IQRA UNIVERSITY IU

Al Abbas Cement Ltd

Analysis of Financial Statements
By Rizwan Ahmed
Master of Business Administration (Finance) Email: rizwanv83@gmail.com

Acknowledgement

I am heartily thankful to my supervisor, Iqbal Lalani, whose encouragement, guidance and support from the initial to the final level enabled me to develop an understanding of the subject.

Lastly, I offer my regards and blessings to all of those who supported me in any respect during the completion of the project.

Introduction Al-Abbas Cement Industries Limited engages in the manufacture and marketing of cement in Pakistan. The company was founded in 1981 and is headquartered in Karachi, Pakistan. Al-Abbas Cement Industries Limited is a part of Al-Abbas. During the fiscal year ended June 30, 2010, the Company's actual production was 582,824 metric tons. Al Abbas Cement Industries Limited (AACIL) was incorporated on 9th February 1986 as a public limited company. Presently, its shares are quoted on all the three stock exchanges of the country. It is part of the Al Abbas Group which. Al Abbas Cement Industries Limited (AACIL) is involved in the manufacturing and marketing of cement. Its products include ordinary Portland cement, suitable for concrete construction and sulphate resistant cement, ideal for construction in or near sea. The company's sulphate resistant cement has less than 2.0 C3A content whereas the maximum limit of C3A content set by British and Pakistan standards is 3.5. Thus, the company's sulphate resistant cement is highly preferred in important projects such as the Thal Greater Canal project. The cement Industry of Pakistan has around 25 active Players. Around 10% have less than 2% market share each. At the same time the top 4 players control more than 40% production capacity in the industry. The cement sector is divided into the north and south zones. Presently north zone accounts for around 80% of the rated capacity with 19 plants, while south zone accounts for 20% with 10 plants.

Industry Overview The year under review has been one of the worst in the history for the local cement industry in terms of prices and profitability. The ongoing recession coupled with capacity expansions in the Pakistani cement sector have created a situation of excess supply and a free fall in prices due to a severe price war. The total cement production capacity of the industry stands at 45 million tons by end of FY10, with capacity utilization of the industry estimated at 68%. The fierce price war has drastically eroded retention prices on one hand, while on the other hand input prices have also increased in general, particularly electricity charges that have increased by 28%. On the backdrop of declining prices, overall cement volumetric growth registered an increase of 9.3% to stand at 34.2 million tons. The increase in the domestic dispatches of the industry is 14.63 % and the decrease in exports is 0.89%. The increase is small compared to the decline in prices, which was 27.53% in the local market and a 12.90% drop internationally. While exports increased considerably during FY09, due to expanding capacity of neighboring countries the local cement industry was unable to capitalize the market and only a marginal rise was seen during FY10. Production and Sales Year over year, Al-Abbas Cement Industries Limited has seen revenues fall from 3.0 Billion to 2.2 Billion. In addition, the company has been unable to reduce the percentage of sales devoted to cost of goods sold, SGA expenses and income tax expenses. This has led to a reduction in the bottom line from a gain of 121.8M to a loss of 720.6M. Al-Abbas Cement Industries Limited may have more financial risk than other companies in the Construction Materials industry as it is one of the most highly leveraged with a Debt to

Total Capital ratio of 78.57%. This ratio actually increased over the last year. Additionally, an examination of near-term assets and liabilities shows that there are not enough liquid assets to satisfy current obligations. Accounts Receivable is among the industry's worst with 8.06 days worth of sales outstanding. This implies that revenues are not being collected in an efficient manner. Last, inventories seem to be well managed as the Inventory Processing Period is typical for the industry, at 119.48 days. 1. Cement production for the year 2010 is 467.442 metric tons, decline of 6%. 2. Decrease in local cement demand. 3. Capacity utilization of the plant only 52%. 4. Declining trend of cement and clinker production net sales revenue declined by 35.6%. 5. Cement sales local and export decreased by 47,407 M.T.

This decline is attributed to the price war in the sector which caused cement companies to slash prices and sacrifice revenue in return for higher sales volume, and is being experienced by all cement companies. Cement production for the year stood at 467.442 metric tons, a decline of 6% over last year (FY'09: 494,042 metric tons), mainly on account of decrease in local cement demand. Capacity utilization, was however only 52%. Due to declining trend of cement and clinker production net sales revenue declined by 35.6%, to Rs 784,243 billion. The production of clinker and cement decreased by 175,078 M.T. and 26,600 M.T. respectively as compared to the corresponding period of last year. Cement sales local and export decreased by 47,407 M.T. in addition the Company has exported 45,904 M.T. of clinker and sold 20,637 M.T. locally. This decline is attributed to the price war in the sector which caused cement companies to slash prices and sacrifice revenue in return for higher sales volume, and is being experienced by all cement

companies. During FY10, exports contributed 17% of the total cement dispatches of the company, while local sales contributed 84%. Export revenue stood at Rs 680 million, (FY09: Rs 1.04 billion), a decline of 34.8%; while revenue from local sales stood at Rs 4.65 billion (FY09: Rs 5.64 billion), a decline of 17.54%. In terms of volume, exports declined by 21.2%, largely a result of increased capacity of neighboring countries. Also, during FY09 AACIL was able to export a considerable amount of clinker which was not feasible this year due to decline in clinker prices internationally. Profitability The cement sector is experiencing growth in cement dispatches but at the same time companies are facing declining profitability. Sales Revenue is on a decline, with cost of production on a steady rise. The decline in profitability resulted in the company experiencing a loss of Rs 720,615 million for the year 2010 (Profit FY09: Rs 121,813 million). The decline of Rs 784,243 million in net sales resulted in production costs rising above revenue, leading to an overall loss. Distribution costs increased by 5%, standing at Rs 413,667 (FY09: Rs 390,619 million), while administrative expenses declined by 19%. Finance charges declined by 19% respectively. These declining costs however were not sufficient to maintain profitability and the company witnessed a loss before tax of Rs 746.498 million. As a result of a deferred tax credit, the final figure of loss after tax stood at Rs 720,615 million. Profitability ratios of the company are on a decline, Gross profit margin in FY10 is on 3% (FY09: 23%) while net profit margin in FY10 also negative -32.7 (FY09: 4%). Similarly ROA and ROE have witnessed sharp declines, with ROA dropping from 2% to -32.7%; and

ROE dropping from 7% to -72.2%. While profitability of the sector is on a decline as a whole, Al Abbas Cement Industries Limited (AACIL) figures stand well below the industry average. The industry average gross profit margin stands at 15.2% while the profit margin stands at 1.4%. Liquidity The liquidity position of the company has been deteriorating over the years due to substantial rise in the current liabilities. AACIL felt a liquidity crunch, like many other companies in the cement sector due to the price war and losses caused by that in FY07 and again in FY08. The current liabilities of AACIL have increased to Rs 1.619 billion during FY10 (FY09: Rs 1.454 billion), backed mainly by increased short term borrowings by the company. Trade and other payables decline by approximately Rs 287 million, while short-term borrowing showed a rise of Rs 400 million. Additionally, current maturities of long-term loans, the largest portion of current liabilities rose by 250 millions. Current assets, is decline by 50% stood at Rs 694 million at the end of FY10 (FY09: Rs 1.35 billion). The composition of current assets changed such that the most liquid asset, cash and bank balances, declined by 65%, standing at Rs 55.8 million (FY09: Rs 159 million). This is a negative sign as it shows that the ability of the company to handle day to day operations is on the decline. Stores, spares and loose tools, which make up 45% of current assets, showed a decline of 12%, standing at Rs 376 million. The current ratio of AACIL presently stands at 0.43, with a decline of 53% over FY09 (FY09: 0.93). The industry average stands at 0.67, with AACIL being the only company with a current ratio below 0.5. Thus, while the overall industry's position is not ideal, it is much better than the position of AACIL.

Asset management Asset management of the company, similar to the other ratios analyzed, saw a decline during FY10. Inventory Turnover fell from 57 days in FY09 to 50 days during FY10, largely a result of declining sales over the year. Adding to the effect of declining sales was the rise in inventory, mainly due to an accumulation of coal which is used in the production process. Days Sales Outstanding remained constant at 3 days, which is considerably lesser than the industry average which is 6 days. The companies operating cycle for FY10 thus stood at 102 days, as compared to 50 days during FY09. While this sharp increase in the Operating Cycle reflects negatively on the company's performance, it is similar to the industry average which is 97 days. This shows that AACIL was previously performing extremely well in terms of Asset Management, and its performance is now similar to the rest of the industry. Total Asset Turnover and Sales/Equity similarly witnessed declines, albeit much smaller. Total Asset Turnover fell from 0.50 during FY09 to 0.41 during FY10. This is entirely due to the decline in sales, as total assets have remained relatively stable over the year. Sales/Equity increases from 1.73 during FY09 to 2.20 during FY10, which showing the company is more able to make use of its Total Stockholders' Equity to generate sales. Debt Management Debt management of AACIL showed moderate deterioration, with rising short and longterm debt. Debt to Assets rose slightly, standing at 0.81 (FY09: 0.68). This is due to the huge rise in liabilities, with assets remaining constant. Total liabilities rose by almost 2.36%, standing at Rs 4.30 billion (FY09: Rs 4.20 billion). Debt to equity rose from 2.44 at the end of FY09 to 4.31 at the end of FY10; attributed to declining equity and rising liabilities. AACIL is seen to be highly leveraged when compared with the industry, which has an industry average debt to equity

ratio of 1.34, which is three times less than the company's figure. Long term debt to equity however showed a poor trend, increasing from 1.60 at the end of FY09 to 2.69 at the end of FY10. Long-term liabilities declined over the year by almost 2.40%, standing at Rs 2.68 billion (FY09: Rs 2.75 billion). Equity declined by 42%, at Rs 96 million, in spite of an increase in the number of shares outstanding. The decline can be attributed to the sharp drop in reserves, a result of the loss faced by the company in FY10. During the year, AACIL took steps to restructure its debt, as a result of which the long term debt to equity position has shown improvement. The management is in process of negotiation with its lenders to reschedule its long-term and nisus to obtain the grace period and deferment in payment of markup. The Company has also strong financial support from its sponsors. During the year, the Sponsors have injected the fresh fund of Rs. 183.251 million and the Board of Directors also proposing to enhance the Company paid up share capital by issuing 100% right share at a discounted value of Rs. 5. The proceeds of right shares at discounted value (if approved by the concerned authorities) would be around 914.225 million. The proceeds will be utilized filling the gap of working capital of the Company and improving the current ratio and debt equity ratio. While finance costs of the company have increased over the period, due to the company's operating loss. While finance costs of the company have declined over the period, due to the company's operating loss the TIE ratio has plummeted. From 2.00 at the end of FY09, the TIE ratio has fallen to -0.76; a decline of 138%. This figure is well below the industry average which stands at 4.35.

Market value Market value of AACIL is seen to be declining steadily with time, with the share price dropping to Rs 3.37 per share by the end of FY10 (FY09: Rs 13.58). The stock has a beta of 0.35, meaning that it has provides a much smaller return in proportion to the market. This also means the stock has low risk and may provide risk-averse investors with a stable investment. Earnings per Share stood at Rs (3.94), reflecting the loss faced by the company (FY09: Rs 0.16). The company's EPS stands well below the industry average which is Rs (3.94) per share. The Price-Earnings Ratio fell to -2.22 at the end of FY10, due to both the fall in market price and the fall in EPS. Book Value experienced a reasonable decline, falling from 12.03 at the end of FY09 to 9.96 at the end of FY10. This is due to the decline in equity and the increase in number of shares outstanding. Like other cement manufacturers, AACIL was unable to provide shareholders with a dividend at the end of the year. Future outlook The prospects of the local cement industry are linked to improvements in the economy, especially macro-economic indicators and the law and order situation. According to the Federal Budget 2010-11, Rs 663 billion had been allocated to public sector development program (PSDP). However, this amount may be slashed by 50% in the aftermath of the floods, as resources are limited. On flip side, these funds would ultimately divert to rebuilding of houses and infrastructures that would balance out the cement demand as the damage to housing and infrastructures have been enormous. The international agencies and world community in general are also expected to provide funds for reconstruction activities. Similarly construction of small and medium size dams as well as army operations in flood affected areas will provide the

required imputes to the ailing cement industry. The increased demand however will not make an impact until the second half of FY11. AACIL is looking to cut costs so as to regain its profitability. The company is taking measures to bring down fuel and electricity costs and has started using alternate fuel and is planning to install waste heat recovery project for further reduction in production cost. Additionally, the management is pursuing optimum utilization of plant with cost effective measures for sustained operations. All these measures along with financial restructuring provide a promising future for the company. Key Weaknesses of Al Abbas Cement Declining trend of cement and clinker production net sales revenue declined by 35.6%. Cement and clinker production is decline by of 6% and 30% respectively. Net profit margin in FY10 is -32.7 (FY09: +4%). ROA dropping from 2% to -32.7%. Not enough liquid assets to satisfy current obligations. Cost of sales increases by 26.6% from 2009.

Ratio Analysis

Financial Ratio
Gross Profit Margin Net Profit Margin ROA ROE EPS Current Ratio Debt Ratio Quick Ratio Debt to Equity Ratio Total Asset Turnover Inventory Turnover

2010
3.06 (32.7) (13.58) (72.30) (3.94) 0.43 0.81 0.13 4.31 0.41. 4.31

2009
23.48 4.08 2.0 7.0 0.67 0.93 0.50 0.29 2.44 0.50 2.53

2008
10.0 (9.31) (2) (6.0) (0.59) 1.34 0.51 0.55 2.30 0.22 2.22

2007
62.6 (68.78) (3.1) (10.2) (1.24) 0.83 0.53 0.23 3.0 0.05 1.12

Income Statement

Balance Sheet