FECTO

CEMENT LTD
SECURITY ANALYSIS
PROJECT REPORT

SUBMITTED TO: SIR AKBAR ALI

SUBMITTED BY: SYED HASSAN ALI
SHAH
ERP: 17135
Class Slot: THURSDAY

1|Page
Table of Contents
Abstract 2
COMPANY BACKGROUND ………………………………………………………………………………………. 2

BOARD OF DIRECTORS ………………………………………………………………………………………….. .2

AUDIT COMMITTEE ………………………………………………………………………………………………. 3

HR COMMITTEE …………………………………………………………………………………………………… 3

EXTERNAL AUDITORS, FISCAL YEAR, COMPETITORS ……..……………………………………………. …3

RISK MANAGEMENT FRAMEWORK …………………………………………………………………………… 4

RATIO ANALYSIS ……………………………………………………………………………………………… 5-10

MAJOR CHANGES ……………………………………………………………………………………………...... 10

REGRESSION & CORRELATION …………………………………………………………………………..... 11-12

KEY AUDIT MATTERS …………………………………………………………………………………………... 12

AREAS OF CONCERN ………………………………………………………………………………………… 12-13

GOIN ON CONCERN ……………………………………………………………………………………………... 13

OPINION ON MANAGEMENT’s EARNINGS QUALITY ………………............................................................ 13

Abstract:
This report aims to provide in-depth analysis and projections for Fecto Cement Limited on the
basis of the historical period 2016-2020. For such purpose, company’s background, company’s
analysis, sector & industry analysis, ratio analysis, risk analysis, and some hidden pattern
interpretation of the analysis were studied and performed.

COMPANY BACKGROUND:
The origin of the Fecto Group can be traced back to the year 1952. The founder Mr. Ghulam
Mohammed Fecto initiated the group’s drive for excellence by establishing a company that was
to be engaged in the trading and assembling of Electrical Appliances & Wires.  The company
then made a pioneering effort as it entered into a joint venture with a Japanese brand for the
manufacturing of Radio, which was the first-ever-technical collaboration with Japan in Pakistan.
The year 1972 witnessed Fecto Group’s major diversification from trading to industrial
activities.  The group moved from strength to strength and made its mark as one of the leading
industrial groups by establishing a Cement Plant, Sugar Mills, Tractor Plant as well as Papersack
& Hardboard Manufacturing Units. In the mid-nineties, the founder with the aim to further
strengthen the leadership heritage and to cope with the realities of a complex business world,
segmented the group amongst his sons. With the demands of corporate legislatures and inherent
procedures being fulfilled, the responsibility of managing Fecto Cement Limited, Frontier Paper

2|Page
Products (Pvt) Limited and a Trading Company was entrusted to Mr. Mohammed Yasin Fecto
and Mr. Mohammed Asad Fecto. As dynamic and illustrious as their father, the spirited two gave
momentum to the Fecto journey of excellence by establishing Fecto Telecommunication and
Fecto Technologies and have been recognized at various forums for their progressive business
intellect.

BOARD OF DIRECTORS:
Mr. Aamir Ghani (Chairman)
Mr. Mohammed Yasin Fecto (Ceo)
Ms. Saira Ibrahim Bawani
Mr. Khalid Yacoob
Mr. Mohammed Anwar Habib
Mr. Jamil Ahmed Khan
Mr. Rohail Ajmal
COMPANY SECRETARY: Mr. Abdul Wahab

AUDIT COMMITTEE:
Mr. Jamil Ahmed Khan (Chairman)
Mr. Rohail Ajmal
Mr. Mohammed Anwar Habib

HR COMMITTEE:
Mr. Jamil Ahmed Khan (Chairman)
Mr. Khalid Yacoob
Mr. Mohammed Anwar Habib

EXTERNAL AUDITOR:
Rahman Sarfaraz Rahim Iqbal Rafiq,
Chartered Accountants.

FISCAL YEAR END:

June 30th.

Products:
Produces Clinker, Cement and Paper sacks.

3|Page
Competitors of Fecto Cement Limited:
Few competitors observed for the purpose of analysis and report are as follows;

MAPLE
KOHAT
LEAF
FECTO CEMENT Ltd CEMENT
CEMENT
Ltd
Ltd

PIONEER
CEMENT LTD

4|Page
CEMENT SECTOR:
The cement industry of Pakistan has come a long way since 1947. Immediately after Partition,
the annual production of cement in the country was 300,000 tons per year and total installed
capacity was 470,000 tons per annum. The first cement factory, established in 1921, in the
region, that is now Pakistan, was at Wah, Punjab.

Two cement factories were established as Zealpak and Maple Leaf, with installed capacities of
240,000 and 100,000 tons respectively. Today, the operational capacity of cement production in
Pakistan is estimated to be between 46- 49 million tons, with an expected expansion to 76
million tons by 2020.

A cement company in Pakistan is defined not by its earnings or product variety, but by
geographical distinctions. Everything above the Sindh-Punjab border is ‘the north’, everything
below is ‘the south’. The north comprises 75% of the country’s operational capacity and has
around 14 players; Dera Ghazi Khan Cement, Fauji, Cherat, Maple Leaf. These export to
Afghanistan and India, but most of their earnings come from the local market.

The south comprises 25% of the operational capacity, and has fewer players; Lucky, Attock and
Thatta. Due to the advantage of being closer to Karachi and Gwadar, the southern players’
earnings are driven primarily by exports to places like Bangladesh, Sri Lanka, Oman and South
Africa.

STRUCTURE OF CEMENT SECTOR:

 There are 30 cement plants in Pakistan. These cement plants are distributed across the
country; mostly around the population centers. The Northern Zone consists of Upper
Punjab, KP, Azad Kashmir and areas of Balochistan close to KP and Punjab. The
Southern Zone, for the most part, is made up of Sindh i.e. the areas close to Karachi.
 Pre Covid: During July-March FY2020, the cement industry has demonstrated a healthy
growth of 37.8% because of:
o Increased exports of clinker, which went up by 100% in July-March.
o Increased domestic demand for cement since government raised the development
expenditures.
o Enhanced remittances inflow may have increased private construction activities.

5|Page
OVERVIEW OF 1 YEAR:

July 2019 July 2020

LISTED COMPANY’S OUSTANDING SHARES:

6|Page
KEY COMPANY’S MARKET SHARE:

DEMAND DYNAMICS (RESIDENTIAL)

Pakistan is experiencing Asia’s fastest-growing urbanization and with that comes the need for
more housing. One government study has shown an immediate need for housing units estimated
at 9 million units. These figures also reveal the uneven patterns of structural growth; for instance,
from 2006 to 2016, the industry grew at a rate of 7% to 10% in the Northern zone whereas, in the
South, it has grown at about 4%. The South is also more dependent on exports than the North.
Studies by the Planning Commission of Pakistan show that by 2030, half of the population of
Pakistan will be living in cities. This means over 100 million urban citizens, and these citizens
will need houses to live in. 38% are single bedroom houses, around 31% are two-bedroom
houses while the rest are three, four and five bedroom houses. 55% are Pucca houses (i.e. houses
that are designed to be permanent dwellings), 11% are Semi-Pucca and 35% are Kacha houses
(not permanent). Housing societies usually have Pucca houses.
The average cement consumption for a 5 marla Pucca house is over 540 bags, where each bag
has a standard weight of 50 kilograms. New housing societies are sprouting up in and around all
major cities of Pakistan (Including the PM Naya Pakistan Housing Program). About 50% of the
demand for cement comes from these schemes. There are over 5100 registered housing societies
working across Pakistan.

DEMAND DYNAMIC (INFRASTRUCTURE)

According to the ministry of finance, 90% of national passenger traffic and 96% of freight
movement in Pakistan occurs through roads. The transport and communications sector
contributes about 10% of the country’s GDP. As per the National Transport Research Center, the
total length of roads in Pakistan is over 264,000 kilometers. It is estimated that about 900 tons of
cement are required to lay one kilometer of a simple two-lane road.

7|Page
Impact of CPEC:
• The economic corridor comprises a network of infrastructure (highways, roads & ports)
and energy projects, industrial parks and more.
• All of these and many more projects are expected to be worth of $9.8B that’ll increase
demand for the cement sector till 2030.
• To meet such rising demand cement sector has already started expanding where it aims to
expand by almost 11.8 Million Tons till 2023 with more future expansion to come.

SUPPLY DYNAMICS:
The factors that affect the supply side of cement industry are;
• Production Cost: Power & fuel constitutes about 30% of the total cost. Second is the
cost of raw materials which accounts for 40% of the total cost.
• Financial Costs: The 7% policy rate which is allowing the cement industry a diluted
borrowing now, can anytime trigger the cement sector cost cutting measures when it goes
up.
• Capacity Utilization: Suppliers have excess capacity thus they are not taking advantage
of economies of scale leading to inefficient production.
• Transportation cost: As cement is a mass commodity, the transportation cost accounts
for 10% proportion of the cement manufacturing cost.

SWOT ANALYSIS:
Strengths:
● Strong exports and international ties
● Increasing EBITDA of companies
● All raw materials are available in Pakistan
Weaknesses:
● Cyclical industry
● Increasing energy costs
● Innovation has reached saturation
● Oligopolistic industry
Opportunities:
● Increasing demand and population
● Huge govt expenditure in infrastructure

8|Page
 ● There are innovative ideas being researched
Threats:
● High taxes (which is being mediated)
● Imported coal subject to exchange rate fluctuation
● Low GDP growth
● Naya Pakistan housing scheme, CPEC, and other development schemes invite new
entrants

Ratio Analysis (Company and Industry):

Current Ratio:
In the early years in the period an average
healthy ratio was observed whereas C.R C.R
was highest in 2019 mainly because there
was a drastic decrease in the trade and Current Ratio Company Current Ratio Industry
8.067088769135
other payables of about 51%, also 9 28
unclaimed dividends went down by 48%. 8
7 5.420809193690
On the other hand a short term loan to a 5.002062306231 29
5.104783183277
6 99 41
related party of about 40,000,000 was 5 3.624953413350
3.277859981781
2.987535670769
given which wasn’t given in the previous 54 2.646290090983
2.590662075251 4
4 03 2.298015237681
54 62
years which lead to a high C.R. However 3 68
2
in 2020, C.R dropped to 2.3 which was due
1
to a sudden increase in current liabilities 0
by almost 30% from the previous year, 2015.5 2016 2016.5 2017 2017.5 2018 2018.5 2019 2019.5 2020 2020.5
trade payables, short term borrowing and current portion of long term loan from a bank became
the main reasons of sudden increase. Also the current assets fell by 3.4% mainly due to decrease
in loan advances and receivables. These were the main reasons of this drastic decrease.
On the other hand industry remained constant almost around 2.5% for the years 2016, 2018, and
2019 where as a slight increase to 3-3.5% was observed in 2017 and 2020 which is not material
enough to discuss.
Inventory T.O (days)
Inventory T.O days Company Inventory T.O days Industry
Inventory Turnover Ratio (days): 188.894297598
635
168.537679804
186.864248264
537
200 164.480561473 158.600963582
My company found it a bit difficult in 180 095 434 149.804068760
737
092 137.758048457
134.765862829
selling its inventory quickly and for the 160 879
318
140
early years in the period I.T remained 120
100
9|Page 80
60
40
20
0
2016.5 2017 2017.5 2018 2018.5 2019 2019.5 2020 2020.5
constant around 185 odd days whereas it improved to 159 and finally 138 in the following years
in the period. The reasons for a high I.T (days) could possibly be due to the nature of company’s
overall business. The industry overall experienced a high ratio as well following similar pattern
due to similar reasons.

Accounts Receivable Turnover (days):

My company follows a strict credit policy and A/c Rec T.O (days)
had a varying but a very small ratio for the whole
period with highest of around 11 being in 2019 A/C Receivable T.O days Company
A/C Receivable T.O days Industry
and then fell back to 9 in 2020. One main reason 86.05561485
100 58856
is the advance payment policy of company and
80
the other major reasons were that in 2020
60 31.27105376
company recovered its cash from the previous 19.94903873 88901
40 11.96648148 6.813062741
46129 11.04386756 9.788888491
period’s credit sales therefore observing low 20
2.038154700
44803 49544 15379 13601
37094
receivable ratio from previous year. And it’s a 0
good sign that the company had cash on hands 2016.5 2017 2017.5 2018 2018.5 2019 2019.5 2020 2020.5

during the tough Covid period.

On the other hand industry observed a generous credit policy with average being atleast 52 days
for the whole period.

Payable Turnover (days):

The payable T.O varied over the years Payable T.O (days)
but didn’t remain at the very high side
Payable T.O (days) company payable T.O (days) Industry
and infact in the most recent year it was
120 106
the lowest depicting company’s good
100 90
liquidity position, its ability to meet its 71 75
80
commitments and liabilities within the 60 48 54
40
allowed time frame. 40
35

20
0
2016.5 2017 2017.5 2018 2018.5 2019 2019.5 2020 2020.5

Debt to Asset Ratio:

In my company debt to asset ratio averaged around Debt/Asset
19-20% throughout the period with highest being Debt/Asset Company Debt/Asset Industry
reported in 2020 around 27% and lowest in 2019 0.5
47.58%
43.12%
around 14.5%. The reason for a debt to asset ratio in 39.84%
0.4 0.2742755915
2020 is due to a huge loan of around Rs.121.89 27.65% 28.34%
0.2068477801 31807
0.3 0.1949437132
0.1920920600
million obtained from Askari bank for a Refinance 20627 45186 288830.1450679681
0.2 6698
Scheme for Payment of Wages and Salaries to the
Workers and Employees of Business Concerns 0.1
0
2015 2016 2017 2018 2019 2020 2021

10 | P a g e
where as in 2019 company tried to repay its short term and long term debt due to which the ratio
was low.
The industry was observed to have a high debt to asset ratio too.

Debt to Equity Ratio: Debt/Equity

My company maintained a debt to equity ratio
between 24-26% for most of the period whereas the Debt/Equity Company Debt/Equity Industry
3.5 330.18%
ratio decreased in 2019 to 17% and then rose again to
3
all time high to 38%. This could mean that my
2.5
company is majorly an equity based company as the
2
capital structure is more bent towards equity financing.
1.5
The industry maintained a high debt to equity ratio 100.00%
1 0.26079203327 65.97%
0.24214917196
0.23776478797 0.37793353555
38.76% 41.11% 0.169683627196188
0.5 715 3156 7533 5424
Gross Profit/Loss Margin: 0
Gross profit/loss margin observed a 2015 2016 2017 2018 2019 2020 2021

declining trend throughout for my company

with being highest at 48% and lowest being G.P/L.M
at -17% for 2020. Gross Profit/loss margin Company
Gross Profit/loss margin Industry
Prices in local market remained depressed
0.60.476340395965
throughout the year due to slowdown in 931 0.435587559821
44.88%
0.5 465
41.94%
construction activities coupled with excess 0.4 0.265078200655
28.98%
971
capacity which further aggravated by 0.3 0.143337032308
21.56%
916
coming into operation of new production 0.2
0.1
lines and lockdown imposed in the country -
-4.24%
0 0.171184165159
by the Government due to Covid 19 2015.5 2016 2016.5 2017 2017.5 2018 2018.5 2019 2019.5 2020
-0.1 053 2020.5
pandemic. However due to Covid-19 coal -0.2
prices have begun to climb down from its -0.3
peak and will play a role in bringing cost of
sales down in future.
The industry also followed a similar declining pattern where loss being observed in 2020.

Net Profit/Loss Margin:

The company actually recorded loss in 2020
and couldn’t earn a great margin in 2019 as N.P./L.M
well. The only good years being 2016 and
Net Profit/Loss margin Company
2017 where N.P.M was 16% and 15% Net Profit/Loss margin Industry
respectively. The early years in the period
especially 2016 were profitable for the
0.3 23.84% 22.09%
0.16174207839
0.14826173358 ROA
0.2 9371 15.39%
0939 0.09009942106
ROA Company ROA Industry
company as coal prices were relatively 362430.01876913301
8.81%
0.1 0.1996279841
cheaper, administrative expenses were low, 0.25 47994
0.1578320109
89921
0 18.76%
distribution cost in line to exports were low, 2015 2016 0.2 2017
99999
15.52% 2019
2018 2020
0.0844680177-10.43%
- 2021
-0.1 0.15 10.31%
finance cost was low due to reduced utilization 0.1
3274220.22231303176
0.0175612145
9934
3.81%
-0.2 0.05 748508
11 | P a g e 0
-0.3 2015 2016 2017 2018 2019 -5.77%
-0.05 -
2020 2021
0.1593094551
-0.1 16734
-0.15
-0.2
of short term borrowings and premature payment of long term financing. The company observed
strictly lesser demands in the market for 2019 and 2020 with 2019 mainly due to low
infrastructure development and no positive signal on the PM housing schemes, whereas in 2020
due to Covid-19 the demand was generally low. The industry generally performed better than the
company in earning net profits with highest N.P.M being at 23% and even the loss was only 4%
as compared to my company loss margin of 22%.

Return On Assets & Equity:

ROA was highest in 2016 mainly because 2016 was the most profitable year in the whole period
for my company due to reasons mentioned above in N.P.M. Even though the assets continued to
increase for my company due to various investments, expansion and project plans such as Pak
China Economic Corridor, low-cost housing schemes ffd5and other government projects but the
profit kept on declining.
ROE was highest in 2016 around 25% and lowest in 2020
around -21%. The reasons for a declining ROE throughout ROE
the period is due to the adverse business conditions
ROE Company
0.251689372 ROE Industry
mentioned above. 0.195358905
25.92%
032968
0.3 21.67%
630790.104921878
0.2 12.82%
284465
Industry also faced a similar pattern and in 2020 their loss 0.020541065
7.03%
0.1 1618687
for the equity investors was twice as compared to my 0 -
company. 2015 2016 2017 2018 20190.219517840
-0.1 2020 2021
736531
-0.2
-32.23%
-0.3
Earnings Per Share:
Due to good overall business conditions
-0.4
EPS
in 2016 the per share profit was around EPS Company EPS Industry
16.2 however in 2020 due to adverse and 10.025511693
12 2721 8.7256129289
difficult business conditions as 10 4096 6.2445537038
8 919
mentioned above per share loss was 6
3.7066311577
6538
around -15.35. 4
2 0.7 0.25 0.2 0.05 0
As compared to company industry’s 0 -
2015.5 2016 2016.5 2017 2017.5 2018 2018.5 2019 4.5633155871
2019.5 2020 2020.5
-2
earning per share also kept on decreasing -4
6233
throughout the period but also didn’t go -6
as high as company’s profit and loss.

Price to Earnings Ratio:

P/E for my company remained around P/E
7-7.2% early in the period then P/E Company P/E Industry
increased upto 10 in 2019 and then fall 59.359121824 63.041814239
100 2763 7911 36.542455929 32.306480325 -
back to -1.34 in 2020. The reason for 7.1188277578 7.2401980825 4.7419094576
2816 10.993200337
8759 1.3424704994
50 1034 379 4231 1734 7343
negative P/E in 2020 is obviously due 0
to adverse market conditions 2015.5 2016 2016.5 2017 2017.5 2018 2018.5 2019 2019.5 2020 2020.5
-50
-100 -
197.46468484
-150 6887
-200
12 | P a g e
-250
mentioned above, investors didn’t anticipate positive news from the company throughout the
period as they did earlier.

Market to Book Ratio:

Market to Book ratio for company was highest in 2016 at 1.8 and lowest in 2019 around 0.2. So
basically earlier in the period market valued company better as compared to later in the period
mainly due to profitability in the early years.

Market to Book Tobin’s Q Ratio:

Company’s T.Q ratio was highest in 2016
Market to Book Company around 1.6 and lowest in 2019 around 0.34.
14.01126280 Market to Book Industry
13.69610430
67612 77893
So company’s low Q ratio could mean that
15

10 Tobin's
4.747456226 Q 4.283130850
1.791733287 31932 2.111618709 27526
5 1.414437173
0.497530046
97415Tobin's Q Company
95475 27815 0.294696225
0.225812044
Tobin's Q Industry
10.02417415 950699 463355 296899
12
0 9.278960933
67859
2015 2016 35531 2018
2017 2019 2020 2021
10
8
6 2.834278878
1.627965014
1.334827083 53391 1.323598914 2.050203354
4
90909 45048 0.595483405 0.338121918
384072 152404
81495
13009 0.488143835
2 313209
0
2015 2016 2017 2018 2019 2020 2021
the cost to replace its assets is greater than the value of its stock. Whereas industry’s T.Q ratio
also followed a declining pattern.

Comment:
After analyzing these ratios I according to my limited skills, learning and risk of using only 5
years historical data (sampling risk) found no suspicious or doubtful increment or reduction in
the ratios.

RISK MANAGEMENT FRAMEWORK:

The company has exposure to following risks;

Credit Risk:
To reduce the exposure to credit risk, company has a policy in place to obtain advance payments
from its customers which reduces default risk and keeps Receivable T.O down. This policy is
relaxed for Government and some SMEs. Also a financial asset is considered as defaulted when
its 90 days overdue. Overall company adheres to a strict credit policy.

Liquidity Risk:
The Company has approaches in place to manage liquidity risk in order to ensure, as far as
possible, that it will always have sufficient liquidity to meet its liabilities when due, under both
normal and stressed conditions.

13 | P a g e
Market Risk:
Company has exposure to two market risk; currency and interest rate risk.

Currency risk:
The Company is exposed to foreign currency risk on sales to the extent that, orders placed are
denominated in a currency other than Pak Rupees that is Dollar($). However, the foreign
currency is converted into Pak rupee at the time of receipt and then deposited into bank account.

Interest Rate Risk:

Interest rate risk is the risk that the fair value or future cash flows of a financial instrument will
fluctuate because of changes in market interest rates. Majority of the interest rate exposure arises
from short and long term borrowings from banks and term deposits with banks.

14 | P a g e