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Selecting the topic from the list was not easy. I go through all the topics and evaluate them on the basis of my knowledge and at last the topic which I decided is "The business and financial performance of an organization over a three year period." After the selection, it is another task for me to select the organization as hundreds of organizations came into my mind. Then I decided to search a little bit as for which organization I got the information available on internet and newspaper. At the end, I came up with the decision of selecting "Dawood Hercules Chemicals Limited"(DHCL).
REASON FOR SELECTION THE TOPIC
I believe that I can do this project very successfully as I am an ACCA student.
The contexts and concepts of this topic are clear to me.
I have study Ratio, SWOT and PESTEL analysis during my studies in ACCA but I don't have the practical experience of applying these. So I decided to take this opportunity to get grip on practical implication of these tools.
Due to lack of resources for primary research I can only conduct secondary research. For this purpose, easy availability of relevant, useful and reliable information from variety of sources is necessary.
I personally find analyzing the financial situation of an organization appealing, as financial analysis delves deep into the foundations of a company, investigating the picture it represents to the outside world in the form of its annual accounts.
REASON FOR SELECTION THE ORGANIZATION
The DHCL has won stock exchange top 25 Companies award for three consecutive years and its annual accounts ranked in top 5 companies of chemical and fertilizers sector for 4 years. Moreover, a leading fertilizer manufacturer in Pakistan, the reliable information required to financial and business analysis is easily available on internet, electronic and print media and public libraries. The information of its competitor would also be available. As the contribution of the fertilizer industry in the socio-economic development of Pakistan is indeed high, keeping this in mind I would able to cultivate a better understanding of Pakistan's economy.
AIMS AND OBJECTIVES
The prime purpose of carried out this project for me is to have an insight into analysis of DHCL's business and financial position and performance and comparing it with Fauji Fertizers Bin Qsaim (FFBL) that includes:
Interpret key financial ratios: Ratio Analysis enables the business owner/manager to spot trends in a business and to compare its performance and condition with the average performance of similar businesses in the same industry. http://www.zeromillion.com/business/financial/financial-ratio.html (Accessed on 9 October 2010)
Profitability ratios: show a company's overall efficiency and performance.
One of the most frequently used tools of financial ratio analysis is profitability ratios which are used to determine the company's bottom line.http://www.bizfinance.about.com (Accessed on 9 October 2010)
Liquidity ratios: used to determine a company's ability to pay off its short-terms debts obligations. http://www.investopedia.com/terms/a/(Accessed on 9 October 2010)
They are used to analyze the quantity and quality of the debt that the company has and to prove until what point the profitability that the company obtains will be able to support the financial cost of this debt. http://www.beginnermoneyinvesting.com/html/solvency_ratios.htm (Accessed on 10 October 2010)
help investors evaluate a firm's ability to effectively and efficiently manage its operations and assets. http://financial-education.com/2007/01/31/activity-ratios/ (Accessed on 10 October 2010)
Shareholders valuation ratio
These are the ratios which help equity shareholders and other investors to assess the value and quality of an investment in the ordinary shares of a company. (BPP: Paper P2 Corporate Reporting 2008/2009)
Appraise and evaluate the internal strength and weakness and external opportunity and threats of DHC. i.e SWOT analysis.
It is the careful evaluation of an organization's internal strengths and weaknesses as well as its environmental opportunities and threats. In SWOT analysis, the best strategies accomplish the organization's mission by 1) exploiting an organization's opportunities and strengths while 2) neutralizing its threat and 3).avoiding (or correcting) its weaknesses. (Fundamental of Management by Ricky W. Griffin: Fifth Edition)
Conduct PESTLE analysis
It will take into account Political, Economic, Social and Technological, Legal and Environmental factors affecting DHCL's in the Pakistan.
It describes a framework of macro-environmental factors used in the environmental scanning component of strategic management. http://en.wikipedia.org/wiki/PEST_analysis (Accessed on 11 October 2010)
Business analysis will be conducted using information derived from annual reports and various other sources.
And lastly to provide a conclusion and provide recommendation on performance of DHCL over three years based on analysis
It is very important to have clarified research questions and answer them through the project. Therefore I have answered the following research questions in my analysis.
What will be my research question/title of my project?
Whether I need some extra course or knowledge acquired in ACCA is enough?
What sources will I use for information about the topic?
How will I prioritize my sources?
What methods I will use to extract information from my resources?
How would I interact with my mentor to get the maximum out of my meetings with him?
Which analytical tools will I use for my analysis?
How this information would help me to carry out my analysis?
What conclusions can be drawn from the analysis?
What IT skill will I need to have to complete my thesis?
OVERALL PROJECT APPROAH
First of all, I identify the core concepts of the research and wrote everything down.
Then I selected a topic.
I search the internet and studied various newspapers and business magazines for my knowledge.
I also prioritized my resources for using the latest information and gave adequate attention to reliable information.
I selected the tools which will help me in undertaking thorough analysis e.g. ratio analysis, SWOT and PESTEL analysis.
I ensured that the limitations of my tools don't affect my analysis.
I took care that I record my sources. For this reason I recorded the publication details of my sources.
The areas in which I faced problems, I discussed about them with my mentor.
I finally formulated the conclusions.
Then I presented my findings to my mentor who suggested improvements and ultimately, I completed my project.
Information gathering and accounting / business techniques
Word count: 1497
SOURCES TO GATHER INFORMATION
A primary source is a document, speech, or other sort of evidence written, created or otherwise produced during the time under study. Primary sources offer an inside view of a particular event. http://knowledgecenter.unr.edu/help/using/primary.aspx (Accessed on 12 October 2010)
are texts based on primary sources, and involve generalization, analysis, synthesis, interpretation, or evaluation. http://www.wordiq.com/definition/Secondary_source (Accessed on 12 October 2010)
Secondary data is more easily available, so it is less dependable. Therefore when I came across a source of secondary data, I have to ensure that it was reliable and authentic before using in my project. There were plenty sources of secondary data. I used off the shelf data like audited annual reports of both the company and its competitor of the years under review, ACCA text books, trade journals, magazines and newspapers.
Annual reports were the most dependable secondary source of information for my research project. These were the most important source for calculation of ratios. I obtained these reports from the Lahore Stock Exchange (LSE).
Internet is also a chief source for collecting data. I used engine searches like Yahoo, Google and Ask. com. After going through the links I selected the relevant and authenticated ones. I also used authentic website for collecting information.
An added major source of information was text and reference books. I used my college library to glance through relevant books concerning the business techniques I was going to use for the analysis. Here the most useful were the ACCA textbooks from BPP.
LIMITATIONS OF DATA GATHERING
I had face complexities while sorting out the gathered data. The information gathered from the internet was not trustworthy in most of the cases and it took me lot of time to make sure the legitimacy of information. Using search engines to gather information proved to be difficult and time consuming as I had to go through numerous websites to obtain the relevant and reliable information. I found it time consuming to find old business magazines and newspapers in the public libraries. Finding relevant articles in the business magazines and newspapers was also a time consuming process.
According to the ACCA Code of Ethics and Conduct any member of profession should keep the following fundamental principles under consideration at any time;
Professional competence and due care
(BPP: P1 Professional Accountant 2008/2009)
I adhered to "Compliance with University's Code of Practice, Ethical standards for Research involving Human Participants" where applicable. At various points, while collecting information, I came across protected or copy right data but I bounded myself within the ethical strictures. I had to uphold objectivity, integrity, confidentiality, professional behaviour and professional care. While gathering information, I made sure that I gave fair consideration to all the reliable sources of information and my personal bias and views did not get in the way of my research.
EVALUATION TOOLS AND MODELS
method of analysis, used in making credit and investment judgments, which utilizes the relationship of figures found in financial statements to determine values and evaluate risks and compares such ratios to those of prior periods and other companies to reveal trends and identify eccentricities. http://www.allbusiness.com/glossaries/ratio-analysis/4954112-1.html (Accessed on 12 October 2010)
Gross profit margin: Gross profit shows you how much money you have to operate your business. The gross profit margin gives you the percentage of your revenue that remains after the cost of your sales.
Net profit margin: Net profit, or the bottom line, is the money remaining after you have paid all expenses. For larger companies, this money is either invested back into the company or paid out in dividends. This is derived as net profit margin in relation to sales.
Return on assets measures how effectively your business uses its assets to create revenue.
Return on equity measures how much money you have earned on your investment.
http://www.business-plan-success.com/Articles/Formulas3/ (Accessed on 13 October 2010)
Current asset: compares a company's liquid assets (ie cash and those assets held which will soon be turned into cash) with short-term liabilities (payables/creditors due within one year). The higher the ratio the more liquid the company is.
Quick ratio: A stricter test of liquidity is the acid test ratio (also known as the quick ratio) which excludes inventory/stock as a current asset. This approach can be justified because for many companies inventory/stock cannot be readily converted into cash. In a period of severe cash shortage, a company may be forced to sell its inventory/stock at a discount to ensure sales.
Debt equity ratio: measures the company's commitments to its long-term lenders against the long-term capital in the company.
Interest cover ratio: measures the amount of profit available to cover the interest payable by the company. The lower the level of interest cover the greater the risk to lenders that interest payments will not be met.
( ACCA Student Accountant February 2007 Christopher Pyke)
Inventory day's : number of days goods remain in inventory before being sold.
http://www.businessdictionary.com/definition/inventory-days.html (Accessed on 13 October 2010)
Inventory turnover: Number of times a firm's investment in inventory is recouped during an accounting period. Normally a high number indicates a greater sales efficiency and a lower risk of loss through un-saleable stock.http://www.businessdictionary.com/definition/inventory-turnover.html#ixzz15CWocBU0 (Accessed on 13 October 2010)
Debtor's turnover: indicates how many times, on average, accounts receivables are collected during a year.
Debtor's collection period: number of days, on average, that it takes a company to collection its credit accounts or its accounts receivables
http://bizfinanc.about.com/od/financialratios (Accessed on 14 October 2010)
Creditor's turnover: The measure shows investors how many times per period the company pays its average payable amount. http://dictionary.reference.com/browse/accounts+payable+turnover+ratio (Accessed on 14 October 2010)
Creditor's payment period: The average length of time between the purchase of inputs and the payment for them.
Cash operating cycle: is the period of time which elapses between the point at which cash begins to be expended on the production of a product and the collection of cash from a purchaser. (BPP: F9 Financial Management 2008/2009)
Fixed assets turnover: measures the company's effectiveness in generating sales from its investments in plant, property, and equipment.
Total assets turnover: measures the ability of a company to use its assets to generate sales.
http://bizfinanc.about.com/od/financialratios (Accessed on 14 October 2010)
Investment valuation ratios
Earnings per share
The portion of a company's profit allocated to each outstanding share of common stock. When calculating, it is more accurate to use a weighted average number of shares outstanding.
Price earnings ratio, which compares the current price of company's shares to the amount of earnings it generates. The purpose of this ratio is to give users a quick idea of how much they are paying for each $1 of earnings.
Dividend yield: is expressed as an annual percentage and is calculated as the company's annual cash dividend per share divided by the current price of the stock.
http://www.investopedia.com (Accessed on 15 October 2010)
Dividend cover: expresses a company's ability to pay ordinary dividends to shareholders out of profits earned. It shows how many times the ordinary dividend is covered by the profit available. http://www.advfn.com/Help/dividend-cover-104.html (Accessed on 15 October 2010)
Limitations of Financial Ratio Analysis
Ratio analysis is a retrospective, not prospective examination.
Ratio analysis is based on accounting not economic data.
Ratios don't capture significant off-balance sheet items.
Basic ratios can be manipulated through acceptable alterations of accounting policies (e.g., LIFO/FIFO).
Financial statement accounts reflect historical cost not necessarily current economic value.
Cash flow measures have been proven to be more closely correlated with stock price movement that income based measures.
http://www.financialmodelingguide.com/financial-ratios/financial-ratio-limitations/ (Accessed on 15 October 2010)
Is a structured evaluation of external and internal marketplace conditions. SWOT is an acronym used by marketers and other business professionals; it stands for strengths, weaknesses, opportunities and threats. These are the key elements behind the SWOT analysis concept. Because they outline marketplace elements that can help or hurt a brand, SWOT analyses are incredibly valuable to decision makers within an organization because they can help management target their marketing message to their strengths and opportunities.http://www.ehow.com/about_6583183_concept-swot-analysis.html (Accessed on 15 October 2010)
Limitations of SWOT analysis
It is not an end in itself but more part of process. It often produces lengthy list which are each accorded the same weighting, when in fact not all strengths or weaknesses facing the organization will be weighted the same e.g the effect of some weaknesses are seriously undermine the competitive advantages of organization but other are less detrimental. Strengths and weaknesses may not be readily translated into opportunities and threats. The same factors may be strength and weaknesses and similarly the same factors can be opportunities and threats. The analysis may be too focused within industry boundary.(Understanding strategic management by Anthony Henry 2008)
PESTEL is a useful checklist for general environmental factors, namely the political, economic, social-cultural, environmental protection, legal and technological issues effecting an organization. In real world they are interlinked of course. Any single environmental development can have implications for all six aspects.(BPP: Paper P3 Business Analysis 2008/2009)
Limitations of PESTEL Analysis
The tool allows users to over-simplify the data that is used. It is easily possible to miss important data.
The tool needs to be updated regularly to be effective.
The tool is most effective when users come from different perspectives and departments.
The tool requires users to have access to data sources which could be time consuming and expensive.
Much of the data used by the tool is on an assumption basis.
The business environment is changing drastically. Thus, it is becoming increasingly difficult for projects to anticipate developments.
http://www.brighthub.com/office/project-management/articles/51754.aspx (Accessed on 9 October 2010)
Results, analysis, conclusion and recommendation
Word count: 3994
The fertilizer sector in Pakistan comprises of 10 companies 4 of which are in the public sector while 6 are in the private http://www.pakissan.com/english/news/newsDetail.php?newsid=10786 (Accessed on 16 October 2010)
The fertilizer industry in Pakistan is of an oligopolistic nature, with the four major players being the Engro, FFC, FFBL and Dawood Hercules with 14%, 38%, 10% and 8% share of urea production respectively.
In FY2009, the urea off-take of industry grew 17% to 6.4 million tons. This was mainly due to record wheat support prices of Rs 950/maund for Rabi 08/09 and 09/10 resulting in highest ever returns for the farmers, increase in acreages under BT cotton requiring more urea and, rising cotton prices encouraging increased fertiliser use. Domestic urea production during 2009 on national basis was 5.05 million tons as compared to 4.98 million tons in 2008. To fill the demand supply gap, GOP imported 1.6 million tons of urea which was distributed through National Fertiliser Marketing Limited. http://www.brecorder.com/index3.php?id=1074756&currPageNo=1&query=&search=&term=&supDate=2010-06-29 (Accessed on 16 October 2010)
DHCL was incorporated as a public limited company on 17th April 1968, as a joint venture between Dawood Group of Industries and Hercules Inc. USA. It was the first private sector venture in Pakistan to receive a loan from the World Bank.
DHCL sells urea under the brand "Bubber Sher". It also sell Anhydrous ammonia which is a by- product.
It is sited at the heart of the Punjab having capacity of 498,000 Metric ton, the area of unparallel agricultural significance, surrounded by the belts of rice, grain and wheat. Located near the historic city of Sheikhupura, about 28 Km from Lahore; (Annual report 2009)
Production and sales analysis
Dawood Hercules Limited
Sale (in Qty)
Sales in Rs.
Average price per ton
In FY2009, DHCL has produced ever highest fertilizer to cater the demand of fertilizer. This level of production was achieved even in situation when company suffered from of longer period of gas curtailment in the FY2009 resulting in production loss of 27,851 as against 9,830 M. Tons in year 2008.
In FY08, DHL urea production was at 508,050 M.T to meet demand. In this year, the plant shut down remained at 33.394 days due to curtailment of gas and maintenance of plant.
The capacity utilization of the company is improving in every next year despite of the pressure on the industry for gas load shedding. This shows the efficiency of management to run plant above standard production.
The company has made a new record by producing 1,600 M Tons fertilizer in one single day on 19th October 2009 which was 1,551 M.Tons in 2008 , the highest in the Company's history.
In 2009, the demand of fertilizers registered an increase in Pakistan due to high support prices of wheat set by government of Pakistan, high acres cultivated for BT cotton by farmers to benefit from high price of cotton requiring more consumption of fertilizers.
In 2009, the Company has achieved to sell 513,221 M. Tons of urea as compared to 527,860 M. Tons last year. This year all the production was sold. Keeping in view rising demand the sales of the company has been slightly reduced. This decrease was attributable to availability of small opening inventory as of 1st January 2009.
In 2008, the company has registered a growth of 4% in volumetric sales. In 2007, a bit depression was seen in local market. In 2008, although around 162.5 kg of fertilizer consumption per hectare was noted that is very low but unprecedented increase in demand of Urea and DAP was noted in this year due to the following factors:
Upsurge in the international prices of Urea and DAP.
Shortage of imported fertilizers
Smuggling to a neighboring country.
Shortfall of fertilizers in international and local cause hoarding
Tremendous rise in prices of DAP making very expensive for farmer who used DAP and finally they shifted to urea which is alternate to DAP. (B.recorder)
Comparison with FFBL
The production of the company is half of FFBL, due to shortage of installed capacity. The capacity utilization is almost 14% higher than that of FFBL by achieving operation excellence. The FFBL has shown almost 168,904 m.ton higher sales than production which was due to reserve of stock relating to previous years. However, DHCL was full of capacity and abundant sales in FY 2008 results in lower opening stock and hence lower sales.
Net profit margin
Return on assets (ROA)
Return on equity (ROE)
The gross profit of the company witnessed a growth of around 4.78% and reached to 41.95% in FY 2008. This increase was contributed by increase in sales price of the fertilizers. The upsurge in fertilizers prices was due to demand and supply gap, this gap was widened in this year because there was worldwide shortage of fertilizers which tend the prices to boost up. Fertilizers in abundant quantity was smuggled from Pakistan, which is not even self sufficient in fertilizer need. Pakistan fulfills its demand by import of fertilizer in sizable volume.
In 2008, the sales of the company were Rs. 7,429 Million as compared to Rs. 5,011 Million for the year 2007. The increase of 48% was recorded in FY 2008 whereas only meager increase of 3.8% in volumetric sales. The average prices gone up by 4,219 per ton.
The increase in sales was not fully translated into gross profit margin as 48% rise in sales value was resulted into just 4.78% increase in gross margin, which is due to substantial shoot up in cost of sales. The cost of sales has registered an increase of 37%, as the raw and packing material, fuel and power and stores and spares, which accounted for 62% of total cost, have been gone up by 20%, 30% and 62.8% respectively. The hike in prices of natural gas, oil & electricity squeezed the gross margins of the company. Stores and spares showed tremendous increase which is due to devaluation of currency as mostly stores and spares are being imported and higher maintenance to achieve higher utilization.
There was substantial variation between net profit margins of year 2009 and 2008. Net profit margin was 202% which dropped down to 41.23%.
The profit before tax and share of profit from associated undertakings showed decline of 5,895 million representing 60% as compare to FY 2007, Even though, the financial charges depicted a growth of 19%, however this considerable fall down was due to substantial gain, on disposal of some portion of shareholding of associate of around 8,658 million, was recorded in FY 2007.
Profit after tax has been tumbled to 3,062 from 10,134 million, showed drop of 70%. The hefty growth in share of profit from associated companies' approx 309% was registered but extraordinary event of disposal depressed the bottom-line. Ignoring the profits from associated and disposal, the company profits has been increased by 120% as compare to 2007 from fertilizers sales.
In FY 2009, the gross profit has lessened to 35.87% despite of the fact that prices have been further increased in this year. Sales of the company has boosted up and depicted 49% increase in sales value. The fertilizers were sold 2.8% in lesser quantity in this year. The company made profit from own manufactured fertilizers of 45% (2008:42%), on the other hand earn only 16% (2008: 41.75%) on imported due to high international prices thus overall gross profit margin decreases.
Net profit margin depicted negative figure i.e losses for the year. The main cause for the loss is diminution in investment value of Rs. 3,791 million in respect of equity shares of the SNGPL represented 3697% decrease, on the other hand, increase in distribution cost of 428%. Product transportation cost has increased to 708% due to hike in oil price and substantial increase in imported fertilizers sale.
ROA was highest in FY 2007 due to abnormal event in this year. However lessen down to 11.95% in 2008 and become negative in line with losses suffered during the year
ROE shows the ability of company to generate profitability from shareholder's invested wealth, which follows the same pattern as companies' profitability.
Comparison with FFBL
The company has attained higher gross profit than its competitors but bottom line has registered loss. This loss was due to impairment of investment in SNGPL, an associate, however the competitors' investment in associated was not diminished hence profit shown. When we don't take into account the profit of associated of both companies and impairment loss, the DHCL managed to sell fertilizer at 20% net profit and that of competitors 13%.
ROE and ROA were in line with net profit, Competitors profitability made these ratios positive.
Overall the liquidity position of the company is highly favorable as the company has sufficient current assets to pay current liabilities over the three years. Current ratio has been remained almost same in FY 2008 as compared to FY2007. However in FY2009, current ratio has been declined from 3.19 to 2.01 showed 37% downward trend. A decrease of 55% and 56% was noted in current assets & liabilities of the company respectively, which cause the current ratio almost static. The short term investment accounted for 70% of current assets in 2007, has been reduced by 5,649 million depicting 71% fall in 2008. The current liabilities which comprise of 64% of short term finance, has been declined to 96% i.e dropped by 2,211 million. The balanced fall between current assets and current liabilities keep liquidity position favorable.
In FY 2009, the current assets have gone up by 19%, whereas 89% increase was noted in current liabilities. The value of short term investment has increased by 52% which represent 57% of current assets. The current liabilities has risen by 89% due to 1,167 million more borrowing was obtained and showed increase of 1606%. The loan was obtained to enhance investment in Engro through a right issue.
DHCL has adequate amount of readily convertible assets almost more than double in FY2007 & FY2008. However this has tumbled by almost ½ times in FY 2009 but still has ample readily available current assets to meet short term liabilities.
Comparison with FFBQL
DHCL liquidity is far better than of its competitor, the competitor has almost equivalent current assets and current liabilities. When it comes to quick assets readily current assets has fallen shorten of current liabilities.
Debt equity ratio (DE)
Long term debt to equity (LTDE)
Interest cover ratio
In FY08, debt equity dropped to 37% as compared to FY2007. During FY08, there was a decrease of debt financing by 27% i.e 2,409 million. DHCL has shown improvement in debt management, as it has made all efforts to finance its business by recouping its profit.
The fall in LTD of 3% in FY 2008 but LTDE enhanced due to decline in profitability and then equity. In 2009, even considerable decline in profit, the equity increase due to due to charging the impairment reserve in profit and loss, previously booked in equity as per SRO of SECP due to crash of stock market. Ignoring this transaction, company shows more profit than last year, hence equity and LTDE declined.
The interest cover tumbled down in 2008, due to lesser profit. In 2009, the profit was not sufficient to pay interest which is very frightening.
Comparison with FFBQL
The DHCL is on sound footing as far its debt management is concerned except lower interest cover in 2009 which was due to impairment impact on profit. However, the competitor has adverse solvency position; it has financed its operation 28% more from debt than equity. Overall it is debt based project. On the other hand, DHCL is heavily dependent on equity.
Inventory in days
Debtor collection period
Creditors payment period
Cash Operating cycle
Total asset turnover
Fixed assets turnover
The market condition prevailing regarding fertilizer demand has improved inventory turnover and inventory days in 2008, which further depicts substantially favorable results as inventory turnover and days reached to 81.92 and 4.46 respectively. DHCL kept inventory in stock only 4 days and the ready collection from debtors almost at time of delivery. The company even thought efficient operating cycle, pay their creditors after 1 month. This was almost 2 months in FY 2007 then which reduced to 1 and half month. In 2007, inventory day was high which resulted in gap of around 6 days between cash collection and cash payment. In subsequent year, gap has been reversed, now the company has to pay after 25 day of cash collection.
The total assets and fixed assets turnover has registered increasing trend which is due to rising sales of both year's i.e FY 2008 and FY2009.
Comparison with FFBQL
The FFBL has more favorable operating cycle of around (78) days as compared to DHCL of -25 days. The DHCL has effectively managed its inventory and debtors than competitors; it takes only 5 days to convert goods into sales and then cash collection and 96 days in case of FFBL. However FFBL has 144 more days available from suppliers. FFBL has more effectively utilized its total assets to generate sales. But fixed assets was more effectively utilized by DHCL as it is evident from capacity utilization.
Shareholders valuation ratios analysis
Price earnings ratio
Market value per share
As the there is no new capital was injected over the past three year, the continuous depressing EPS and rising PE since 2007 due to deceasing profits. In 2009, the investors' confidence on the company was shattered as this is evident from decline in market value per share. The dividend declared by the company has reduced from Rs.1.5 to Rs. 1 per share. The dividend yield showed a bit improvement in FY 2008, because constant dividend even after decline in profit. However in FY2009, the dividend yield fallen down in line with dividend declared. Dividend cover fluctuation follows the trends of profits.
Comparison with FFBL
Losses gave rise to negative EPS in case of DHCL, profit results in positive EPS and higher dividend cover for FFBL and announcement of higher dividend in FY 2009. The DHCL did well, i even in situation of loss it has announced divided. FFBL higher divided and lower stock price make dividend yield ratio better than DHCL.
DHCL has the privilege of being the first fertilizer manufacturing company to obtain ISO-9001:2000 certification in Pakistan.
DHCL has the tallest industrial structure in Pakistan which has the height of 348 feet.
The Company has been awarded the National Environment Excellence Award 2009 by the National Forum for Environment and Health
In year 2009, the company got ISO 14001 certification after consistently complying with National Environment Quality Standards (NEQs) over the years..
The DHCL is part of "Dawood Group" which has multi faceted investments in fertilizers, energy, technology, textile, insurance and financial services sectors.
DHCL is producing at more than 100% of installed capacity through operational excellence produced 513,315 M .Tons of urea, which is ever highest. (www.dawoodhercules.com and Annual report 2009)
GOP encourages investment and various concessions regarding import and local manufacture of plant, equipment and machinery, including deferred duty payable through customs debentures are available as per the Investment Policy and applicable Tariff Structure.(http://www.nfdc.gov.pk/Policy.html) (Accessed on 19 October 2010)
Safe man-hours record recorded in 2009 is eight million achieved on 4/11/2009 and DHCL has appointed DuPont Sustainable Solutions to help it to achieve world-class safety standards. Contract consist of safety management consulting program as well as process safety procedural improvements.
DHCL is the only fertilizer company which has installed Bry Air's environmental control system for fertilizer storage to efficiently prevent the effects of humidity.www.bryair.com/fertilizer (Accessed on 19 October 2010)
Company suffer from significant loss, which was mainly because of impairment of investments in associates, the company must have a balanced portfolio of investment to avoid abnormal losses.
In the prevailing situation, when demand is rising the company has not installed any new capacity to avail the opportunity.
Manufacture only one type of fertilizer i.e urea
Pakistan has agri-economy; agriculture contributes 21% to GDP. Agriculture sector engaged around 44 percent of the workforce. Further, 66 percent of the population depends on agriculture for their livelihoods, so fertilizer companies have potential to grow to remain Pakistan competitive.(Economic survey 2009-2010)
Pakistan is fall short of one million tons urea manufacturing capacity(Better agriculture boost GDP Growth by Shabbir Kazmi 13 October 2010 in The Financial daily)
With the increasing demand of fertilizer in Pakistan, the government meets the demand shortfall by import of fertilizer at high rate. The fertilizer industry is under capacity and the DHCL may enhance its production capacity by making investment.
The type of fertilizer manufacture by DHCL is "Urea", The company may initiate to produce advance form of fertilizer "DAP" and other phosphate fertilizers.
Since 2005 there is no quota restriction by WTO, so there are more opportunities for company to export. This can be achieved by installing surplus capacity.
Due to an agriculture based economy and increasing rate of literacy, demand in Pakistan is heavy and because of increased awareness about the use of fertilizer, demand for the fertilizer will increase.
The Ministerial Committee's decided that subsidy to fertilizer sector will continue in the post flood scenario since the countrywide agriculture productivity depends upon access and affordability of agriculture inputs. It was also assured that gas curtailment to fertilizer sector would end as soon as the gas situation improves. http://www.dailytimes.com.pk/default.asp?page=2010%5C10%5C08%5Cstory_8-10-2010_pg5_6 (Accessed on 20 October 2010)
The government has allocated Rs. 250 billion for agriculture credit disbursement for the year 2008-09 which is 25% higher than FY 2008.finance.gov.pk/survey/chapters/02-Agriculture09.pdf (Accessed on 20 October 2010)
In 2009-10, Rs 260 billion which is 4% more than last year. http://www.dailytimes.com.pk/default.asp?page=2009%5C10%5C15%5Cstory_15-10-2009_pg5_1 (Accessed on 201 October 2010)
The gas load shedding may have great impact on fertilizers sector and consequently put pressures to increase in prices of fertilizers to prevent from suffering losses. This may impact on demand. Daily times: Gas curtailment for fertilizer sector By Tanveer Ahmed May 01, 2010
Food and Agriculture Organisation of Pakistan categorized Pakistanas a 'high stress' country with respect to water availability. At independence, Pakistan had about 5,000 cubic meters per capita. Now it has less than 1,500 and expected to drop upto 2020 to less than 1,000. Daily times: Pakistan's growing water challenges by Syed Mohammad Ali April 06, 2010.
The recent unprecedented floods, which have ravaged approximately 20% of the country's landmass, will surely hit our economy including agriculture section in short/medium term. Fertilizer industry is no exception to this. http://www.brecorder.com/news/supplements/1117577:fauji-fertilizer-bin-qasim-limited.html (Accessed on 21 October 2010)
The favorable fertilizer policy announced by the government, subsidy provided by the government and other privileges e.g in form of lesser load shedding competitively. These support activities always put pressure on fertilizer manufacturers not to increase the prices without approval of the government. (Gathered from of daily news)
Fuel and gas prices in Pakistan have enormously increased.
The availability of DAP and other Urea substitutes may have impact on urea demand.
Despite of political instability and inconsistent policies of government, every government endeavors to make strategies which support the fertilizer sector because this is directly link with the agriculture sector which is backbone of our economy. At the same time, a financial constraint prevents the government to pay announced subsidy on imported fertilizers. As I read in newspaper that government refused subsidy claims of around Rs one billion due to the severe financial constraint. Daily times: Financial constraints: MoF refuses to clear fertilizer subsidy claims By Ijaz Kakakhel March 28, 2009
In 2009, government has provided a massive subsidy of Rs.27 billion in the supply of urea and DAP.(B.recorder)
Government under Fertilizer policy, 2001 provided tax relaxation and Initial depreciation allowance (50%) for fertilizer industry.(Fertilizers Policy 2001 issued by government of Pakistan)
The gas sales agreement exists between government and fertilizers manufactures but govt changed it unilaterally and planned to reduce 20% in gas supply. Therefore, they the fertilizers company has decided for legal enforcement of these agreements.The Nation: Fertilizer sector threatens legal action By: Ahmad Ahmadani | Published: May 05, 2010
Fertilizer consumption in Pakistan is closely linked to the economic growth of the country. This fact is proved by the positive correlation between the fertilizer consumption per hectare and nominal GDP.(Economic survey 2008-2009)
Rising prices of natural gas and oil may put pressure on fertilizer sector
Increasing interest rate as dependence on loan financing and devaluation of pak rupees.
Awareness among farmer has increased with passage of time
About 67% lives in rural areas and depends mainly on agriculture. http://www.pakissan.com/english/allabout/farminputs/fertilizers/sustainable.agriculture.and.fertilizer.shtml (Accessed on 22 October 2010)
The company has upgraded Primary Waste Heat Exchanger,Primary Reformer Harps Assemblies and conventional instrumentation (with Distributed Control System).
To improve the quality of urea prills, a new prilling tower was built. It operates on natural draft air circulation, which results in increased average size and strength of the prills.
Quality Management System of DHCL was assessed and registered against quality assurance standard ISO 9002:1994 in 1997 and was upgraded to ISO 9001:2000 in 2002. www.dawoodhercules.com (Accessed on 22 October 2010)
The Competition Commission of Pakistan (CCP) has alleged the fertilizer sector including the DHCL for anti-competitive behavior, making contracts subject to the acceptance of other supplementary obligation and subjecting fertilizer dealers to unilateral changes in price during the booking and delivery time.
Daily times: CCP conducts hearing in fertilizer manufacturers case 18 December 2009 by staff reporter
Company collaborated with WWF-Pakistan for Better Management Practice in agriculture to promote sustainable practices to reduce environmental impact of agriculture in the rural areas.
DHCL has installed facilities for processing of liquid effluents, gaseous emissions and solid disposals for pollution abatement as per specified limits set by NEQS.
DHCL is the first industrial organization to voluntarily monitor and report the compliance with NEQS to Environment Protection Agency (EPA) through SMART. SMART is self monitoring and reporting program tool, which provides information on the compliance status to the EPA.
New Double walled Ammonia Storage to prevent environmental risk from existing single walled. www.dawoodhercules.com (Accessed on 23 October 2010)
CONCLUSION AND RECOMMENDATIONS
In FY2008, unpredictable demand which was arises due to shortage of imported fertilizers, smuggling and high prices in international market triggered the demand. In FY2009, The demand uplifted due to government policies to support agriculture sector and almost all production were sold at substantially higher prices. The financial analysis also revealed that DHCL is working on 15% more than its standard capacity by exploiting its available resources. DHCL is effectively and efficiency operating when we take into account production and sales even in situation of gas load-shedding. However, it must be considered to enhance its installed capacity to capture more market share in the situation when Pakistani fertilizer's companies couldn't meet the demand of agriculture sector. The company's abnormal profitability in 2007 was due to its disposal of share in associate. In FY 2008, disregarding profits from associated and disposal, profits has been increased by 120% as compare to 2007 from fertilizers sales. In FY 2009, the company suffered from substantial losses due to impairment of associate, but if we ignore share of profit and impairment of associate, the company has 20% net profit margin. This depicts that fertilizers business is profitable but it need to have diversified portfolio of investment to be overall profitable.
As it has favorable liquidity position and cash operating cycle, it must consider to effectively operate its treasury function by investing the surplus cash by making few days placements to earn profit.
The company has improved in debt management and made reliance on self financing its operations. However FY2009, was a bit disappointing year as the company suffered losses and consequently lower divided which dropped down its share price.
The competitor has almost double capacity and hence higher sales but the capacity utilization of DHCL is unprecedented. The sales of FFBL are higher than its production contrary to DHCL which is due to abundant available opening stock. The competitors' registered overall profitability The higher profit lead to declaration of higher dividend but still the share price of competitor is substantially lower than DHCL which shows the potential of DHCL share. Liquidity and solvency of competitor is adverse. Whereas efficient than DHCL in negotiating with creditors regarding credit period.
We concluded that company is exposed to scarce water availability, gas load-shedding, devastation of flooded landmark. As the company has effective debt management, liquidity position and being part of sound group, it must exploit the opportunities of higher demand, e.g by producing other type of fertilizers.
The macro environmental affect on the company mainly comprises of fund shortage by government, inflation lead by rising prices of oil and natural gas, legal case lodged by CCP for anti-competition behavior, devaluation of currency and increasing interest rate. The social factors relatively goes in favor of the company as 66% of Pakistani people are directly or indirectly associated with agriculture sector but mostly are illiterate and various effort by relevant ministry to educate farmers especially via Pakistan television and radio, has improved the scenario. Technological and environmental factors are considerably addressed by the company. The company must formulate strategies in ambit of marketing effort for awareness among farmers to increase per hectare consumption but this would be fruitful when company builds its capacity for more production.