Fahadi Mughal
The Relationship between PROFITABILITY &
Various Economic Indicators
ABSTRACT
Profitability
is the most discussed issue of the business sector. A number of factors have
been suggested to increase the profits of a firm. Those factors are not always
useful for all companies of a specific industry. Sometimes situations deviate from what
theories say. We have discussed the same in this report that whether the
profitability of our industry is consistent with the theories. We have analyzed
Cement industry of Pakistan, taking
under consideration the statistics of eight listed companies of KSE, which are
as follow:
1. Lucky Cement.
2. Attock Cement Pakistan Limited.
3. Fauji Cement Company Limited.
4. Cherat Cement Company Limited.
5. Pioneer Cement Limited.
6. Bestway Cement Limited.
7. Kohat Cement Company Limited.
8. Thatta Cement Company Limited
Research Topic:
Relationship between
following economic indicators and profits of the cement companies listed above.
1. GDP
2. Share
Prices
3. Interest
Rates
4. Discounts
Rates
In the subsequent paragraphs
economic indicators are being discussed
and their relationship on the profits.
Market
price/share & profitability
The
cement prices have been on a persistent rise despite removal of 2.5% special
excise duty (SED), lowering of GST by 1% and FED by PkR 200 per ton in the
budget FY12 which resulted in saving of PkR 22-23 per bag. The prices of cement
were increased on the justification of rising costs particularly that of coal.
The average prices of Cement were PkR 330 in January 2011 which surged to PkR
425 in December 2011 thus rising by 29% in a year. In August 2009, CCP had
imposed a penalty of PkR 6.3 bn on APCMA and its members on account of
cartelization which was contested in court and still remain pending. However,
at present, the documentary evidence of any collusive arrangement leading to
undue hiking of cement prices may result in lowering of cement prices and the
cement companies may face further penalties for violating the rules of fair
competition. It would be negative for the Cement Sector in general however, it
would be too early to assess its impact. Usually as per analysis market value
of share is linked to profitability and dividends of the company which is also
inherently linked with profits of the company. Companies in Cement sector with
substantial profits don’t have a higher market value as compared to other
sectors. But market prices are not the
only factors which changes with the variation in profits there are also other
factors which have greater impact on market prices such as law and order
situation, political situation and foreign issues Etc.
GDP & Profitability
Local demand in the country for the year 2008-09 is expected
to be around 20 million tons. Domestic demand is expected to grow at 13%
Capacity growth rate (CAGR) during next five years. Certain factors will also
affect the growth of cement industry as well. These are as follows
Ø
Higher GDP growth has positive impact on cement demand.
Ø
Cement demand growth rate was double the GDP growth rate in last three
years.
GDP
is an economic indicator showing income on domestic basis. Usually when GDP of
a country increases, the firms and industries flourish. Increase in GDP, thus,
have a direct impact on profitability. But again it is not only one factor
there are also others which effects on GDP to make it rise or fall.
Inflation and Profitability
An exhaustive
analysis of inflationary trends in Pakistan interestingly reveals that
ex-factory prices of cement per bag have not increased in proportion to other
construction industry inputs in the last 10 years, which has rendered the
balance sheets of most cement companies impaired and the industry has been
recording huge financial losses.
This was claimed by All Pakistan Cement Manufacturers
Association (APCMA) Chairman Aizaz Shaikh.
During
the last financial year 2010-2011, 11 cement units suffered loss before
taxation aggregating to Rs 5.681 billion while seven cement units, of which two
are located near Karachi in close proximity to the sea port, earned profit of
Rs 5.982 billion. At the end of last fiscal, industry debts to financial
institutions have risen to a massive Rs 125.3 billion and cement units located
in the North are particularly challenged and are unable to service their debts.
Due
to inflation prices of bricks and cement increases and people reduce their
demand and this impacts on profitability.
A Brief Overview of Cement
industry in Pakistan:
Growth
of cement industry is rightly considered a barometer for economic activity. In
1947, Pakistan had inherited 4 cement plants with a total capacity of 0.5
million tons. Some expansion took place in 1956-66 but could not keep pace with
the economic development and the country had to resort to imports of cement in
1976-77 and continued to do so till 1994-95. The industry was privatized in
1990 which led to setting up of new plants. Although an oligopoly market, there
exists fierce competition between members of the cartel today.
The
industry comprises of 29 firms (19 units in the north and 10 units in the
south), with the installed production capacity of 44.09 million tons. The north with installed production capacity
of 35.18 million tons (80 percent) while the south with installed production
capacity of 8.89 million tons (20
percent), compete for the domestic market of over 19 million tons. There are
four foreign companies, three armed forces companies and 16 private companies listed in the stock exchanges. The
industry is divided into two broad regions, the northern region and the
southern region. The northern region has around 80 percent share in total
cement dispatches while the units based in the southern region contributes 20
percent to the annual cement sales.
Cement
industry is indeed a highly important segment of industrial sector that plays a
pivotal role in the socio-economic development. Since cement is a specialized
product, requiring sophisticated infrastructure and production location. Mostly
of the cement industries in Pakistan are located near/within mountainous
regions that are rich in clay, iron and mineral capacity. Cement industries in
Pakistan are currently operating at their maximum capacity due to the boom in
commercial and industrial construction within Pakistan.
The
cement industry in Pakistan has grown steadily over time. At the time of
freedom in 1947, there were only 4 cement factories with a total output of
nearly 0.5 million tons. By 1972, the number of cement factories increased to
14 and the total output also increased to 2.5 million ton but this pace could
not be continued in parallel with the country’s financial growth. Both
Government
and private sectors worked on proposals to set up new factories. Following the
new policy of the Government of Pakistan, cement industry was also nationalized
along other industries in 1972 and the “State Cement Corporation of Pakistan
(SCCP)” was constituted and given the responsibility of production of cement in
the country. Taking into account the high cement demand as compared to supply,
cement import was also allowed in financial year (FY) 76-77 and continued until
FY 94-95. With a change in strategy of Government control over industrial
units, the nationalized cement factories were put up for privatization along
with other factories. The private sector was allowed to take over cement manufacturing.
As a result, the role of SCCP as market leader went astray gradually and at
present it owns only four factories, of which two have been closed down due to
effectiveness and productivity issues. In view of the high demand during the
period of free economic policy, a number of new plants were set up and many
others introduced great extensions to increase their existing output.
Lucky Cement.
|
2011
|
2010
|
2009
|
2008
|
2007
|
|
|
Profits
|
3,970,400,000
|
3,137,457,000
|
4,596,549,000
|
2,677,670,000
|
2,547,292,000
|
|
current assets
|
9,444,466,000
|
6,871,464,000
|
7,857,942,000
|
8,355,524,000
|
5,409,143,000
|
|
current liabilities
|
10,696,789,000
|
9,641,691,000
|
9,098,678,000
|
7,686,897,000
|
6,352,429,000
|
|
current ratio
|
0.8829
|
0.7127
|
0.8636
|
1.0870
|
0.8515
|
|
share prices
|
70.84
|
62.14
|
58.53
|
97.93
|
137.75
|
|
GDP (ppp)
|
$488,000,000
|
$476,500,000
|
$459,300,000
|
$452,700,000
|
$427,900,000
|
|
Inflation (avg. CPI)
|
13.50%
|
11.73%
|
20.78%
|
11.99%
|
7.77%
|
|
discount rate
|
13.50%
|
14.00%
|
12.50%
|
15.00%
|
10.00%
|
AND
|
Correlation analysis
|
||
|
profits and GDP
|
0.536876
|
|
|
profits and inflation
|
0.906298
|
|
|
profits and discount rate
|
0.080562
|
|
|
profits and share prices
|
-0.75937
|
|
Attock Cement Pakistan Limited.
|
2011
|
2010
|
2009
|
2008
|
2007
|
|
|
Profits
|
684,429,000
|
1,016,685,000
|
1,492,951,000
|
435,025,000
|
796,433,000
|
|
current assets
|
2,347,481,000
|
2,792,563,000
|
2,762,349,000
|
1,480,329,000
|
1,285,026,000
|
|
current liabilities
|
1,378,379,000
|
1,065,190,000
|
1,135,564,000
|
980,419,000
|
1,012,774,000
|
|
current ratio
|
1.7031
|
2.6217
|
2.4326
|
1.5099
|
1.2688
|
|
share prices
|
48.53
|
65.5
|
70.22
|
77.13
|
122.45
|
|
GDP (ppp)
|
$488,000,000
|
$476,500,000
|
$459,300,000
|
$452,700,000
|
$427,900,000
|
|
Inflation (avg. CPI)
|
13.50%
|
11.73%
|
20.78%
|
11.99%
|
7.77%
|
|
discount rate
|
13.50%
|
14.00%
|
12.50%
|
15.00%
|
10.00%
|
|
Correlation analysis
|
||
|
profits and share prices
|
-0.09087
|
|
|
profits and GDP
|
0.061199
|
|
|
profits and inflation
|
0.707653
|
|
|
profits and discount rate
|
-0.29826
|
|
Fauji Cement Company Limited.
|
2011
|
2010
|
2009
|
2008
|
2007
|
|
|
Profits
|
425,661,000
|
250,179,000
|
1,007,623,000
|
413,598,000
|
646,323,000
|
|
current assets
|
4,792,126,000
|
2,070,718,000
|
1,654,014,000
|
5,294,083,000
|
1,953,527,000
|
|
current liabilities
|
5,384,740,000
|
3,984,915,000
|
2,628,010,000
|
2,454,761,000
|
1,442,287,000
|
|
current ratio
|
0.8899
|
0.5196
|
0.6294
|
2.1567
|
1.3545
|
|
share prices
|
4.12
|
4.55
|
6.59
|
10.12
|
19.7
|
|
GDP (ppp)
|
$488,000,000
|
$476,500,000
|
$459,300,000
|
$452,700,000
|
$427,900,000
|
|
Inflation (avg. CPI)
|
13.50%
|
11.73%
|
20.78%
|
11.99%
|
7.77%
|
|
discount rate
|
13.50%
|
14.00%
|
12.50%
|
15.00%
|
10.00%
|
|
Correlation analysis
|
||
|
profits and share prices
|
0.228116
|
|
|
profits and GDP
|
-0.40061
|
|
|
profits and inflation
|
0.630424
|
|
|
profits and discount rate
|
-0.51709
|
|
Cherat Cement Company Limited.
|
2011
|
2010
|
2009
|
2008
|
2007
|
|
|
Profits
|
68,651,000
|
(13,755,000)
|
159,287,000
|
10,354,000
|
184,158,000
|
|
current assets
|
1,717,555,000
|
1,239,483,000
|
1,343,431,000
|
1,719,948,000
|
1,240,430,000
|
|
current liabilities
|
1,799,917,000
|
1,622,417,000
|
1,070,994,000
|
1,597,703,000
|
542,025,000
|
|
current ratio
|
0.9542
|
0.7640
|
1.2544
|
1.0765
|
2.2885
|
|
share prices
|
9
|
9.22
|
13.53
|
27.09
|
56.5
|
|
GDP (ppp)
|
$488,000,000
|
$476,500,000
|
$459,300,000
|
$452,700,000
|
$427,900,000
|
|
Inflation (avg. CPI)
|
13.50%
|
11.73%
|
20.78%
|
11.99%
|
7.77%
|
|
discount rate
|
13.50%
|
14.00%
|
12.50%
|
15.00%
|
10.00%
|
|
Correlation analysis
|
||
|
profits and share prices
|
0.552793
|
|
|
profits and GDP
|
-0.58629
|
|
|
profits and inflation
|
0.151998
|
|
|
profits and discount rate
|
-0.88283
|
|
Pioneer Cement Limited.
|
2011
|
2010
|
2009
|
2008
|
2007
|
|
|
Profits
|
120,650,000
|
(590,925,000)
|
36,114,000
|
(179,971,000)
|
(93,494,000)
|
|
current assets
|
1,184,191,000
|
1,334,028,000
|
1,020,577,000
|
785,002,000
|
966,292,000
|
|
current liabilities
|
4,404,220,000
|
4,908,339,000
|
3,489,131,000
|
2,969,300,000
|
1,999,850,000
|
|
current ratio
|
0.2689
|
0.2718
|
0.2925
|
0.2644
|
0.4832
|
|
share prices
|
5.51
|
6.37
|
13.58
|
28.17
|
37.4
|
|
GDP (ppp)
|
$488,000,000
|
$476,500,000
|
$459,300,000
|
$452,700,000
|
$427,900,000
|
|
Inflation (avg. CPI)
|
13.50%
|
11.73%
|
20.78%
|
11.99%
|
7.77%
|
|
discount rate
|
13.50%
|
14.00%
|
12.50%
|
15.00%
|
10.00%
|
|
Correlation analysis
|
||
|
profits and share prices
|
0.109795
|
|
|
profits and GDP
|
-0.05708
|
|
|
profits and inflation
|
0.355336
|
|
|
profits and discount rate
|
-0.29817
|
|
Bestway Cement Limited.
|
2011
|
2010
|
2009
|
2008
|
2007
|
|
|
Profits
|
179,230,225
|
(1,209,436,510)
|
974,023,986
|
168,581,479
|
51,538,731
|
|
current assets
|
5,103,635,761
|
4,695,170,277
|
4,805,715,348
|
3
,719,300,964
|
2,806,801,429
|
|
current liabilities
|
9,629,477,120
|
9,005,030,150
|
7,411,881,095
|
5
,340,724,139
|
3,410,125,493
|
|
current ratio
|
0.5300
|
0.5214
|
0.6484
|
0.6964
|
0.8231
|
|
share prices
|
12.12
|
14.28
|
25.54
|
40.1
|
81.95
|
|
GDP (ppp)
|
$488,000,000
|
$476,500,000
|
$459,300,000
|
$452,700,000
|
$427,900,000
|
|
Inflation (avg. CPI)
|
13.50%
|
11.73%
|
20.78%
|
11.99%
|
7.77%
|
|
discount rate
|
13.50%
|
14.00%
|
12.50%
|
15.00%
|
10.00%
|
|
Correlation analysis
|
||
|
profits and share prices
|
0.167503
|
|
|
profits and GDP
|
-0.25674
|
|
|
profits and inflation
|
0.584051
|
|
|
profits and discount rate
|
-0.23803
|
|
Kohat Cement Company Limited.
|
2011
|
2010
|
2009
|
2008
|
2007
|
|
|
Profits
|
63,715,971
|
(327,777,142)
|
27,092,698
|
222,439,366
|
48,807,582
|
|
current assets
|
1,953,618,476
|
1,407,168,642
|
1,645,675,393
|
1,332,629,006
|
556,440,086
|
|
current liabilities
|
2,810,539,470
|
3,242,472,939
|
2,946,392,234
|
2,016,497,901
|
555,798,204
|
|
current ratio
|
0.6951
|
0.4340
|
0.5585
|
0.6609
|
1.0012
|
|
share prices
|
6.11
|
6.6
|
7.28
|
36.63
|
54.5
|
|
GDP (ppp)
|
$488,000,000
|
$476,500,000
|
$459,300,000
|
$452,700,000
|
$427,900,000
|
|
Inflation (avg. CPI)
|
13.50%
|
11.73%
|
20.78%
|
11.99%
|
7.77%
|
|
discount rate
|
13.50%
|
14.00%
|
12.50%
|
15.00%
|
10.00%
|
|
Correlation analysis
|
||
|
profits and share prices
|
0.470634
|
|
|
profits and GDP
|
-0.36684
|
|
|
profits and inflation
|
0.045079
|
|
|
profits and discount rate
|
-0.00714
|
|
Thatta Cement Company Limited.
|
2011
|
2010
|
2009
|
2008
|
2007
|
|
|
Profits
|
(74,558,000)
|
942,000
|
203,872,000
|
39,522,000
|
46,652,000
|
|
current assets
|
1,055,648,000
|
585,639,000
|
594,336,000
|
599,355,000
|
1,288,449,000
|
|
current liabilities
|
870,285,000
|
571,714,000
|
507,111,000
|
586,953,000
|
1,271,169,000
|
|
current ratio
|
1.2130
|
1.0244
|
1.1720
|
1.0211
|
1.0136
|
|
share prices
|
19.98
|
20.88
|
19.87
|
23.3
|
N.A
|
|
GDP (ppp)
|
$488,000,000
|
$476,500,000
|
$459,300,000
|
$452,700,000
|
$427,900,000
|
|
Inflation (avg. CPI)
|
13.50%
|
11.73%
|
20.78%
|
11.99%
|
7.77%
|
|
discount rate
|
13.50%
|
14.00%
|
12.50%
|
15.00%
|
10.00%
|
|
Correlation analysis
|
||
|
profits and share prices
|
-0.11527
|
|
|
profits and GDP
|
-0.44514
|
|
|
profits and inflation
|
0.634326
|
|
|
profits and discount rate
|
-0.25679
|
|
