Cement: LAFARGE PAKISTAN CEMENT LIMITED – Analysis of Financial Statements Financial Year 2008 – 1Q – Financial Year 2011

Lafarge Cement which is a subsidiary of Lafarge. It started its operations in 2006 with an annual capacity of 2.5m tons of cement. Its state of the art plant is located at Kalar Kahar, Chakwal in Punjab. The plant produces Ordinary Portland Cement (OPC) and Sulphate Resistant Cement (SRC). The plant is located in Kalar Kahar because Kalar Kahar is rich in good quality limestone.

The packaging options at LPC are 50 k bags, 1.5 tons, 2 tons and bulk carriers. PACKEM, a product by LP is the first cement in Pakistan to have reached European and Indian standards.

Lafarge, of which Lafarge Pakistan Cement is a subsidiary, has its headquarters in Paris, France. It is the leader of building materials and is present in 76 countries. Lafarge Pakistan complies with International standards. It also complies with the World Bank Environmental Standards. LP has invested it energy efficient plants due to which it has been able to produce cement with the least CO2 and green house gases emissions. The Quality Management System at Lafarge ensures high quality cement.

RECENT RESULTS (1Q11)

The sales in the first quarter of 2011 have not been very positive for the industry, both locally and in exports. Local dispatches have amounted to 5.85 million MT, and exports have been 2.07 million MT, a decline of 7.9% and 8.9% respectively from the corresponding period last year*. The company sold 399,000 MT during the quarter. There was a substantial drop in its exports’ volumes to 104 thousand MT. Similarly, domestic volumes also declined to 295,000 MT due to shrinkage of the domestic market and unprecedented cold and rainy spells in January and February. Net turnover at Rs 1.68 billion was witnessed in 1Q11. Gross profit of Rs 353 million was witnessed as compared to Rs 28.5 million loss in the same period last year. Distribution costs were much lower partly because of lower export volumes, along with administrative charges and other operating expenses. Other operating income was considerably lower at Rs 8.4 million as compared to Rs 14 million in the same period last year. Operating profit was Rs 231 million as compared to Rs 224 million loss in the same period last year. PAT was Rs 13.8 million, a massive improvement from Rs 407 million in the same period last year.

FINANCIAL ANALYSIS (FY10)

The local dispatches improved from 22.1million tons in FY09 to 22.6 million tons in FY10 as the cement industry recovered a bit from fall in the previous years. Because exports to gulf states declined exports fell from 11.2 million in 2009 to 9.7 million tons in 2010. The gross profit in FY10 declined to Rs 856 million from Rs 984 million in FY09. The company had an operating loss in FY09 of Rs 172 million, which converted to a profit of Rs 62 million in FY10. The company used local coal and bio-mass in FY10 instead of imported coal and the finance costs of the company fell from Rs 1231 million in FY09 to Rs 981 million in FY10. The capacity utilisation of LP fell from 92.68% in 2009 to 79.65% in 2010.

The year 2009 was very difficult for the entire cement industry due to economic crisis and security threats. The local dispatches of LP in FY09 were 20.5 million tons, which was a decrease from FY08. The export in FY09 increased from 9.8 million tons in FY08 to 11.7 million tons. The gross profit in FY09 was Rs 984 million as compared to Rs 979 million in FY08. The company reported an operating loss in FY09 but was able to financial costs from Rs 1482 million in FY08 to Rs 1231 million.

LIQUIDITY

The current ratio of the company fell from 0.73 in 2008 to 0.31 in 2009 and then 0.26 in 2010. This is because the current assets increased by 9.9% in 2010 as compared to 2009 but the current liabilities increased by a much greater 30%. The shorter borrowings increased by a significant 94.3% in FY10 as compared to FY09, which constituted the increase in current liabilities. The quick ratio too declined from 0.55 in 2008 to 0.2 in FY09 and 0.19 in FY10. The reason is again the increase in current liabilities.

The current ratio fell in FY09 as compared to FY08 because the current assets fell by 44% in FY09 as compared to FY08 and the current liabilities increased by 30%. The increase in current liabilities was also a reason due to which quick ratio fell.

ASSET MANAGEMENT

The inventory turnover increased from 7.7in FY08 to 9.9 in FY09 and then fell to 9.6 in FY10. The minor fall from FY09 to F10 was due to a 15.7% decline in cost of sales and a 13.7% decline in average inventory. The total asset turnover increased from 0.34 in FY08 to 0.41 in FY09 and then fell to 0.35 in FY10. The fall of total asset turnover in FY10 was because the sales in FY10 fell by 15.4% as compared to FY09. The sales to equity ratio fell from 0.83 in FY09 to 0.78 in FY10. This is due to the 15.4% decline in sales.

The inventory turnover increased in FY09 as compared to FY08 because the cost of sales increased by 10.6% in FY09. The total asset turnover increased in FY09 due to a 9.3% increase in sales. This was also the reason due to which the sales to equity ratio increased slightly.

DEBT MANAGEMENT

The total debt to asset ratio has remained relatively constant in FY 08, FY09 and FY10 at 0.5, 0.5 and 0.55. The long-term debt to asset ratio has declined 0.26 in FY08 to 0.16 in FY09 and 0.09 in FY10. This is because the long-term debt has declined by 42.7% in FY10 as compared to FY09. And it has declined by 30% in FY09 as compared to FY08. The TIE ratio declined from 0.045 in FY08 to -0.16 in FY09 and then increased to 0.06 in FY10. The increase in TIE from FY09 to FY10 is because the EBIT in FY10 was Rs 61.7 million as compared to an operating loss of Rs 171.5 million in FY09. The TIE was negative in FY09 because the EBIT too was negative. The debt to equity ratio on the other hand has increased from 0.99 in FY08 to 1 in FY09 to 1.2 in FY10.

PROFITABILITY

The Return on Asset was same in FY 08 and FY09 at -0.06 and improved in FY10 to -0.05. The negative ROA is because in all these three years the company has had a net loss. However there has been an improvement in FY10 because the net loss is Rs 948.4 million as compared to Rs 1277 million in FY09. The loss was Rs 1242.5 million in FY08. The ROE fell from -0.11 in FY08 to -0.13 in FY09 and improved slightly to -0.1 in FY10. The negative ROE is again due to the net loss in all the three years. The ROE improved slightly in FY10 because the net loss is lesser than that in FY09 as mentioned earlier.

The gross profit on sales is constant in both FY10 to FY09 at 0.12. It fell in FY09 as compared to FY08 (when it was 0.13). The fall in F09 was due to the 9.3% increase in sales but very little increase (0.04%) in gross profit. The net profit margin has improved from -0.17 in FY08 to -0.16 in FY09 and -0.13 in FY10.

The EPS in FY10 is -0.72 due to the net loss reported. It was -0.97 in FY09 and -1.01 in FY08. The improvement is because the amount of net loss is reducing as mentioned earlier.

FUTURE OUTLOOK

Lafarge Pakistan hopes 2011 will be a better year than 2010. Natural calamities and social changes will affect the economy and hence the company but LP is still hopeful. The company hopes government support, an increase in price, construction activities in Pakistan and a possible start of reconstruction in Afghanistan will bring about a good year for the company and its shareholders.

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