Professional Documents
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DISCLAIMER
Opportunity Rationale
The overall Cement market is a growing in Pakistan, relying heavily on
the trend of construction on big projects like industrial estates, house
building projects, and other infrastructure like Dams or development
projects of government like building of schools, hospitals, etc. In
Pakistan this business will pick up as development in infrastructure
rises.
Industry Profile
A market is a group of buyers and sellers exchanging goods that are
highly substitutable for one another. Markets are defined by demand
conditions; they embody the zone of consumer choice for the goods.
• Product type
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.
• Geographical Area
The other factor i.e. geographic location also doesn’t affects a lot
considering the flexibility of demand. Example can be taken from the
fact that if DG cement in DG KHAN raises its price and MAPLE LEAF
CEMENT in DaudKhel will raise its price to match DG cement’s. This is
due to cartel of all of the cement manufacturers in Pakistan. Thus the
customer has no choice at all to switch between two brands of cement.
As the cement market is moving from a virtual 'sellers' market' to an
over-supply situation, it is expected that when prices stagnate and
profitability becomes a function of volume and economies of scale,
location advantage and proximity to markets will become extremely
important factors. At present 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.
• Understanding the Demand
After the massive losses that the cement sector incurred during FY’96-
03 period, the dynamics of the industry have entirely changed.Cement
dispatches registered a healthy growth of 19.7% and 20.0% in FY'04
and FY'05 respectively.
In FY'05, domestic dispatches increased 18.2% to 14.8m tons from
12.5m tons in FY'04 whereas exports also showed a growth of 40.0% to
1.6m tons in FY'05 from 1.1m tons in FY'04. In 9mths'06, domestic
demand and exports maintained the momentum, grew 14.6% and
6.6% respectively.
The upward trend in the cement demand is likely to continue in the
next 3-4 years due to the better expected performance of the housing
sector and the GoP's focus on infrastructure development- National
Program for watercourses, construction of dams etc.
According to the “Medium Term Development Framework”, the
government will gradually increase its allocation for the Public Sector
Development Program from Rs272b in FY'05 to Rs597b in FY'10, which
is likely to generate further demand in coming years.
During last five years, price of cement has risen at a very high pace.
Cement industry faces an upward trend in prices and seldom goes
down due to which high stocks may result in huge profits. Due to high
demand, competition in the market is negligible
• Increasing Market
Due to Governments aggressive policies regarding heavy capital
expenditures for providing infrastructure and construction of dams etc.
Moreover rehabilitation of cities destroyed by earthquake few years
back in Pakistan, and for reliefe of victims of terrorism in Swat, Bonair,
and other tribal areas, require heavy construction work to carry in near
future. The client foresees drastic increase in the usage of cement
products.
The current government is promoting cement industry by allowing
them to export cement to different countries which mainly includes:
India;
China;
Afghanistan;
Iran;
UAE, etc.
Company’s Profile
Our Vision & Mission:
"Pioneer Cement Limited, is committed to make sustained efforts
towards optimum utilization of its resources through good corporate
governance for serving the interest of all its stakeholders."
We at Pioneer Cement Limited are committed to provide our customers
quality cement by producing it according to international and Pakistani
standards. We have selected ISO 9002 based quality assurance system
to ensure that our customers get quality cement according to their
expectations.
Our Philosophy:
The Management of Pioneer Cement Limited are committed to
maintaining this quality policy at all levels of the company. For this, as
well as to achieve our corporate objectives, we all shall work as a team
and pursue continuous improvement.
Incorporation:
Pioneer Cement Limited (PCL) 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
Core Objectives
Customers’ satisfaction
Efficient deployment of resources
Optimization of cost
Research and development
Maximization of profits
Environmental protection
Core Values
Professional ethics
Respect and courtesy
Recognition of human assets
Teamwork
Innovations and improvement
Business Ethics
Transparency in transactions
Sound business policies
Judicious use of Company’s resources
Avoidance of conflicts of interest
Justice to all
Integrity to all levels
Compliance of laws of the land
Our Quality Policy
Pioneer Cement Plant is well managed by professionals in the cement
filed. Stringent quality control procedures are applied for testing at
every stage of production to achieve high quality cement.
Its systems are also certified against ISO 9001:2000 QMS and
ISO:14001:2004 for environmental protection.
Policy Statement
Pioneer Cement Limited is committed to produce high quality cement
as per International and Pakistan Standards. The top management will
ensure that products of Pioneer Cement meet and exceed the product
quality requirements to achieve customer’s satisfaction.
The Company is committed to abide by all applicable legal and
regulatory requirements and shall orient for continual improvement
including prevention of pollution by establishing and monitoring of its
Quality and Environmental objectives.
The Chief Executive and management are committed to communicate
and maintain this policy at all levels of the company and achieve
continual improvement through teamwork.
Brand of the Year 2006
Pioneer Cement Limited markets its product under the brand name of
“Pioneer Cement” and because of its quality which meets rather
exceeds the expectations of the consumers, has been awarded as
winner of the “Brand of the Year Awards 2006” in cement sector in
National Category.
Environmental Obligations
Cement Industry is normally considered to be highly un-friendly to the
Environment because of its inherent processes difficulties. However,
with the development of technology, our modern plants are equipped
with dust collecting equipments which help to reduce the pollution.
Due to conversion from oil firing system to coal firing, there were
chances that Pioneer Cement may suffer on account of pollution. The
Management realized that for introducing Environmental ethics to
meet the challenges, ISO 14001 is the need of the day. Therefore, the
Management with the efforts of its employees succeeded in meeting
the environmental objectives and targets after evaluating legal
requirements, organizational aspects, technological options and other
requirements.
The Company acquired the services of Moody International for the
assessment of audit. The audit has been carried out successfully and
the auditors have recommended Pioneer Cement Ltd. for the
Certification against ISO 14001 Environmental Management System.
This shows the commitment of the Management of PCL towards
environmental protection and prevention of pollution. PCL has been
playing its role towards the development of a better society and a
better future through continual improvement in the Environmental
Management System.
Performing Corporate Social Responsibility
Pioneer Cement Limited has been giving due importance to its social
obligations particularly in areas surrounding the factory:
• Primary Schools of Boys and Girls were constructed in 1995 in
Chenki village and is being managed by the Company.
• A dispensary was established near the factory site to cater the
emergency requirements of the workers as well as villagers
residing in the vicinity of the factory.
• A mosque has been constructed in Chenki village and is being
maintained by the Company.
• Metal road of 15 km length was re-constructed, raised and
widened to 30 feet for the residents of Jabbi and Chenki villages.
• Donations were extended for construction of educational block in
District Public School, Khushab.
• Donations were made to employees living in earthquake affected
areas and also to the victims of these areas.
• PCL is playing an active role in Khushab District Industrial
Association.
• PCL is providing technical support to Vocational Training
Institute, Quaidabad.
In addition to fulfilling social obligations in the adjoining areas, the
Company also made donations to organizations like TB centre, Family
Support Programmes, Emergency response centre and SOS schools.
Board of Directors
Chairman
Mr. Manzoor Hayat Noon
Non-Executive Directors
Mr. K. Iqbal Talib
Mr. Adnan Hayat Noon
Mr. Salman Hayat Noon
Mr. Wajahat A. Baqai (NBP)
Mr. Rafique Dawood (FDIB)
Audit Committee
Chairman
Mr. Rafique Dawood (FDIB)
Members
Mr. Salman Hayat Noon
Mr. Adnan Hayat Noon
Mr. Etrat Hussain Rizvi
Mr. Wajahat A. Baqai (NBP)
Company Secretary
Syed Anwar Ali
STRATEGIC ANALYSIS
PEST analysis
Political Factors
Economic Factors
Socio-Cultural Factors
• As Pakistan is an Islamic country and people are very strict in case of
Islam any thing against the philosophy of Islam on either print or
electronic media are treated as against Pakistan.
• Most of the people dislike anything extra-ordinary or something
which sabotage their culture or subculture.
• In metropolitan cities women are doing work along with their other
responsibilities but other than metropolitan cities it is difficult for
women to convince their parents and spouses for work.
Technological Factors
Companies have technology with which they can compete in the
Pakistan and now companies are investing in their infrastructure to not
only expand but also to upgrade their existing structure.
Pakistan's economy with a GDP growth rate of 5.8% has
attracted a foreign investment of US$ 5.15 billion in 2007-08.
Tariffs
Substitutes availability
The rate of availability of substitute of cement is very low. So lots of
opportunity is there to entre into this industry
Bargaining power of suppliers
Firm may pursue a backward integration strategy to gain control or
ownership of suppliers. This strategy is effective when supplier are
unavailable, too costly, or not capable of meeting a firm’s need on a
consistent bases.
In cement industry the supplier power is high.
Bargaining power of consumers
Bargaining power of consumers also higher when the products being
purchased are standard or undifferentiated
Increases bargaining can be the most important force affecting
competitive advantage. The power of bargaining increases:
If they can inexpensively switch to competitive brands
(-1best and -6
ENVIRONMENTAL STABILITY ( ES) worst)
very bad to
Less developing country PEST unstable -5 worst
Major business with few industries which are now
depressed -3 bad
Cement industry de-regulation has created
instability -3 bad
Total -11
FS
Conservative Aggressive
+6
+5
+4
+3
+2
+1
CA IS
-
-6 -5 -4 -3 -2 -1 - +1 +2 +3 +4 +5 +6
2 -1
1
-
-2
2
-
-3
3
-4
-
4
-5
-
Defensive 5
-6
- Competitive
6
ES
Grand Strategy Matrix
Quadrant II Quadrant I
Market development Market development
Market penetration Market penetration
Product development Product development
Horizontal integration Forward integration
Divestiture Backward integration
Liquidation Horizontal integration
Concentric diversification
STRONG
WEAK COMPETITIVE
Quadrant III
COMPETITIVE POSITION
POSITION Retrenchment Quadrant IV
Concentric diversification Concentric diversification
Horizontal diversification Horizontal diversification
Conglomerate diversification Conglomerate diversification
Liquidation Joint ventures
Conclusion:
In Grand Strategy matrix the firm is in high growth market and in a
good competitive position so the firm will pursue the strategies of
Quadrant I as results are drawn by the Space Matrix.
1) Market development
2) Market penetration
3) Product development
4) Forward integration
5) Backward integration
6) Horizontal integration
7) Concentric diversification
Recommended Strategies
The strategies recommended to Pioneer are:
1) Market Development
2) Market Penetration in newly developed market
The Pioneer Cement can grow outside the border as the company has
the required resources in bulk and have required competencies. The
Pioneer Cement can enter the market by having the minimum charges
as compare to new rivals and can penetrate into market by giving the
supreme Quality cement.
The markets available for entrance are Middle East, China, Iran and
India. The further work is done by the help of Quantitative Strategic
Planning Matrix to evaluate the best market to enter.
Quantitative Strategic Planning Matrix
Start
Expand Exporting in
Operation Middle East,
s In Iran
Pakistan Afghanistan
and India
weig
KEY FACTORS ht AS TAS AS TAS
OPPORTUNITIES
3.
1 High Value currency 0.05 5 0.175 2.5 0.125
2.
2 Trend of Development 0.15 5 0.375 3 0.45
Development Stage of 3. 0.468
3 Countries 0.125 75 75 4 0.5
Relevance in Corporate
4 Culture 0.075 4 0.3 3.5 0.2625
THREATS
3.
1 Saturated Market 0.05 5 0.175 3.5 0.175
2 Competitors aggressive 0.1 4 0.4 3 0.3
3 Instable economies 0.15 2 0.3 3 0.45
4 Required Production Range 0.125 3 0.375 4 0.5
3. 0.612
5 Low value of money 0.175 5 5 3 0.525
3.181
Total 1 25 3.2875
STRENGTHS
3.2
1 High Profit Margins 0.15 2 0.3 5 0.4875
Development of New 2.
2 Products 0.1 5 0.25 3 0.3
1.
3 High Growth Chances 0.1 25 0.125 3.5 0.35
1.
4 Suitable Polices 0.1 5 0.15 3 0.3
Pretax Profit is higher than 2. 0.337
5 Industry 0.15 25 5 3 0.45
WEAKNESSES
3.
1 Restructuring cost high 0.1 75 0.375 4 0.4
2 Export operation loosing 0.15 2 0.3 3 0.45
money
The company is slow in 2. 0.337
3 globalization 0.15 25 5 4 0.6
Total 1 2.175 3.3
Conclusion:
The market of Asia looks promising to enter in due to some strong
reasons. In Asia there is no major difference across the culture though
some countries are entirely different from each other but in starting
Pioneer should enter in countries like India which is a big market and
there are no major corporate differences.
In exporting there are many options. The Company may exploit great
opportunities in Asia Pacific. The India, Iran and China may be good
markets to explore.
Summing Up the Report:
Implementation
The Pioneer cement company must re-structure the organization to
enter into new markets. The structure of organization must be similar
to the multi national companies to survive in the new market.
The company has the adequate resources to enter into the
international market. company has strong financial backup and having
enough resources to enter into a new market with all new structure
and culture.
New standard of operations are required to enter into to new market.
Evaluation and Control:
The evaluation and control system required to be updated to
implement the strategy because the firm is leaving its home country.
New standard of information must be implemented and adequate
measures must be applied to evaluate the strategies
MARKET RESEARCH
Event
• According to the provisional numbers released by All Pakistan
Cement Manufacturing Association (APCMA), cement sales
remained muted to 21.8mn tons in the 9MFY09, despite 52%
growth in exports, as local sales continue to disappoint declining
by 17%. We strongly believe that March dispatches data will be
revised upwards since it doesn’t contain the data of five plants
(most notably Fauji and Mustehkam Cement).
• Coal prices are down 27% QoQ in 3QFY09, while cement price
are still buoyant. We expect margins of sector to improve
substantially in 2HFY09.
Impact
• Local sales show growth of 11% MoM: For the month of
March, local sales increased by 11% MoM because of start of
summer season in which local sales remain high due to increase
in construction activities. Because of increase in capacities in
North, utilization is low there when compared to South, where
proximity to port is another reason for higher utilization.
• Exports still growing: March exports increased by 9% MoM, to
reach the 1mn tons mark for the second time in history. Looking
at the trend exports are expected to remain steady atleast till
FY09 end.
• Pioneer Cement leads in QoQ sales comparison: In our FSL
cement universe, Pioneer cement has registered a growth of
25% QoQ in 3QFY09 while Pioneer cement lags showing a decline
of 25%. Lucky and D.G. Khan Cement have also shown good
growth of 14% and 20%, respectively.
• Coal prices show decline while cement prices remain
steady: Coal prices on South Africa’s Richards Bay and
Australia’s Newcastle in 3QFY09 are down by 27% QoQ & 21%
QoQ, respectively. Currently coal price in RB index stands at
$63/ton (-43% YoY). Currently cement prices are still in the range
of Rs330-350/bag, which is very high considering that production
costs are coming down and utilization level is below 80%.
Outlook & recommendation
• Local sales peak in summer season while exports are expected
to remain steady atleast till FY09 end. Looking at the decline in
coal prices trend and buoyant cement prices, we expect 2HFY09
results to be exceptional.
• From FY10 onwards, exports are projected to decrease which will
lead to competition in local market amid increased plant
capacities (especially in North). Local sales post FY09 are
projected to show some improvement but the size of growth
depends a lot on the size of PSDP in the FY10 budget.
• Since most of the additional capacity has come in North we
expect increased competition and prices cuts in that region first.
However, North plants could benefit if some substantial aid is
given for development spending (dams) in the upcoming Friend
of Pakistan summit. Otherwise we advice investors caution on
cement sector from a long term perspective because of
overcapacity problems. In the sector we like Attock Cement
(South location, strong brand name & low leverage) and Lucky
Cement (increased presence in South, exports leader and
moderate leverage).
Source: Foundation Securities
Main Office
Eport division plant of Pioneer Cement Plant will be installed at Chenki
at a distance of 40 Km from Khushab and 34 Km from Jauharabad
where Pioneer has already has its factory. Its privileged location at
central Punjab allows easy and fast Supply of raw material.
Depreciation on Equipment
Depreciation on Equipment is assumed 10% per annum based on the
straight line method for the projected period.
Working Capital
It is estimated that an additional amount of approximately PKR
38,250,000 will be required to meet the working capital requirements /
contingency cash for the initial stages. The requirement is based on
the rent, utilities and salaries expenses for at least four months.
Taxation
The tax rate applicable to corporate in Pakistan is 35% has been used
for calculating income tax in this feasibility report.
Cost of Capital
We gathered the information from the steel industry, and obtained
industry beta-β, risk free rate and other relevant information.
Considering all this, by using WACC, we calculate our cost of capital
15%.
PROJECT FINANCIAL ANALYSIS
Key Assumptions:
11,028,40 12,972,70
6,452,175 7,984,762 -------------
Interest 14.5% 0 2
63,817,62 90,026,50 136,993,
Taxable Income 26,047,825 43,622,738
7 2 024
22,336,17 31,509,27 47,947,5
Tax 35% 9,116,739 15,267,958
0 6 58
But for this we need a formula for present value of each year, so:
2012 38,221,967
2013 43,139,250
2014 88,225,222
Total 229,870,689
The internal rate of return means that the discount rate that makes the
NPV of an investment zero.
For internal rate of return (IRR) it is necessary that NPV must be zero.
So for IRR
This rate of return is internal rate of return (IRR). So this rate makes
NPV is equal to zero. Now based on IRR rule, an investment is
acceptable if the IRR exceeds the required return. It should be rejected
otherwise. But in this project we can see that our IRR is 21.72% and
our required rate of return is 15%. So we can say that this project is
acceptable on the base of IRR rule, because our IRR is greater than our
rate of return.
This method tells us that the amount that we have invested on our
project, how many periods required to covering this amount.
As we know that our initial cost is PKR 188,250,000. After the third
year, the cash flows total PKR 133,114,803, so the project pays back
between somewhere in fourth year. Because the accumulated cash
flow for the fourth year is PKR 208,565,621, we need to recover PKR
55,135,197 in the fourth year. The fourth year cash flow is PKR
75,450,818, so we will have to wait 0.73 year to do this.
So the payback period is thus 3.73 years. But on the payback rule, an
investment is acceptable if its calculated payback period is less than
some pre-specified number of years. And also we can say that this
project is acceptable for us because our payback period is only 3.73
years. And we can cover our initial investment only in three years,
eight months and twenty three days.
This method tells us that the amount that we have invested on our
project, and how many periods required to covering this amount by
discounting as the value of rupees fall.
As we know that our initial cost is PKR 188,250,000. After the four
years, the discounted cash flow is total PKR 141,645,467, so the
project pays back between somewhere in fifth year. Because the
accumulated cash flow for the fourth year is PKR 88,225,222 , we
need to recover PKR 46,604,533 in the fifth year. The fifth year
discounted cash flow is PKR 88,225,222 , so we will have to wait ..53
year to do this.
So the payback period is thus 4.53 years. But on the payback rule, an
investment is acceptable if its calculated discounted payback period is
less than some pre-specified number of years. And also we can say
that this project is acceptable for us because our discounted payback
period is 4.53 years. And we can cover our initial investment only in
four years six months and ten days.
Average Accounting Return
= _46,866,003_
188,250,000
ARR = 49.79%
Profitability Index
So;
Now we can see that our profitability index is 1.22 which is greater
than 1. So this project is acceptable for us on the basis of profitability
index.
1 2 3 4 5
Years (Bags (Bags (Bags (Bags (Bags
) ) ) ) )
Accounting Break- (FC+D)/(P-VC) 77966 77300 76679 76097 75554
Even 1 8 0 9 9
Financial Break- (FC)/(P-VC) 67796 67796 67796 67796 67796
Even 6 6 6 6 6
Cash Break-Even (FC+OCF)/(P-VC) 93819 10032 10777 11566 12161
2 60 34 21 07
Explanation
Accounting break-even gives the sales level that result in zero project
net income. This means that it gives that level of sale where EBIT will
be zero. So it is calculated for every year as we can calculate EBIT for
every year. It is very obvious from the figures that break-even occurs
quite in time with respect to sales in units.
Cash break-even gives the sales level that result in zero operating cash
flows. This means that for calculating this break-even have to take
OCF equal to zero. As this break-even depends only on the price,
variable costs and fixed costs, so it can be calculated for each year.
Same is true for cash break-even as it also occurs quite in time with
respect to sales in units.
Financial break-even is the sales level that results in zero NPV. This
break-even is one for the whole project. Reason for this is we have
different total project cash flows for our five year project. In order to
get this break-even we must calculate OCF in calculating this break-
even. It is very obvious from the table that break-even also occurs at a
suitable position.
Operating Leverage
Operating cost basically the degree to which firm or project relies on
fixed assets. A firm with low operating leverage will have low fixed
costs compared to a firm with high operating leverage. Generally
speaking, projects with a relatively heavy investment in plant and
equipment will have a relatively high degree of operating leverage.
Such projects are said to be capital intensive.
Years 1 2 3 4 5
Degree of 1 + (FC) / 3.61 3.08 2.70 2.42 2.26
Operating (OCF)
Leverage
Current liabilities
27,3 32,8 46,34 53,65
payables 43,000 21,165 8,446 6,455 -
43,0 53,2 75,52 88,48
short term loan 14,500 31,748 2,668 4,682 -
Equity
40,0 40,0 40,00 40,00 40,000
Owner's Equity 00,000 00,000 0,000 0,000 ,000
16,9 28,3 41,28 58,32 206,810
Retained Earning 31,086 54,780 6,458 2,226 ,226
In this balance sheet we have forecasted this for five years. In which
we have assets side as well as liabilities and owner’s equity side. And
in assets side we have current side and net fixed assets. And net fixed
assets we have depreciated the amount of net a fixed asset which has
PKR 2,000,000.
But in liabilities side we see that the total liabilities vary each year. And
in owner’s equity will be PKR 40,000,000 each year.