The Gross Profit Percentage Finance Essay

The decrease in profits in FY10 was due to the decline in cement prices as mentioned earlier. The cement prices rose in the next year, and the company successfully took advantage from that increase and recovered its gross profit. In FY11, there was sharp increase in the fuel consumed cost from the last year 2010 Rs 1,338 million to Rs 1,917 million in FY11, which was an increase of 43%. The rising electricity tariff and increase in prices of coal in international market have affected the profit margins of the Company. Due to fragile market condition, most of the time company was unable to pass on the impact of raising prices to end user. FCCL is also continuously declining its production level due to shortage of electric power supply and gas curtailment, made the company unable to achieve economies of scale. There was an addition of new cement plant during the year 2011 with a production capacity 7560 TPD in order to achieve the economies of scale. Through this plant containing state of the art technology, company will be able to achieve greater profit margins. (Director Report, Financial Statements) During FY10, the adverse impact of drop in sales turnover affected the total gross profit of the sector by decrease of 49% year-on-year (YoY). This decline also affected the gross margin which became 17% compared to the last year's 29%. On per-tone-basis, in FY10 retention prices were lowered by 21% YoY and gross profit lowered by 53%YoY. A leading cement producer, Tariq Saigol said that most of the industry is bearing losses due to massive increase in costs. The prices of the fuels were at their historic highs and making record. The increase in electricity rates are also getting unbearable for all the industries. (Ahmed, 2011) The trend of gross profit of the competitor company, Attock Cement is also declining continuously, evident from the table below. This decline is not as sharp as FCCL has during the three years. Over the three periods, the gross profit percentage of Attock Cement Pakistan Limited has decreased by 36%, from 31.83% in FY09 to 20.23% in FY11, whereas this percentage of Fauji Cement Company Limited has declined from 31.75% in FY09 to 17.35% in FY11, down by 45%. The main reason was that Attock Cement has an ability to absorb the rising prices of the raw material effectively due to high production capacity and by achieving economies of scale.

Gross Profit

Fixed Asset Turnover (Times)

The fixed assets turnover of FCCL is experiencing declining trend. The company's property, plant and equipment in FY10 were increased by 27% from Rs 18,777 million in FY09 to Rs 23,819 million but net sales in the same year were decreased by 28% from Rs 5,314 million in FY09 to Rs 3,808 million in FY10. This decrease was due to decrease in the cement prices of the cement, locally as well as globally. Therefore the selling price per bag has decreased. In order to win the customers the gross profit margins was declined from 31.75% in FY09 to 13.54% in FY10. However, FCCL didn't get the expected response from the market, therefore the production despatches has decreased to 96.06% as compared to previous year 100.09%. In FY 11, the fixed assets turnover has increased a bit from 0.16 times in FY10 to 0.18 times in FY11, due to the increase in net sales by 24.6% from Rs 3,808 million in FY10 to Rs 4,743 million, in FY11 by increasing the property, plant and equipment by 12%, from Rs 23,819 million in FY10 to Rs 26,658 million in FY11. The increase in net sales was due to improvement in cement price levels. (Annual Reports, FCCL, 2010, 2011) Tariq Saigol, a competent cement producer said in his interview that main problem for the cement industry is that its cost of production is higher than the sales in the domestic market. He further added that it is not possible to increase cement prices under current economic scenario. (Ahmed, 2011) From the table given below, fixed asset turnover of Attock Company is much high as compared to FCCL, but they are also experiencing the declining trend continuously. Attock Cement Pakistan Limited has earned high turnover by using the fixed assets Rs 5,396 million as compared to Fauji Cement Company Limited's fixed assets Rs 26,658 million, which were 5 times greater. Through an effective sales mix, the competitor company, maximize its sales revenue greater than the FCCL by using comparatively less fixed assets. Fixed Asset Turnover FY11 FY10 FY09 Fauji Cement Company limited 0.18 0.16 0.28 Attock Cement Pakistan limited 1.60 1.82 2.05

(Figures are taken from Financial Statements)

Fixed Asset Turnover

Current Ratio

In order to meet its short term liabilities the current ratio should be at least 1. FCCL's current ratio throughout the period was less than 1. In FY10, the decrease in current ratio by 22%, from 0.81% last year to 0.63% in FY10, was mainly due to the increase in current liability by Rs 1357 million, up by 52% as compared to the increase in current assets by Rs 417 million, up by 25%. On further investigation the rise in current liabilities was due to the rise in the accrued markup by RS 254 million, up by 267% and current portion of long term liabilities by Rs 746 million, up by 230%. The increase in markup accrued and current portion of long term financing was due to the increase in long term financing from Rs 6,224 million in FY09 to Rs 11,909 million was due to the finance required for the construction of the new plant. In the next FY11, company improved its current ratio by 41%. This increase was mainly due to the increase in current assets by Rs 2,721 million, up by 131% as compared to the current liabilities by Rs 1,400 million up by 35%. The sudden increase in current assets was caused by the increase in stocks by Rs 397 million, which was a significant increase of 413%. The stock in trade is considered to be the least liquid asset. The increase in stock was due to decline in local demand as government has not spending on the public development programs, results in piling up of stocks. The increase in cash and bank balance to Rs 979 million as compared to previous year balance Rs 192 million, which is a positive sign for the company to meet its short-term liabilities. (Annual Reports, FCCL, 2010, 2011) As compared to its competitor Attock Cement Pakistan Limited, FCCL is not at safe edge. Attock cement Pakistan Limited has been maintained its liquidity quite efficiently above 1. The decrease in current ratio in FY11 was due to the decrease in cash and bank balances and short term investments. The competitor company has invested in waste heat recovery system and other fuel generating projects, which helped Attock Cement Pakistan Limited to balance its energy. Fauji Cement Company limited (Rs) FY11(000) FY10(000) FY09(000) Current Assets 4,792,126 2,070,718 1,654,014 Current Liabilities 5,384,740 3,984,915 2,628,010 Stock 493,922 96,684 137,451 Receivables 36,960 24,514 54,641 Creditors 207,636 315,661 197,703

(Annual Reports)

Current Ratio FY11 FY10 FY09 Fauji Cement Company limited 0.89 0.63 0.81 Attock Cement Pakistan limited 1.70 2.62 2.43

(Annual Reports)

Current Ratio

Debt: Equity Ratio

FCCL has increased its gearing continuously over the last three years. In the FY10, the increase of long term finance by 91%, from Rs 6,224 million last year to Rs 11,909 million in FY10, was the main cause of the increase in the proportion of debt. This increase in debt was due to the finance required for the construction of a new line 7560 TPD cement plant. In the FY11, the debt to equity ratio is at stable position. The shareholders might be dissatisfied from the performance of the company and feel reluctant to invest further in the company. (Annual Reports, FCCL, 2010, 2011) According to spokesman of APCMA, the continuous losses to cement industry are unbearable and might endanger the servicing of Rs 132 billion in loans the cement sector owes to the banking sector. (Today, 2011) From the table given below, Attock Cement Pakistan Limited has totally depending on the equity from the last two years. Attock Cement Pakistan Limited has reduced its dependence on debt in those conditions where cement sector were facing losses. FCCL should benchmark its debt dependence with the Attock Cement Pakistan Limited. Debt: Equity Ratio FY11 FY10 FY09 Fauji Cement Company Limited 0.55 0.57 0.40 Attock Cement Pakistan Limited

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0.13

(Annual Reports)

Debt Equity Ratio

SWOT Analysis

Strengths:

Fauji cement has installed a German technology plant that ameliorates its clinker production by 7200 tons per day raising the total capacity from 1.1 billion tons to 2.2 billion tons. Moreover, the plant is coal efficient as it replaces 170 tons coal per day. (Nation, 2011) United Nations Environment Program (UNEP) has certified Fauji cement Ltd under contribution to "Plant the Planet: Billion Tree Campaign", as the company stands firm over environmental issues. Moody International has awarded the company, for maintenance of up to date and effective environmental systems, ISO 14001 status. (https://www.fccl.com.pk/main/index-7.html, n.d.) In the cement industry major volume leaders, in stock market Karachi, according to topline sector analyst are three companies including Fauji cement with 31.2 million shares gaining Rs 0.3. (Times, 2012) The company has installed a refuse derived fuel system at a cost of Rs 320 million, reducing 300-400 tons of garbage to produce cheap power for the company's production needs. (Recorder, 2011) The company despite high debt amounts has sound cash flows to support its leverage, with better interest coverage ratios. (IGI, 2008)

Weaknesses:

Fauji cement has high financial risk involved as it is heavily geared with debt rising from Rs 325 million to Rs 1 billion in one year. (Recorder, 2011) The company has failed expand its local demand base while certain competitors like Lucky cement have maintained domestic volume health. (Annual Reports, FCCL, 2010)

Opportunities:

APCMA has estimated that if in land freight subsidy of 50% is provided by the government exports would raise by 36%. (Times, n.d.) In the 2011-2012 fiscal budgets the federal excise duty was reduced from Rs 700 per ton to Rs 500 per ton, special excise duty was abolished and general sales tax reduced by 1%. Such amendments reduced pressures on price by Rs 30 per bag. (Shahzad, 2012) Cement exports to Afghanistan comprise for 50% of total cement exports for the country. Moreover, the prices of cement exports to Afghanistan have increased by 25% ensuring sustainability of producers. (APP, 2012) Local cement dispatches have escalated by 8% for 9MFY12 with improvement in north region demand. In Mar-12 the dispatches increased to 2.55 m tons a growth of 15%. (Markets, 2012)

Threats:

The cement manufacturers in north zone face the problems of high transportation costs. The costs of export freight are escalating due to rising diesel costs and locational distance from sea port in the south. (Tribune, 2012) India is an attractive market for Pakistani cement manufacturers but the imposition of non-tariff barriers by the rival government deprives the sector of prospective opportunities. (Rizvi, 2012) Inflationary pressures on the construction materials discourage construction and development sector growth, having dire consequences for the cement industry. For instance, price of 1000 bricks is Rs 7000 rising from Rs 4200 in 10/11. (Tribune, 2012) Currently the cement sector operates at 70% of capacity utilization unable to pass high production costs to consumers or reap the benefits economies of scale. (Times, 2012)

Porter Five Forces Analysis

Threat of New Entrants/Barrier to Entry:

High capital Requirements:

Cement sector requires huge investment for plants, for which leverage injection of cash is needed. Resultantly new entrants will be dissuaded.

Economies of Scale:

By producing on large scales with new and large capacity production lines has made the new entry much difficult in this sector. Like acquisition of new plant with largest capacity by FCCL which is the first German plant in Pakistan which created a barrier for new entrants.

Distribution Channels:

Massive floods which disrupted all the distribution channels including supply of key raw materials such as coal and limestone and the cement which could not be transported over to the market place for sales. (Khan, 2011) Consequently new entrants of cement sector are deterred.

Government Regulations:

Government policies also play a vital role for creating barriers in cement sector. Two years back Government of Pakistan (GOP) agreed to share transportation cost from mils to sea port. Which boosted the exports but it is regrettable that promised support was not provided. Owing to this situation threat become much less from new arrivals in this sector. The overall threat of new entrants is low.

Threat of Substitute:

At present, there is no substitute for cement.

Bargaining Power of Customer:

Cement buyers possesses high bargaining power as most of them purchase in bulk by availing discounts. Little differentiation of product also increases their power to influence as they can easily switch from one supplier to another. While the household users of the cement has no bargaining power as rates are fixed and controlled by industry cartelization. This force is of medium strength in this sector.

Bargaining Power of Supplier:

Bargaining power of suppliers mainly depends upon the raw material availability in any sector. FCCL's main raw materials are lime stone and clay which are used in dry process. These are easily available in Pakistan, hence suppliers are unable to exert pressures .FCCL has shifted to alternate fuel system called Refused derived fuel (RDF) along with other market leaders which made the suppliers of fuel less influential.

Rivalry and Competition:

FCCL is a cartel member with other leaders under the umbrella of APCMA (All Pakistan Cement Manufacturers Association).Cartelization resulted in price hike and has limited the competition in cement sector (The Nation.com). Although GOP is taking some measures to break it but these are not substantial. Which is preventing rivalry but the presence of strong and efficient units have kept the level of competition high, among the cement industry. Moreover, the decrease in overall demand and an increase in fuel costs will further intensify the competition through curtailment of industry margins. (Times, 2009) (Khan, 2011)

Conclusion and Recommendations

The reported position of the current ratio remained less than 1 in consecutive three financial years. Low current ratio means that company's current assets have not increased in the proportion of current liabilities. Therefore, Fauji Cement Company limited should invest more in current assets; increase cash and bank balance, increase liquid asset so that company would be able to pay its current liabilities when it would be required. Moreover, company should as well try to reduce the stock turnover days and take other appropriate measurements to improve its current position. Fauji cement has maintained its gearing position to acceptable level. Therefore, this would be beneficial for the company's future prospects. As the company is neither committed with any high finance cost nor any long term liabilities concern. Company has as well the advantage to raise debt from the financial institution if required for the future investment. Above all new investor would also attract by observing debt-equity ratio because investors are risk averse, and company has the low risk for the future. The turnover reported by the Fauji Cement Company limited has fluctuated trend. As turnover of the company substantially reduced in FY10 as compare to FY09 and in FY11, company reported recovery but still not matched with the turnover reported in FY09. The reason of reduction in turnover is the reduction in capacity utilization, shortage of electricity and the prices. Therefore, Fauji Cement Company limited should improve the efficiency of its marketing staff, improve the quality of its cement produced and increase the budget of advertisement so that company makes its position in the tough competitive market. The overall profitability of Fauji Cement Company limited has faced a decline trend. In FY10, Company's profit substantially decreased as compare to FY09. However, in FY11, company has improved its performance and reported an increase in profits but is still unable to compensate the downfall faced in profitability. The reasons behind the reduction of profitability are the distribution cost, travelling and entertainment expense, which has significantly increased the cost. Moreover, decrease on sale volume has negative impact on the profitability threatening the company's market standing and competitors gaining edge over the Fauji Cement Company limited. Therefore, it is important for the Fauji Cement Company limited to increase its market share and increase its distribution network to gain the marketability and competitive position in the industry. Fauji cement should as well try to reduce the overheads' cost which is directly or indirectly attributable to the product, further implement cost reducing techniques on its business which ultimately beneficial for the enhancement of the company's profitability.

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