D.G.

KHAN CEMENT COMPANY LIMITED

Analysis of Financial Statements Financial Year 2007-2008

OVERVIEW:

D.G Khan Cement Company Limited (DGKC) was established in 1978 under the management control
of State Cement Corporation of Pakistan Limited (SCCP).

It produces and sells ordinary Portland and sulphate-resistant cement

. It is a unit of Nishat Group.

 D.G. KHAN CEMENT COMPANY LIMITED

A leading and diversified business group with strong presence in most important sectors of
Pakistan: textiles, cement and financial services, power generation, paper products. It is listed on all
the three stock exchanges of the country. It is also awarded for its quality management system by ISO
one is for its quality assurance ISO.9001-2000
 D.G. KHAN CEMENT COMPANY LIMITED
and the other is for environmental management system ISO-14001-2004
DGKC Company started its commercial production in April 1986 with 2000 tons per day
(TPD) clinker. In 1992, Nishat Group acquired the DGKC under the privatization process of
the government. Since its privatization DGKC expand its production capacity. As a result, now DGKC
is the second largest cement producer of the country. The company had a total installed capacity of
37,156,750 metric tons as at June 2008.

DGKC has two plants at Dera Ghazi Khan and a new state-of-the-art Greenfield cement plant at
Khairpur village, which was started in FY04 and began commercial production in June 2007. The
plant has a capacity of 2.1mtpa. After the commencement of production from new plant and effective
and efficient operations by management led to 70% and 66% increase in the volume of clinker and
cement production respectively. The company has its own power generation plant along with WAPDA
supply. A duel-fuel power generation plant at Khairpur cement plant also started its commercial
operations successfully in FY 2008.
 D.G. KHAN CEMENT COMPANY LIMITED

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.

CORPORATE PROFILE
Board of Directors

Mrs. Naz Mansha Chairperson

Mian Raza Mansha Chief Executive
Mr. Manzar Mushtaq Chief Executive
Mr. Khalid Qadeer Qureshi Chief Executive
Mr. Zaka-ud-Din Chief Executive
Mr. Muhammad Azam Chief Executive
Mr. Inayat Ullah Niazi Chief Financial Officer

Audit Committee

Mr. Manzar Mushtaq Member/Chairman

Mr. Khalid Qadeer Qureshi Member
Mr. Muhammad Azam Member

Company Secretary

Mr. Khalid Mahmood Chohan

Bankers

Royal Bank of Sotland (Formerly ABN AMRO Bank Allied Bank Limited
(Pakistan) Limited)
Askari Bank Limited Bank Alfalah Limited
Citibank N.A. Habib Bank Limited
MCB Bank Limited National Bank of Pakistan
Standard Chartered Bank (Pakistan) Limited The Bank of Punjab
 D.G. KHAN CEMENT COMPANY LIMITED
United Bank Limited

Auditors
KPMG Taseer Hadi & Co, Chartered Accountants

Legal Advisors

Mr. Shahid Hamid, Bar-at-Law

Registered Office

Nishat House, 53-A, Lawrence Road, Lahore-Pakistan

Phone: 92-42-6367812-20 UAN: 111 11 33 33
Fax: 92-42-6367414
Email: info@dgcement.com
web site: www.dgcement.com
Factory
1. Khofli Sattai, Distt. Dera Ghazi Khan-Pakistan
Phone: 92-641-460025-7
Fax: 92-641-462392
Email: dgsite@dgcement.com
2. 12, K.M. Choa Saidan Shah Road,
Khairpur, Tehsil Kallar Kahar,
Distt. Chakwal-Pakistan
Phone: 92-543-650215-8
Fax: 92-543-650231
D.G. KHAN CEMENT COMPANY LIMITED
 D.G. KHAN CEMENT COMPANY LIMITED

PRODUCTION:
Utilization
DGK-Unit-1 1112.6%

DGK-Unit-2 2114.1%

KHP-Unit-1 192.6%

Total 103.1%

Plant performance during the year under review was excellent. Kiln-2 at DG Khan Site operated for
record 343 days which is a record in the cement industry. Kiln-1 at DGK and kiln-1 at KHP operated
325 and 287 days respectively. It was only possible by adopting sound and prudent production
management and preventive maintenance techniques. Your management believes in the policy of using
the best available equipments to achieve both efficiency and effectiveness. This is evident for the fact
that overall capacity utilization of the plants was above 103% during FY 2008 which is unprecedented
in the cement industry of Pakistan.

During 2008, the company produced 4,142,764 metric tons of clinker and 4,227,767 metric tons of
cement. Both clinker and cement production increased in 2008, relative to the production figures of
2007. The capacity utilisation of the cement sector increased to 81% in 2008 as against 79% in 2007.
DGKC outperformed the overall sector in production and achieved a capacity utilisation of over 103%
in 2008. However, the clinker and cement production during 1Q 2009 was around 6% and 2% low
respectively, than the production during the corresponding period of 2008. The company reduced its
production due to *lower demand of cement and clinker during 1Q 2009.
*Due to overall economic crises of country and the slow down in the public development programs Sectors.

Foreign and Local Dispatches:

The cement sector had shown an impressive growth of 24.3% in cement dispatches during 2008,
owing to a strong demand in the local market and supply deficits in the regional markets. The major
boost had come from the export sales (a growth of 142%) while local cement dispatches had grown
nominally by 6.5%. However, the sector could not maintain this strong performance and the total
cement dispatches during 1Q 2009 showed a nominal growth of 0.7% to 7.33m tons as against 7.28m
tons in the corresponding quarter of 2008.

Local cement dispatches declined by 15.4% due to slow economic activity and a cut in PSDP (Public
Sectors Development Programs) expenditure by the government. Capacity utilization also declined to
78.9% in 1Q 2009 from 82.2% last year mainly due to poor local dispatches. Exports showed a growth
of 59.5% and export market share rose from 21.5% in 2008 to 34.1% in 1Q 2009 and this increase
boosted the overall sales of the sector. The total cement and clinker sales of DGKC increased in 2008,
 D.G. KHAN CEMENT COMPANY LIMITED
as higher production enabled the company to tap the local and international markets
effectively. The export of cement was 331% higher during 2008 while the local cement sales
increased by 52%.

Exports were higher in 2008 because the company was able to enter the Middle East, Russia, India and
some African countries markets and exports to Afghanistan. The share of exports in total sales earnings
increased to 16% in 2008 from 5% in 2007. This increase in the sales volume of DGKC was in line
with the overall trend in the cement sector. Along with cement, the company also exported clinker in
2008. During 1Q 2009, although the sector's total sales increased by only 0.7%, the sales of DGKC
increased by around 94% from Rs 2,233 million during 1Q 2008 to Rs.4,337 million in 1Q 2009.
There was an increase in the volume of sales and the cement prices had also stabilized during the
period, resulting in a rise in sales.

Ratios Analysis

LIQUIDITY
FY'07 FY'08
Current Ratio 2.60 1.59
Quick Ratio 2.56 1.56
Cash Ratio 2.3 1.27
Inventory Turnover (Times) 14.86 23.6
Account Receivable Turnover (Times) 8.2 13.07

LIQUIDITY:

Liquidity position of DGKC's had been strengthening since the past few years and in 2007, its
liquidity position was most favorable. The increase in current assets had brought about this change.
There was a 98% increase in short-term investments.

The cash and bank balances had also risen. In 2008 the current assets of the company declined slightly
but a 63% rise in current liabilities caused a decrease in the liquidity of the company. Investments
nearly 79% of the company's total current assets and they declined by 11% in 2008.

In the 1Q of 2009, the liquidity position of the company go down as the current assets of the
company declined by 17% while current liabilities increased by 18%. The investments decreased from
Rs 15 billion at year-end 2008 to Rs 10.9 billion by end of 1Q 2009.
.

PROFITABILITY
FY'07 FY'08
Gross Profit Margin 31.65% 15.39%
Net Profit Margin 25.27% -0.43%
Return on Assets 3.14% -0.10%
Return on Equity 4.78% -0.18%
 D.G. KHAN CEMENT COMPANY LIMITED
Profitability ratios of the company have shown a declining trend. The profit margin has
decreased continuously along with return on assets (ROA) and return on equity (ROE). The
profit after taxation had declined by 33% in 2007 due to lower net retention prices caused by
a supply overhang in the overall industry. Also the problem of rising input costs had begun in 2007.
This rise in cost of production and raw material have continued in 2008 and further aggravated,
causing the declining trend of the profitability of DGKC. Despite a strong growth in cement
dispatches, the cement sector experienced decline in profits during 2008.

Profitability of the sector fell by 73.6% to Rs 562 million till March 2008 from Rs 2,133 million in the
corresponding period of 2007. Although the sales volume of the cement companies increased, the net
sales revenue did not increase to an equal extent due to decrease in net retention prices in the sector.
Over the years all cement manufacturers undertook huge capacity expansion plans. This created a
situation of excess supply in the market. Companies resorted to price wars leading to a fall in prices
and reduced the profit margins for the companies. The average cement price during the period July-
March 2008 was Rs 128.3 per bag as compared to Rs 133.6 per bag in the same period of 2007.

Company had earned the highest sales revenue of Rs 12.445 billion in 2008. However, despite this, the
gross profit in 2008 (amounting to Rs 1.9 billion) was around 6% lower than the gross profit posted in
2007 (Rs 2.0 billion). The reason for lower gross profit was a 140% increase in the cost of sales during
the fiscal year 2008. Major input costs increased and decreased the profitability of DGKC and resulted
in a loss after taxation of Rs 53.230 million in 2008 against a profit after taxation of Rs 1.622 billion in
2007.

Cement manufacturers were affected with rising fuel and power prices during 2008. The cost of
production for the cement companies went up due to rise in the prices of imported coal. The cement
companies in Pakistan have shifted from oil to coal or gas during the past few years. All cement
manufacturers now use coal as a basic fuel. Pakistan has huge reserves of coal, but cement companies
import it, as local coal has high sulphur content. Crude oil prices shot up during 2008 and had its
impact on prices of coal and natural gas. The rise in the costs of international coal prices has been one
of the major reasons behind decreasing of gross margins of cement companies during 2008.

There was nearly a 50% rise in the coal prices in 2008. Along with the rise in the international coal
prices, the depreciation in rupee value against the US dollar also added to the cost of importing coal.

Current Position of DGKC:

Cement sector posted profit after taxation of Rs 1.3 billion in first quarter of 2009 as compared to Rs
500 million in the corresponding period of a year earlier. The net sales of the cement sector in first
quarter 2009, was 96% higher than the net sales generated during the corresponding period of 2008.
Net retention price during the period under review was 90% higher against the same period in
Financial Year 2007.

It is believed that the profit of the sector increased due to a price arrangement between companies in
the local market to keep prices high. Due to higher costs, operating and finance expenses, the
profitability of DGKC remained low during first quarter 2009. The cost of sales for the company
increased by 63% during the period. The furnace oil/coal costs for the period 1Q 2009 was Rs 1,823
million as compared to Rs 800 million during the corresponding quarter of 2008. The electricity and
gas costs were lower in 1Q 2009. However the cost of raw and packing material increased by 22%.
 D.G. KHAN CEMENT COMPANY LIMITED
Administrative expenses increased by 26% while the selling and distribution expenses
increased dramatically by 830% (from Rs 46.2 million in 1QFY08 to Rs 428.2 million in 1Q
2009). Selling expenses may have increased due to higher transportation costs involved with exports
and higher fuel costs. Also, the finance costs increased substantially by 268% as interest rates rose
owing to tight monetary policy. These rising costs greatly affected the profitability of the company and
resulted in the loss after taxation of Rs 168.7 million during 1Q 2009.

ASSET MANAGEMENT:
FY'07 FY'08
Inventory Turnover (Days) 100.46 79.40
Days Sales Outstanding 8.09 10.59
Operating Cycle 108.55 89.99
Total Asset Turnover 0.12 0.24

The asset management of DGKC In 2008 improved as the inventory turnover rate increased because
the company earned sales revenue more in proportion to the increase in inventory. Thus the days to
convert inventory into sales became less (from approx. 100 days in 2007 to 79 days in 2008). Although
the days to convert sales into cash (DSO) days sales outstanding increased slightly, the substantial
decrease in ITO (inventory turnover in days) led to the shortening of the operating cycle in 2008. The
days sales outstanding was higher because the trade debt increased (by 153%) during 2008 as against
sales.

The sales to equity and total asset turnover of the company which had a declining trend till 2007
increased in 2008. The sales to equity ratio had been decreasing because of an increase in the paid up
capital. But the trend was reversed in FY08 because the paid up capital remained same while the
reserves were fell, causing a decrease in the equity base of the company. Also higher growth in sales
increased the sales/equity ratio. Total asset turnover also improved because the management of the
company's assets was effective in generating higher sales revenue. The company's performance in the
area has improved as full-scale production from the newly establish Khairpur plant has sales.

DEBT MANAGEMENT RATIOS:

FY'07 FY'08
Debt to Asset 34.44 42.15
Debt /Equity 52.53 72.85
Long term debt to equity 30.75 32.77
Times Interest Earned 4.71 0.86

During 2007 Debt management ratios showed a positive trend. The debts to asset and equity ratios as
well as the long-term debt ratio all go up during the period and this reflected a reduction in the
company's dependence on debt financing. However, during 2008 the debt ratios of the company rose
because the total debt increased in 2008 mainly due to a 63% increase in the current liabilities, which
form 55% of the total debt. Long-term debt however decreased. Long-term debt to equity increased
because of a decline in the equity base due to fall in reserves. The TIE ratio continued to fall in 2008
 D.G. KHAN CEMENT COMPANY LIMITED
against a positive trend that prevailed before 2007. The reason is substantial rise in finance
charges due to high interest rates in the economy. Also the operating income in 2008
decreased, thus reducing the extent to which operating income can decline before the firm is
rendered unable to meet its interest costs.

Market Ratios
FY'07 FY'08
Earnings per Share 6.40 -0.21
Dividend per Share 1.50 -
Price Earning ratio 16.72 -475.60
Book Value 133.80 118.64

Due to the losses the company incurred in 2008 and during first quarter 2009, it’s earning per Share
(EPS) and Price to Earning (P/E) Ratio has been negative. The average share price of DGKC covered
around Rs 100/share except during the fourth quarter of 2008 when share price fell well below the
average. During first quarter 2009, the share price averaged around Rs 50. This shows that the dismal
profits of the company have started reflecting in the low investor confidence and the falling share
price. The management did not recommend any dividend for 2008 due to dismal profitability situation.

FUTURE OUTLOOK:

The central excise duty on cement was increased to Rs 900 per ton from current Rs 750 per ton in the
budget 2009. On each bag the CED (central excise duty) increased by Rs 7.50 per bag (from Rs 37.5
per bag to Rs 45 per bag). But this increase is not expected to impact the profits of the cement sector
because this increment in CED will be passed on to the consumers. However, the rise in the GST by
1% will increase the local cement prices and may slow down the cement demand.

Local cement dispatches are expected to remain depressed due to slowdown in economy-led
construction activities in the country and due to inflationary pressures. In the budget 2009, the
government had allocated Rs 550 billion for Public Sector Development Programme (PSDP),
however, owing to budgetary deficit, the government later decided to cut PSDP expenditure. Cement
consumption is correlated to GDP growth and as the economic condition now stands, we can predict a
grave slowdown in the GDP growth of the country. Thus the per capita cement consumption will also
fall during 2009. Exports have so far shown a strong growth and supported the total cement
dispatches. Cement manufacturers have been focusing on the international markets to achieve growth
in their sales.

Pakistan has been exporting cement to Afghanistan. Regional shortage of cement had presented a good
opportunity to our cement manufacturers. Cement demand in Afghanistan is expected to be 1.5m-2.0m
tons per annum for the next five years. Cement manufacturers have also growing opportunities in the
 D.G. KHAN CEMENT COMPANY LIMITED
Middle East and the African countries. However, the effects of global recession have started
to impact international demand for cement.

Indian market, which was a window of opportunity for Pakistani cement manufacturers, has been
closed as India banned import of cement from Pakistan due to escalating tensions between the two
countries. Expenses are expected to increase for cement manufacturers. During the past, our cement
manufacturers shifted production from oil to coal or gas. Pakistan has huge reserves of coal, but the
manufacturers are compelled to import coal due to high sulphur content in local coal. The coal prices
in the international market have fallen from their peak level of US $210 per ton.

Depreciation in rupee value will neutralize the impact of decreasing international coal prices. The
government has raised the power tariff by nearly 50% with variable rates for peak and off-peak hours.
The gas prices have also risen. This will increase the cement manufacturers' cost of production and
impact their profitability in 2009. DGKC seems to be all set to tap new markets for cement exports.
The company's largest Vertical Cement Grinding Mill at DG Khan site has been upgraded and started
operation on trial basis during the first quarter 2009. The mill is expected to start commercial
production in second quarter of 2009.

After the start of grinding mill, additional quantities of cement will be available. Increased production
will help DGKC to export to new markets and generate higher sales. However, cost of production and
operating expenses will be critical in determining the profitability of the cement sector in 2009.
Expenses are expected to increase for cement manufacturers due to the hike in coal prices and higher
interest rates in our economy. This will negatively impact the gross margins of the cement sector.

Coal prices more than doubled during 2008 with average coal prices being around US $176/ton during
the fiscal year. Rising coal prices coupled with a depreciating rupee will increase the cost of
production for the cement companies and hit their gross margins hard. DGKC is trying to cut its costs
that have adversely impacted its profits in 2008. To reduce electricity cost, DGKC has started a project
of power generation from waste heat at DGK site. The project is expected to generate substantially
cheap electricity of about 10.4MW without using any fuel. This would help to cut down the cost of
production. DGKC has also decided to use municipal solid waste as fuel for its heating purposes.
DGKC is in contact with different city governments to enter into agreements for acquiring solid waste.
This project will be beneficial, as it would bring down the company's costs of production, help resolve
the environmental issues related with disposal of solid waste and most important, it would save huge
foreign exchange, which spent on import of furnish fuels.

References
http://www.cementchina.net/news/shownews.asp?id=4144
http://www.dgcement.com/financial-reports/AnnualReport2007-08.pdf
http://www.dgcement.com/financial-reports/DG1stQurater2008-09.pdf
http://economicpakistan.wordpress.com/2009/02/01/cement-industry/
Analysis of Financial Statement by Gibson