cartel of all of the cement manufacturers in Pakistan. 4. The freight charges are a massive 20% of the retail prices. The plants located very close to each other and tapping the same market will have to expand their markets which will increase their freight expenses. Dandot, Pioneer, Maple Leaf and Garibwal are all located within a radius of 100 kilometers and are selling bulk of their production in the same areas and will thus face serious competition from each other. 5. 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. 6. Increase freight charges 7. Exporters of the cement often complain that railways freight charges for carrying cement from Lahore city to the border of India are Rs500 per ton ($8 per ton) while it covers only 35 km. Against this, they say on the Indian side, the freight is only $3 per ton for bringing goods from Chundrigar to the border area. Cement exports have been badly hit by high fee that is being charged by trucks and also by foreign shipping companies for the haulage of cement from Pakistan to India. This increase in freight charges effect our exports due to which our exports is declining 8. Logistic Problem 9. Some of the cement companies of Pakistan have received orders from Russia with a price tag of Rs 860 per bag. But our logistics is the biggest hurdle in the way as our transportation system is not good enough to transport cement to Russia due to which our cement companies might lose the chance to capture the Russian market which is a highly profitable market. 10. Usage of Paper bag 11. Pakistani cement companies export there cement in paper bags because paper bags are cheap as compared to plastic bags. But the Cement exported in paper bags is against the

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International standards and companies have to pack the cement in plastic bag. The cement export to India could be affected by the shortage of plastic bags used for transporting the commodity. Although there are two companies that are manufacturing plastic bags for cement but they are not able meet the demand. So thats why Pakistan cement companies export cement in paper bags.

12. Idle capacity of various players: The biggest problem of cement industry is the idle capacity of various players. As many cement players are not operating at their full capacity.

13. They are still using obsolete marketing practices. Top management should use up-to-date marketing practices rather to use orthodox ideas. This is the age of advertisement and they should advertise their product rather use push strategy. They should emphasize on pull strategy as well. They have good, energetic, experienced marketing and sales team they should use it constructively. 14. They have not divided their zones for marketing and sales teams. 15. They are not paying much attention to promotional tools. They are not advertising their product. They are only using trade promotions, which are not enough to have a good positioning in the market. 16. They do not have much interaction with the distributors. They do not go to the distributors for inquiring about the sales.

Threats:
1. Unanticipated increase in interest rates or less than expected demand growth might create severe crises for the sector couple of years forward. 2. Lack of demand or depressed demand in future will prove to be lethal for the sector that has just started to recover from the miseries of 90s. Lack of demand forced cement units to

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operate at very low capacity utilization in nineties. There was a fierce competition among cement manufacturers. 3. A price war was witnessed which ended up with no conqueror. Similar apprehensions exist for the future when there will be plenty of excess capacity. Any hurdle in the growth of cement demand may force the sector into the price war. Yet, we expect cement manufacturers to act prudent and learn lesson from the history. Any mistake, similar to the one made in the last decade, will again coerce the sector into the era where all are losers with no winner. 4. Main component of the cost is fuel. Pakistan's cement industry has converted their plants to coal considering it to be the cheapest fuel, but its price in international markets has gone up by more than 300 per cent in the last one year, which directly relate increasing the cost of production. 5. The demand of cement falls heavily during rainy weather in the country, which directly affects the running cost of a unit. It is only the rising levels of cement exports, which are sustaining the industry. 6. Instead of appreciating the marketing skills of cement entrepreneurs to explore new markets for cement, the industry is being pressurized constantly without realizing that any reduction in cement exports from Pakistan will not only deprive the country of foreign exchange ($2 billion last year), but will also result in losses to the industry. 7. The burden of increased input costs has to be borne by the consumers. It is only the government, which can provide relief to the consumers by cutting down or abolishing the central excise duty. 8. Problems of oversupply situation: Following problems might arise with the oversupply situation in cement industry: Lower capacity utilization will reduce benefits of economies of scale. High leverage will also adversely affect profitability of new plants. New plants will gain market share at the cost of older players, which are not undergoing expansion. Large idle capacity is will create panic in players and this may result in price wars in the coming years.

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9. IMF Package in Future can cause to decrease GDP and economical development in Pakistan. Which will also be cause to stop development of infrastructure? So it will have huge effect on cement industry also. 10. Indian and Iran industry is also expanding its cement capacity Presently, India faces an acute cement shortage in its Southern states of Tamilnado and Madras and in north Punjab. However, reports indicated that the Indian industry is also working on a fast track to expand their capacity in these regions to offset the shortfall Major capacities of countries like India and Iran are expected to

come online by FY10 and onwards which are likely to convert these countries from dependent importers to potential exporters. 11. High energy prices Recently cement industry of Pakistan is facing high energy prices due to increase in the international prices of coal and oil. As our coal contain high percentage of sulphur. Due to which Pakistan cement industry is not able to use local coal as a source of energy. Due to which Pakistan cement industry has to import coal from different countries at high prices. High finance and depreciation cost as Pakistan cement industry is expanding its capacity to get the proper advantage of strong demand of cement in different countries. The total industry installed capacity is expected to reach 49.1 million tons per annum by FY10 and because of higher expansion finance and depreciation cost is also going to rise by the FY10. 12. Decrease profitability due to competition in cement industry The sharp decline in cement prices has been witnessed due to domestic competition among producers has dampened the profitability of the industry. This increase in competition among the players has further decreased the prices of cement in the local market. The cement manufacturers decrease the prices of their products in order to get high market as compared to its competitor. 13. High level of taxation

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Presently, the cement industry of Pakistan is heavily burdened due to levy of Federal Excise Duty @ Rs. 750 per ton and General Sales Tax @ 16% on duty paid value. In addition to Federal Excise Duty and General Sales Tax, cement industry is also paying the provincial levies (Royalty and Excise Duty) on acquiring of raw material for production of cement i.e. lime stone and shall clay.

Opportunities:
1. The local cement industry faces high upfront fuel costs. In order to facilitate their conversion to coal, which is widely available in the country, the government has given incentives for imported plant and equipment for coal firing units. 2. The demand of Pakistani cement is expected to continue to grow at the rate of 20 per cent for about four years to come. It may then follow traditional growth rate of seven per cent per year. Announcement of major dams will dramatically increase this demand. 3. Deregulation after accession of Pakistan to WTO is expected to open the window of competition from cheaper markets. There may be no tariff after this deregulation on import of cement allowing its entry into Pakistan from cheaper market at lower rate. Cement from cheaper markets may also block Pakistans export of cement to its neighboring countries. Global market has vigorously taken up the advantage of economy of scales and multinational giants now control more than 40 per cent of world production (China not included). The recent acquisition of Chakwal Cement by an Egyptian giant, Orascom may be a beginning of such an entry in Pakistan by multinationals. New avenues for export of cement are opening up for the indigenous industry as Sri Lanka has recently shown interest to import 30,000 tons cement from Pakistan every month. If the industry is able for avail the opportunity offered, it may secure a significant share of Sri Lanka market by supplying 360,000 tons of cement annually. 4. Government Development Expenditure Government development expenditures count for one third of total cement consumption. Increase in development expenditures has helped cement demand to grow at very high rates. Increase in PSDP- as announced in Medium Term Development Framework 2005-10 made the cement demand to grow in the country. Infrastructure development in a region triggers private development projects having even positive impact on cement demand.

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5. Construction of large dams Construction of four large dams will generate demand of 3.7mn tons as construction activities start. Our estimate does not include demand generation from Skardu-Katzarah dam as its feasibility study in not yet completed. Extent of demand generation will depend on size of dam, type of dam, and extent of relocation/resettlement activities required. Bhasha dam will generate maximum demand as it is RCC concrete dam whereas other dams being Earth fill/Rock fill dams will require less cement for their construction. Resettlement activities for Kalabagh dam will generate maximum demand as it is located in a highly populated area. 6. Improved access to regional market Afghanistan is Pakistans largest cement export market. The prospects for cement exports seem bright in the medium term due to rising domestic as well as regional cement demand. Pakistan also achieved improved access to India after the complete removal of the 12.5 percent custom duty on Portland cement imports in this country

from January 2007, showing improved export opportunities for Pakistan. India is planning to import more cement from Pakistan to stabilize prices in the market and the government wants a balance in demand and supply of cement in the current fiscal year. The import of cement from Pakistan has increased manifold during last four months. India has registered a number of Pakistani cement manufacturers, a requirement to facilitate import of cement. Pakistan has already increased the frequency of trains from one to three in a week to carry cement from Pakistan to Wagah border. Due to boom in the construction industry, India needs cement in bulk to meet its growing needs.

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7. Demand of Pakistani cement by Russia Fresh enquiries have been received from Russia and buyers are quoting very attractive prices as Pakistani cement quality is of very high standard and holds good strength. 8. High prices of cement in the international market Cement exports are expected to soar by a massive 107 per cent due to the primary source of overall cement growth in FY08, the high exports owing to the cement supply shortage in India and Middle East which lead to rocketing cement prices in the region. 9. Increase in demand of cement due to the upcoming sports event South Africa is schedule to host the football world cup of 2010 due to which they need to make the football stadiums for the World Cup and Sri Lanka are also expected to approach Pakistani companies for cement imports because Sri Lanka to co-host the cricket world cup of 2011.

BACKGROUND INFORMATION
DG CEMENT COMPANY IS NOT OUR EXISTING LESEE, HOWEVER THE ASSOCIATED COMPANIES (NISHAT POWER
LIMITED) HAS TAKEN FACILITIES FROM US PREVIOUSLY AND FOLLOWING IS THEIR CREDIT HISTORY WITH OUR FINANCIAL INSTITUTION:

CONTRACT DATE

ASSET DESCRIPTION MACHINERY

LEASE AMOUNT (RS.)

SECURITY DEPOSIT (RS.) 300,000

LEASE TERM

IRR

JUN 2006

3,000,000

03 YEARS

K +4.00

EXPOSURE TO THE GROUP CONCERN

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CONTRACT CONTRACT 01 TOTAL .

CAPITAL COST 3,000,000 3,000,000

PRINCIPAL OUTSTANDING 937,221 937,221

RENTALS OUTSTANDING 997,440 997,440

MONTHLY RENTAL 87,825 87,825

RENTALS OVERDUE Nil.

GROUP DISBURSED / FRESH EXPOSURE

STATUS

CAPITAL COST (RS.) 3,000,000 NIL 35,448,679 10,128,000

PRINCIPAL OUTSTANDING (RS.) 937,221 NIL 6,236,710 7,173,931

Rentals Outstanding (Rs.) 997,440 NIL 8,389,030 9,386,470

DISBURSED APPROVED BUT UNDISBURSED FRESH EXPOSURE TOTAL

FINANCIAL INFORMATION

This financial statement is audited by M/s A. F. Ferguson & Co., Chartered Accountants as auditors for the year ending 30 June 2012

BALANCE SHEET
Equity and liabilities: 2011 ---- (Rupees in thousands) ---Non current Liabilities 2010

Long term finances Long term deposits

4,880,579 70,893

5,089,507 81,138

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Retirement and other benefits 104,029 Deferred Taxation

139,213

1,707,886

1,456,960

----------6,798,571

-----------6,740,634

Current Liabilities Trade and other payables Accrued markup Short term borrowing-secured Current position of non-current liabilities Provision for taxation 1,644,045 284,511 8,691,982 2,001,566 35,090 ------------12,657,194 1,679,749 346,125 9,585,642 2,139,283 35,090 -----------13,786,189

ASSETS 2011 2010

---- (Rupees in thousands) ----

NON CURRENT ASSETS Property, plant and equipment Capital work in progress Investments Long term loans, advances and deposits 24,611,565 25,307,302 1,373,820 5,259,416 133,219 ----------465,650 4,696,922 158,677 ------------

31,378,020 30,628,551 CURRENT ASSTES Stores, spares and loose tools Sock in trade Trade debts 3,543,034 862,141 459,300 3,017,742 1,036,876 303,949

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Investments Advances, deposits, prepayments And other receivables Cash and bank balances

12,126,349 10,740,972

1,136,564 167,642 -------------

1,087,161 230,792 ------------

18,295,030 16,417,492

Profit and Loss Account for the year ended June 30,2011

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COMMENTS
1. As per the balance sheet companys total liability ratio is only 39% which means company has equity of more than 60% in its total capital. Which shows that Dg cement is in a strong equity position and has very less chance to get bankrupt

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2. As per balance sheet data companys total long term liability ratio is only 71% 3. Current ratio f year 2011 is 1.44 which is neither below the prescribed limit of 1 nor above than 2.5 4. TIE (EBIT/Interest) for the year ended June 30, 2011 is 1.3 only 5. Total assets of the company is increasing at 89% 6. Net financial debt is decreased by 7.38% 7. Working capital for the year ended June 30, 2011 is 56,37,836 which means company is able to pay off its short term liabilities on immediate basis.

REQUIREMENT OF THE REGULATORY BODIES

Long-term Debt/Equity ratio is within the prescribed limit of 60/40. Current ratio is within the prescribed limit which shows that company has strong liquidity position. Borrowers total facilities are within the limit of 10 times of capital & reserves free of losses. The prescribed exposure limit is within 20% of equity. TIE is under the prescribed limits of 4.

LEASE JUSTIFICATION
Profitability of the prospect is improving. Existing relationship with one of its group company with satisfactory repayment behavior. Guarantee of one of the group concern is strong enough to rely upon

LEASE PROPOSAL PROCESSED BY

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