Financial Statement Analysis and Valuation

Course Code: F--401

Executive Summary
Cement industry of Bangladesh is in its growth stage. The industry is developing day by day.
Lafarge Surma Cement Limited is one of the major producers of quality cement in
Bangladesh. As per the course requirement we are told to conduct the fundamental analysis
of Lafarge Surma Cement Limited. The company is a listed company and its shares are
traded in the capital market. We have collected the annual reports of last couple of years
and from the data we have prepared the proforma income statement, free cash flow and
then ultimately the valuation of the companys share. We have shown the market strategy
of the company. They prefer differentiation that is high price for high quality. The industry
life cycle indicates that Cement industry is in its growth stage. We have shown the
competitive forces along with Michael Porters five force model. Competitive advantage and
disadvantages are described there. Then the ratio analysis gives us the performance of the
company. Then the prospective analysis gives us the intrinsic value of the companys share,
which is 16.79 Tk. whereas on 31 December, 2012 the market price was around 32 Tk. We
have confirmed our valuation with the help of Sensitivity, Scenario and Simulation analysis.
After the valuation we have found that the share is priced higher than the intrinsic value.
That means the share is Overpriced. Holders of the share should sell the share or should
take a short position of Lafarge surmass share.
Analysis of the performance of the company through ratio analysis on four dimensions
against benchmark, peer and industry as well as over time has been done. Determining
potential red flag, conducting DU-PONT analysis computation of FCF analysis of sustainable
growth, estimation of value addition, measurement, and degree of financial leverage have
been done.
There I have presented comments on disclosure practice-both voluntary and mandatory,
management decision analysis, and choice of accounting policy, off balance sheet items,
economic characteristics and strategies of Lafarge Surma Cement Limited.

Financial Statement Analysis and Valuation

Course Code: F--401

Introduction
Lafarge Surma Cement Ltd. (LSC) was incorporated on 11 November 1997 as a private
limited company in Bangladesh under the Companies Act 1994 having its registered office in
Dhaka. On 20 January 2003 Lafarge Surma Cement Ltd. was made into a public limited
company. The Company is listed in Dhaka and Chittagong Stock Exchange. Today, Lafarge
Surma Cement Ltd. has more than 20000 shareholders. In November 2000, the two
Governments of India and Bangladesh signed a historic agreement through exchange of
letters in order to support this unique cross border commercial venture and till date it is the
only cross border industrial venture between the two countries. Since Bangladesh does not
have any commercial deposit of limestone, the agreement provides for uninterrupted
supply of limestone to the cement plant at Chhatak in Bangladesh by a 17 km long belt
conveyor from the quarry located in the state of Meghalaya. The company in Bangladesh,
Lafarge Surma Cement Ltd. wholly owns a subsidiary company Lafarge Umiam Mining
Private Ltd. (LUMPL) being registered in India. This commercial venture with an investment
of USD 280 million, which is one of the largest foreign investments in Bangladesh, has been
financed by Lafarge of France, world leader in building materials, Cementos Molins of Spain,
leading Bangladeshi business houses together with International Finance Corporation (IFC
The World Bank Group), the Asian Development Bank (ADB), German Development Bank
(DEG), European Investment Bank (EIB), and the Netherlands Development Finance
Company (FMO).Lafarge Group, with 176 years of experience, holds worlds top-ranking
position in Cement, Aggregates, Concrete and Gypsum. It operates in 64 countries with
around 68,000 employees. Lafarge is named as one of the 100 Most Sustainable Companies
in the World. Cementos Molins of Spain, with 75 years of experience, also operates in
Mexico, Argentina, Uruguay, and Tunisia. Now, after three years of production operations,
we are producing world class clinker and cement which is a demonstration of the
sophisticated and state-of-the-art machineries and processes of our plant at Chhatak. The
Company is already meeting about 8% of the total market need for cement and 10% of total
clinker requirements of Bangladesh market whereas we continue to enjoy strong growth
rates. By supplying clinker to other cement producers in the market, we contribute some
USD 50-60 million per annum worth of foreign currency savings for the country. We
contribute around BDT 1 (one) billion per annum as government revenue to the national
exchequer of Bangladesh. About 5,000 people depend on our business directly or indirectly
for their livelihood.

Financial Statement Analysis and Valuation

Course Code: F--401

Product Information
The word Supercrete is derived from two English words Superior and Concrete.
Supercrete is the one and only Portland Limestone Cement (PLC) in Bangladesh, which is
produced using limestone extracted from LSCs own quarry in Meghalaya, India. After
mining at Nongtrai of Mehgalaya, it travels cross-border through a 17 km Long Belt
Conveyor (LBC) directly to LSC plant at Chhatak, Sunamgonj. The LSC plant is a state-of-theart and the only fully integrated dry process cement plant in Bangladesh where clinker and
cement of high premium quality are produced. The international standard Quality Control
and Monitoring Lab ensures that every bag that leaves the plant carries the same consistent
premium quality all the way. Supercrete is premium quality cement made for general
purpose applications namely foundation, beams, columns, slab, masonry and plastering
works. It is also used to prepare high grade concrete through proper mix design during
Bridges and Flyover constructions. Its mix is richer and denser allowing a better Bonding
Power when used with different types of aggregates. Supercrete production undergoes
stringent quality control & environment management system that is certified by Asia
Technical Centre, Kuala Lumpur, Malaysia. The Bangladesh as well as European Standard of
Supercrete is BDS EN 197-1: 2003 CEM II/ B-L 42.5 N. Of this standard, 42.5N means a
minimum of 42.5 Mpa compressive strength in 28 days. N stands for normal strength
development. In each pack of Supercrete, Clinker is 65-79%, and Limestone is 21-35% of the
total composition. In addition to Clinker and Limestone, a minor ingredient Gypsum (about
3-4%) is also added. Supercrete comes in 50 Kg Bags.
The benefits of using Supercrete are plenty. Just to share a few:
At the hydration period Limestone accelerates the reaction of C3A, which results in early
setting and early strength developed in theconcrete and mortar. Due to this behavior, the
following advantages are evident at construction site
- Supercrete enhances the work progress with respect to concrete strength development
- Supercrete better performs in the earthquake zone
In the mortar work (Brick/Plastering), the surface of the plaster turns smoother when
compared to PCC cement
The concrete becomes more durable due to less porosity in concrete that is made of
Supercrete
The hydration heat is less, resulting in less thermal crack and hair crack in the surface
Limestone resists the concrete from chloride and sulfur attack
Mortar remains rich because Supercrete requires less remixing with water
Easy to apply, comparatively minimal effort required

Market Information
According to the long-term industry forecasts made by global authorities, high spending on
infrastructure projects and growing demand for housing units will fuel the Bangladeshi
cement industry. Cement is already an astonishing $1.2 billion industry in Bangladesh,
growing steadily at 1.5 to 2 times the GDP growth. The per capita cement consumption now
is only 75 kg in Bangladesh (as compared to that of the developed countries where it is a
staggering 1,000 kg). This means the cement industry possesses a great opportunity for
growth in terms of volume, revenue and employment generation, contributing significantly
to economic growth in Bangladesh.
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Financial Statement Analysis and Valuation

Course Code: F--401

Despite having more than 30 active players inclusive of both locals and multinationals, the
market is dominated by only a few. Two-thirds of the cement consumption is skewed
towards Independent Home Builders (IHB) with high Pucca concentration in the major cities.
Real Estate and Governments development expenditure would stand next to the IHBs on
consumption. The capital, Dhaka would consist of almost half of the total industry
consumption. As cement is still technically an engineers product for its various applications,
it is not understood well enough by most of the end users. There are many misconceptions
in the market regarding cement quality, strength, colour, etc. The most common myth is
that the strength of a construction is directly related to the strength of a cement product.
The fact is that the strength of a construction will depend on a number of factors like the
mix design, engineering design, the load distribution, the quality and the standard of the
material used etc. Therefore, Supercrete puts a lot of emphasis on educating the consumer
group through various meets, seminars, workshops etc. for better usage and understanding
about the quality and the parameters of construction. Supercrete is multi-purpose cement
that works well for any construction from foundation to plastering.

Market share of major cement companies

Company

Market share

Shah cement

14.2%

Heidelberg Cement

9.3%

Meghna Cement (MCML-King)

7.4%

Seven Circle BD Ltd.

6.9%

Lafarge Surma Cement Ltd.

6.7%

Holcim BD Ltd.

6.4%

Unique Cement (Fresh)

6.1%

MI Cement (Crown)

4.9%

Premier Cement

4.0%

Akij Cement

3.7%

Royal Cement

3.0%

Mongla Cement (SKS)-Elephant

2.9%

MTC Cement (Tiger)

2.8%

Total market
companies

share

of

largest

13 78.29%

Source: BCMA

Financial Statement Analysis and Valuation

Course Code: F--401

Achievements
The Lafarge Surma Cement plant in Chhatak, Sylhet is an iconic model of engineering
advancement. Its 17 km long belt conveyor is a global phenomenon and is a one of its kind
cross-border overland single flight conveyor. This state-of-the-art facility still amazes the
construction maestros and has set a model example for many projects undergoing
worldwide. Lafarge Surma is determined to hold Supercretes premium quality through realtime online production report to Lafarge Groups Asia Technical Centre (ATC) in Malaysia.
While the dedicated experts in the business are concentrating to provide customers with
the best product and services, the high end machinery automatically tests and sends results
against strict adherence parameters to ATC every hour. This is free from any human
interference or errors.
These combined efforts enabled LSC to Capture a market share of 8% in 2008 from 4.5 % in 2007, within a year since its
inception
Obtain the No.1 rank in overall customer satisfaction rating, independently surveyed by
Research International, India
Being awarded as the best plant in Lafarge Group globally for Clinker to Cement ratio
improvement
Achieve the award for the best mine safety by the State of Meghalaya, India
Being recognized as Superbrand by the International Superbrands Council, a global
autonomous arbiter on branding
We are always thriving for excellence in all aspects of our business and operation. To
achieve that, we always compete with the industry players, to innovate and design the best
products and apply the best practices. This culture helps us to stay ahead of our competitors
and to come up with new ideas for our customers. Interestingly, we also compete among
ourselves amongst 78 countries within the Group, to find each of our competitive
edge. Recently, Lafarge Surma has won two awards for Optimization in Distribution Network
and Ergonomic Warehouse Operation in the Cement Awards 2010, a global competition
organized by the Group. We had also been awarded the second prize for our innovative idea
of Retail Management Software for Distribution in the IdeaFactory 2010, another global
competition organized by the Group.

Financial Statement Analysis and Valuation

Course Code: F--401

Industry analysis using Michael Porters five force model

Competitive Force 1: Threat of entry
Cement industry is at growing stage now. So there is possibility of new entrants here. If it is
easy to enter in this industry it will reduce the profitability of the existing firms. But after
analyzing different factors we have found out that threat of new entry is not so high in
cement industry. The causes are discussed here.
Main raw material of production of cement is clinker which constitutes 70% - 75% of total
cost of cement production. Bangladesh does not have its own supply of limestone and
cannot produce clinkers domestically. It is too difficult to the small manufacturers to survive
in the industry due to the shortage of raw materials since small companies face difficulties
to arrange the raw materials in competitive price. Only 10-15 companies are holding 80% of
market share. The high cost of raw materials, networking problem, high transportation cost,
few suppliers etc. hinder the new companies to capture a good market share. As new
companies cannot go for large share at the beginning of their business, threat of new entry
is lower for Heidelberg Cement Company.

Competitive Force 2: Rivalry among existing competitors

There is high competition among local cement companies and foreign companies. Local
companies have some advantages over foreign companies.
Cement industry is oligopoly type in nature. Heidelberg, Holcim and Lafarge are the leaders
among multinational cement manufacturers and Shah and Meghna are the leading domestic
manufacturers in the industry. Heidelberg Group is the biggest among the foreign
companies, but its market share is around 9.3% despite it has been in Bangladesh for nearly
a decade.
Local companies grab the largest market share by operating in economics of scale by
supplying cement in the main growth areas and they also have the best marketing network.
Local companies also reduce the cost of production by building big plants. Local
manufacturers make their service available to the mass people through economics of scale.
But multinational companies serve only a group of customers because they charge high
price for superior brand value and quality.
Multinationals bear high overhead costs regarding salary, infrastructure, quality control etc.
On the other hand, local companies are more focused to keep the overhead costs low and
concentrate in offering quality product with additional benefits like home delivery system,
rebate, gifts etc.

Competitive Force 3: Pressure from substitute product

Till now no other product has emerged in our country as a substitute of Cement.

Competitive Force 4: Bargaining power of buyers

Bargaining power of the buyers is limited in the cement industry because of the following
reasons:
1. The demand for Cement is inelastic.
2. No real quality substitutes are available.
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Financial Statement Analysis and Valuation

Course Code: F--401

3. Large number of customers in the industry, since Cement is the key of infrastructure
development.
4. Buyers have to choose from only a few main Cement producers in Bangladesh.
5. Only the industrial buyers have a little advantage than the ordinary buyers in the
Cement industry.

Competitive Force 5: Bargaining power of suppliers

The Bargaining power of suppliers is pretty high in the cement industry of Bangladesh
because of the following reasons:
1. All the inputs are imported.
2. Numbers of suppliers are very few and raw materials are not so available.
In summary due to low brand strength, high fragmentation, low cost advantages (except in
case of some players), the competitive intensity is high. Pricing is poor and depends on
demand scenario. If demand drops, the profitability suffers as the players cut price to run
plants at full capacity (due to high fixed costs).

Financial Statement Analysis and Valuation

Course Code: F--401

Ratio Analysis of Lafarge Surma Cement Ltd

1. Benchmark is Heidelberg Cement Ltd for its outstanding performance.
2. Peer Company is also Heidelberg Cement Ltd as no other company was
multinational in our assigned group.
Liquidity ratios:

Liquidity ratios
0.7
0.6

Value

0.5
0.4
0.3

Current ratio

0.2

Quick ratio

0.1
0
2008

2009

2010
year

2011

2012

As we can see in the graph both the current and quick ratios are decreasing from 20082010, the liquidity position of Lafarge Surma cement decreased from 2008-2010. After 2010
the company started improving its liquidity position and both the ratios then increasing
from 2010-2012.
Ratio
Current ratio
Quick ratio

Lafarge Surma
Cement Ltd

Heidelberg (Peer and

Benchmark)

0.42579855

2.09299964

0.238177

1.52170365

Industry average
1.14306979
0.644910387

Lafarge Surma is far behind from both the Industry average and the benchmark (Heidelberg
Cement Ltd). In case of quick ratio Lafarge Surma is also far behind the industry and
benchmark ratio. It should take immediate steps to manage its current assets and liabilities
and improve its liquidity position.

Financial Statement Analysis and Valuation

Course Code: F--401

Solvency/Leverage ratios:

value

Solvency/Leverage ratios
4.5
4
3.5
3
2.5
2
1.5
1
0.5
0

Total debt ratio

Debt-equity ratio
Equity multiplier

2008

2009

2010

2011

2012

Year

Total debt ratio and Debt to Equity ratio is very smaller and decreasing year by year. This is
the result minimum debt used in the financing. Equity multiplier is relatively higher than
Debt/equity and Total debt ratio. Equity multiplier is decreasing year by year is not a good
sign for the company.
Ratio

Lafarge Surma
Cement Ltd

Heidelberg (Peer and

Benchmark)

Industry average

Total debt ratio

0.62394467

0.35447312

0.556447593

Debt-equity ratio

0.4736661

0.55643297

2.143406173

Equity multiplier

3.07331922

1.55643297

4.74279661

Total debt ratio of Lafarge is very high from the Benchmark Company and little bit above the
industry average. It makes sense for a growing company to have more debt in the capital
structure.
The debt/Equity ratio is lower than the Benchmark Company and very lower than the
industry average. This means that the company can use the available debt capital to
maximize the value of the firm.
Equity multiplier is higher than the Benchmark Company and lower than the industry
average. This reveals the company is highly dependent on equity capital than the
benchmark Company.

Financial Statement Analysis and Valuation

Course Code: F--401

Profitability ratios:

Profitability ratios
0.2
0.15
0.1
Value

0.05
Profit margin

0
-0.05

2008

2009

2010

2011

2012

-0.1

ROA
ROE

-0.15
-0.2
-0.25

Year

All the profitability ratios have the same trend for Lafarge Surma Cement Ltd. That is the
company had good profitability in 2008 and 2009.In 2010 and 2011 there were negative net
income as a consequence of production problems for forest regulations. But after the court
order and solution of the problem the company took a sharp turn and profitability was back
on track in 2012.
Ratio

Lafarge Surma
Cement Ltd

Heidelberg (Peer and

Benchmark)

Industry average

Profit margin

0.00757398

0.10770048

0.051815024

ROA

0.01149591

0.12323139

0.05042401

ROE

0.03274149

0.19039174

0.169242696

Profit Margin was only 0.7% on average for Lafarge Surma Cement Ltd. Whereas Benchmark
Company had a handsome profit of 10% on average and the industry norm was 5% profit
margin on average. We can conclude that the bad performance during 2010-2011 was the
main culprit for this happening.
Both the Return on Assets and Return on Equity were much lower than the benchmark and
than the industry average. Heidelberg performed well on both the parameters than Lafarge
Surma cement. Production hassle is the main cause for this bad performance.

10

Financial Statement Analysis and Valuation

Course Code: F--401

Efficiency ratios:

Value

Effeciency ratios
45
40
35
30
25
20
15
10
5
0

Inventory turnover
Receivables turnover
Fixed Asset turnover
Total Asset turnover
2008

2009

2010

2011

2012

Year

Efficiency ratios are not very good as the performance was bad in the last few years. Total
asset turnover, fixed asset turnover and Inventory turnover remained almost the same for
every period. Receivables turnover reached its maximum in 2010 when the company started
performing poorly. And this is quite rational for a poorly performing company.
Ratio

Lafarge Surma
Cement Ltd

Heidelberg (Peer and

Benchmark)

Industry average

Inventory turnover

4.17223043

5.77609539

5.786954333

Receivables turnover

19.4225735

11.8847179

11.77757964

Fixed Asset turnover

0.5078999

2.71331776

2.287469796

Total Asset turnover

0.41896864

1.13747285

0.955524939

Though Lafarge Surma had bad performances in 2010 and 2011, inventory turnover
performed quite well for the firm. This has reduced the impacts of bad performance in 2012.
This was also near to the Industry Average and benchmark.
The company had its problems over receivable collection. Receivables turnover was greater
than both Benchmark and Industry average.
Fixed asset turnover was very low on average than the benchmark and Industry average.
Total asset turnover also was low on average than both the Benchmark and Industry
average.
Though problems were evident but the company did not go whole wrong during the bad
times. Efficiency was reduced but the company overcame in 2012.

11

Financial Statement Analysis and Valuation

Course Code: F--401

Market based ratios:

Market based ratios

60
40
20
Value

0
-20

2008

2009

2010

-40

2011

2012

P/E ratio
Price to Book value
Ratio

-60
-80
-100
-120

year

Price earnings ratio was volatile throughout the periods, took a dip in 2010 and recovered in
2012. On the other hand Price to book value ratio remained steady relative to P/E ratio. This
is consistent with the performance of the company.

12

Financial Statement Analysis and Valuation

Course Code: F--401

DU-Pont Analysis (Five Factors)

2008

2009

2010

2011

2012

Operating profit margin

0.3235391 0.2490551

-0.009269

Total asset turnover

0.3509149 0.4434191

Interest burden

0.4681957 0.5587755 14.043364 6.14159057

After tax retention rate

0.6750342 0.5552571 0.7118043 0.91978233 0.6942121

Financial leverage

4.2450256 3.5793376 3.9154705 1.95755789 1.6692044

ROE

0.1523218 0.1226433

-0.0333832 0.2381971

0.341535 0.35005207 0.6089222

-0.123897

0.844053

-0.1292236 0.1418632

After conducting the FIVE FACTOR DU-PONT analysis I have found the Return on equity
(ROE) for the respective years. The ROE of 2010and 2011 is negative since the net income
for these two years was negative.

ROE Sensitivity analysis:

Factor of ROE

Covariance

Operating profit margin

-2.68494

Total asset turnover

2.066914

Interest burden

2.144838

After tax retention rate

7.636355

Financial leverage

-1.37581

After calculating the co-variances of the five factors of ROE I have found the covariance of
after tax retention rate is 7.636355 and is also the highest among the other factors. So the
sensitivity analysis shows after tax retention rate is most sensitive among all the other
factors of ROE for Lafarge Surma cement Ltd.

Red Flags of Lafarge Surma Cement Ltd

1.

2.

There has been an increasing gap between reported income and cash flow from
operating activities.
Particulars

2008

2009

2010

2011

2012

Net Income

635195

582925

-523967

-1150048

1485055

CFO

792808

2044653

295191

-1126939

2908058

Unexplained change in Long term debt in 2012 which has been drastically reduced
compared to previous periods.
Particulars

2008

2009

2010

2011

2012

Long Term Debt

6404929

4705955

3000781

2511995

8356

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Financial Statement Analysis and Valuation

Course Code: F--401

Earnings Quality
In accounting, refers to the overall reasonableness of reported earnings. It is an assessment
criterion for how "repeatable, controllable and bankable" a firm's earnings are, amongst
other factors. The above factors lead to investors needing to assess the extent to which a
firm's reported earnings are free from mistake or manipulation, i.e. the quality of the firm's
earnings.
Ways to lower Earnings quality of a firm:
Other ways accounting choices can lower a firm's earnings quality include:

Recording revenue too soon or of questionable quality,

Recording fictitious revenue,

Boosting income with one-time gains,

Shifting current expense to a different period,

Failing to record or improperly reducing liabilities,

Shifting current revenue to a later period, and

Shifting future expenses to the current period as a special charge

Earning Quality of Lafarge Surma Cement Ltd. (Balance sheet approach)

Particulars

2009

2010

2011

2012

Aggregate accruals

-679990

-490894

1121377

-867385

Accruals ratio

-4.6144

-3.46902

7.751787

-5.94383

Earning Quality of Lafarge Surma Cement Ltd. (Cash flow approach):

Particulars

2009

2010

2011

2012

Aggregate accruals

-1473081

-647457

-987067

-1561612

Accruals ratio

-9.99631

-4.57541

-6.82334

-10.7011

Analysis:
The accruals ratios of Lafarge Surma Cement Ltd From 2009 to 2012 were predominantly
negative. Lower the accruals ratio, the better the earning quality of a firm. The Accruals
ratio should be between 10 to -10. Whenever it reaches 10 or -10 it gives a signal that the
earning quality might reverse. We can say that the earning quality of Lafarge Surma Cement
is quite good. But in 2011 the quality slightly
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Financial Statement Analysis and Valuation

Course Code: F--401

deteriorated. Overall earning quality is very good for Lafarge Surma Cement Ltd.

Classification according to OCF and FCF: (Based on Cash Flow Statement)

Particulars

2008

2009

2010

2011

2012

OCF

792808000

2044653000

295191000

-1126939000

2908058000

FCF

2052265000

2940094000

1137521000

-86371000

3203405000

Decision

Matured

Matured

Matured

Disinvestment

Matured

We can see that the OCFs of the firm are positive except in the year 2011. The FCFs of the
firm are also positive except the year 2011. It means the firm is heading to its maturity.
From 2008-2010 it can be classified as matured firm that why in 2011 the firm has both OCF
and FCF negative it can be classified as disinvestment which is common for a matured firm.
The cash flows of 2012 also assure the fact the firm is going through its maturity stage. We
can say that the company is going through its high growth to maturity stage from the
analysis of OCFs and FCFs of the firm.

Analysis of Cash flow trend

OCF Trend
4E+09
2908058000

3E+09
2044653000

2E+09
1E+09
0
-1E+09
-2E+09

792808000
2008

2009

295191000
2010

2011

2012

-1126939000

In 2008 there was positive cash flow from operating activities as a consequence of good
performance. The cash flow has increased from 2008-2009 and remained positive. From
February 5, 2010 to First week of august 2011 there was no supply of limestone from the
companys mine in Meghalaya, India due to forest issues. The company faced production
problems and continued limited production of cement with imported limestones. This
reduced OCF from 2009-2010. The OCF even decreased in 2011 as the company cannot
operate fully due to shortage of limestone. So, negative OCF were evident in 2011. Since the
solution of this limestone problem the company regained its reputation and started full
production in august 2011. The company performed greatly in 2012 and has recorded
highest cement sales of 141183 tonnes, in the history of the company. Therefore the OCF in
2012 is positive and was the highest during 2008-2012.
We can conclude that when the company is producing in full swing its Operating Cash Flow
is quite satisfactory, it has increasing cash flow trend except 2010 and 2011 as there were
production problems.
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Financial Statement Analysis and Valuation

Course Code: F--401

Actual and Sustainable Growth rate

Actual growth of Lafarge Surma cement (In %)
2008

2009

2010

158.8441

21.43915

-25.0321

2011

2012

7.835096 74.47076

Sustainable growth of Lafarge Surma cement (In %)

2008

2009

2010

17.9693

13.97873

-11.0239

2011

2012

-11.4436 16.53154

Analysis:
In 2008 the company has tremendous growth rate of around 159% due to the greater
demands of cement in Bangladesh. Where the sustainable growth was only 18%, means the
company has tremendous growth opportunity and for proper funding the company retained
all of its earnings.
In 2009 the company due to huge competition in the cement industry the company has
growth rate of 21%, which is also greater than sustainable growth rate of 14%. So the
company further retained earnings and tried to maximize the growth opportunities.
During 2010-2011 the company reduced its growth even negative growth rates were found.
This was due to internal production problems. The company has the potential of growing
further but it could not due to limestone shortage. The company did a good job during these
periods.
In 2012 when the limestone problem solved the company was back on track with a growth
rate of 74% where sustainable growth was around 17%. The company had to fund these
growth opportunities with no dividend declaration, by plowing back the earnings of the
company.
In short Lafarge Surma Cement Ltd. Has potential growth opportunities but it needs more
funding and financial strengthening. Most of the times, Actual growth was greater than the
sustainable growth. The firm can increase its D/E ratio for proper funding.

Economic value addition (Amount in ,000)

2008

2009

2010

2011

2012

NOPAT

1419575

1400346

-9736.57

302380.7

1942484

Invested
capital

10606881

9888004

7455800 11500582 11194481

WACC

0.122571

0.122571 0.122571

0.122571

0.122571

EVA

119478.8

188363.7

-1107257

570364.8

-923601

16

Financial Statement Analysis and Valuation

Course Code: F--401

Economic Value addition is the value added to the shareholders of the company. When it is
positive shareholders values have increased, when it is negative shareholders value have
decreased. Due to negative Net Income, shareholders value has decreased in year 2010 and
2011.

Degree of Operating, Financial and Total leverage

Particulars

2008

2009

2010

2011

2012

EPS

1.094

1.004

-0.58

-1.29

1.28

EBIT

2009805

1878803

-52417

-203587

2534432

Sales

6211938

7543725

5655374

% Change in EPS

-8.22669

-157.769 122.4138

-199.225

% Change in EBIT

-6.51814

-102.79 288.3988

-1344.89

% Change in Sales

21.43915

-25.0321 7.835096

74.47076

DOL

-0.30403 4.106328 36.80858

-18.0593

DFL

1.262122 1.534868

0.42446

0.148135

DTL

-0.38372

6.30267 15.62378

-2.67521

6098478 10640061

Degree of operating leverage:

Operating leverage involves using a large proportion of fixed costs to variable costs in the
operations of the firm. The higher the degree of operating leverage, the more volatile the
EBIT figure will be relative to a given change in sales, all other things remaining the same. In
2009 and 2012 the degree of operating leverage was very low and in 2010 and 2011 this was
very high. During these periods EBIT was more volatile relative to changes in sales due to
fixed cost.
Degree of Financial leverage:
Financial leverage involves using fixed costs to finance the firm, and will include higher
expenses before interest and taxes (EBIT). The higher the degree of financial leverage, the
more volatile EPS will be, all other things remaining the same. Every year the degree of
financial leverage existed. Every year DFL boosted EPS except 2011 as this years operations
are restricted by the internal production problems. If the company wishes to increase D/E
ratio then the degree of financial leverage will boost EPS more and more as the company
has its growth opportunity.
Disclosure practices of Lafarge Surma cement Ltd.:

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Financial Statement Analysis and Valuation

Course Code: F--401

Mandatory disclosure
Mandatory disclosure includes some necessary things which are required by law such as
directors, the remuneration of the directors & their responsibilities, accountability and
audit, the key operating and financial data, related party transactions, relations with
shareholders & the shareholding pattern of the company, risk factors & concerns, credit
rating, system of internal control etc.
IASB general requirements for Financial Statements can be thought of as Mandatory
disclosures for meeting accounting standards.
Required financial statements:
1. Statement of financial position( Balance Sheet)
2. Statement of comprehensive income( Single statement or Income statement+
statement of comprehensive income)
3. Statement of changes in equity
4. Statement of cash flows
5. Notes, summarizing accounting policies and disclosing other items
6. In certain cases, Statement of financial position from earliest comparative period.
General features:
1. Fair presentation: Fair presentation requires faithful representation of the effect of
transactions, other events and conditions in accordance with the definitions and
recognition criteria for assets, liabilities, income and expenses set out in the
framework.
2. Going concern: financial statements are prepared on a going concern basis unless
management either intends to liquidate the entity or to cease trading, or has no
realistic alternative but to do so. If not present on a going concern basis, the fact and
rational should be disclosed.
3. Accrual basis: Financial statements are to be prepared using accrual basis of
accounting
4. Materiality and Aggregation: Omissions or misstatements of items are material if
they could, individually or collectively; influence the economic decisions that users
make on the basis of the financial statements.
5. No Offsetting: Assets liabilities, and income and expenses, are not offset unless
required or permitted by an IFRS.
6. Frequency of Reporting: Financial statements must be prepared at least annually.
7. Comparative information: Financial statements must include comparative
information from the previous period.
8. Consistency: The presentation and classification of items in the financial statements
are usually retained from one period to the next.
Structure and Content Requirements:
1. Classified statement of financial position.
2. Minimum information on the face of the financial statements.
3. Minimum informations in the notes.
4. Comparative information.

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Financial Statement Analysis and Valuation

Course Code: F--401

Voluntary Disclosures
Voluntary disclosure includes annual general meetings, press releases, information placed
on corporate websites and other corporate reports like -environmental aspects, corporate
social responsibilities, compliance status report etc.
No extensive voluntary disclosures made by Lafarge Surma Cement Ltd. Some voluntary
disclosure includes
1.
2.
3.
4.
5.
6.

State of the companys affairs.

Health & safety.
Security.
Production, commercial, Logistic performance.
Human resource.
Corporate social responsibility.

Significant accounting policies

a. Basis of preparation:
The statements are prepared in line with Lafarge group Accounting policies following
generally accepted accounting principles (GAAP), after due compliance with the
Bangladesh Financial Reporting Standards (BFRS), the companies act 1994, the
Securities and Exchange Rules 1987 and other applicable laws and regulations.
Financial statements have been prepared under the Historical cost convention,
except for the following:
1. Derivative financial instruments measured at fair value.
2. Financial statements at fair value through profit and loss measured at fair value.
b. Use of estimates and judgments:
1. Estimates are prepared on the assumption of going concern, are established
based on currently available information.
2. The accounting for certain provisions and disclosure of contingent liabilities are
judgmental.
c. Functional and presentation of currency was Bangladeshi Taka.
d. Property, Plant, Equipment:
1. These are capitalized at acquisition cost and subsequently stated at cost less
accumulated depreciation and accumulated impairment losses.
e. Intangible assets: Software, construction in process.
f. Inventories are stated at lower of cost or net realizable value while packaging
materials and spares are valued at cost.
g. Cash and cash equivalent comprises cash in hand and cash at bank.
h. Revenue was recognized as Sale of the products, net of value added tax and
discounts, is recognized upon raising invoices to customers.
i. Each material class of similar items is presented separately in the financial
statements. Items of dissimilar nature or function are presented separately unless they
are immaterial.

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Financial Statement Analysis and Valuation

Course Code: F--401

Management Discussion and Analysis (MDA)

Management has stated year2012 as a significant land mark for the company. Based on
subsequent issues:
1.
2.
3.
4.

Successfully resolved the forest permit issue.

Company is utilizing its full capacity.
Excellent production performance during 2012 in both Chatak and Meghalaya.
In 2012 company achieved 47% growth against a market growth of 9%. Higher than
the industry average. Sharp turnaround from losses of previous two years and
achieved excellent profits.
5. As a part of its market approach, it has entered into an outsourced grinding
agreement with Madina cement, a big local grinder at the plant near Dhaka.
6. The company will produce Portland composite Cement which will be marketed
under a new brand Powercrete.

Economic Characteristics and Strategies

Considering the Life cycle of the industry, currently cement industry of Bangladesh is in
the growth stage. Sales of cement are increasing due to growing demand for cement
in both the local and foreign markets. The industry realized about 30% and 21%
growth in 2009 and 2010 respectively after suppressed demand from previous years.
Industry expected demand growth is 20%-25% for the next three years based on the
assumptions below.
1. Government would be able to materialize its important ADP.
2. According to the UN Population Fund (UNFPA) report 2010, 28% people of our country
live in urban areas where the population growth is 3.2 per thousand. Urbanization and
demand for accommodation are increasing day by day. Thus it is expected that the
real sector will grow steadily with the household users increasing cement consumption
pattern.
3. Private sector may get interested to invest in real estate for getting tax advantages
of their undisclosed funds
4. Good number of large infrastructure construction projects (Padma Bridge, Flyovers,
highways) are on the pipeline.
5. There is no Substitute for Cement. Steel can be used in construction but in limited
extent due to its high cost. On the flip side, some caution has to be maintained due to the
current demand- supply gap leading to over capacity and falling margins and prices. Also,
given the close linkages between them, the effect of a slowdown in real estate
growth or hike in interest rates globally or price increase of imported raw materials
should also be considered.

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Financial Statement Analysis and Valuation

Course Code: F--401

Structure-Conduct-Performance(S-C-P) Analysis
Strategy is a set of actions to be taken in the future for the achievement of goals of a firm.
For the cement industry strategy can be set with the help of S-C-P analysis. This means
Structure-Conduct-Performance analysis. The Structure-Conduct-Performance model is an
analytical approach/framework used to study how the structure of the market and behavior
of sellers of different commodities and services affecting the performance of markets. It is
used to trace the causes of industry performance. It is based on a model of Cause and
Effect: Industry financial Performance is caused by the competitive Conduct of players in the
industry; this Conduct is in turn caused by the industry Structure. This model can be used to
justify consolidation in the industry. If Structure drives Performance, one way to improve
performance is to create a more attractive industry Structure. This analysis is similar to the
competitive intensity dimension of Porters 5 forces analysis. The usefulness of this model is
diminished when industry boundaries are blurred and primary threats are coming from
outside the industry.
Structure of the cement Industry:
Industry concentration:
The cement industry of Bangladesh is pretty much fragmented but large institutions play
the key role in shaping the competition of the industry. We can conclude the industry as
Oligopolistic in nature. Though the market is dominated by large firms there exists very
high competition among the companies within the industry. Some can argue that the
industry is in perfectly competition stage.
Market share:
Although the market is fragmented, the major portion of the market share is dominated
by large cement companies. Some firm in this industry has high market share relative to
others because of high product quality, brand image and customer loyalty. The largest
13 cement manufacturers hold 78% of the market share. Heidelberg, Holcim and Lafarge
are the leaders among multinational cement manufacturers and Shah and Meghna are
the leading domestic manufacturers.
Ownership of major companies:
The major owners of the firms are both local and multinational. Almost all the bigger
cement firms are formed under the company act as both public Ltd Company and
private Ltd Company. Some small firms are partnership firms. Most of the large
companies in this industry are listed to DSE and CSE. They raise capital from stock
market. No one is state owned, so owners are public and private group members
Conduct of the firms in the cement industry:
Competition criteria:
Cement companies compete aggressively on price, advertising, product quality,
innovations of the product etc. Their cement product is price sensitive. To grab the
market share with cost leadership they compete with each other on basis of
advertisement, ingredient combination.
Competition intensity:
Every firm wants to enlarge its market share. As a result they induce in high competition
among themselves. As the market is growing they compete on enlarging the total
market share with growth of the market. They do not compete directly with other firms.
21

Financial Statement Analysis and Valuation

Course Code: F--401

Sometimes grabbing others market share can be a way of increasing companys own
market share in the cement industry.
Performance of the firms in the cement industry
Long term shareholders return:
As the company is in growing stage shareholders can enjoy high returns relative to other
sectors in the economy. Customers accept the product (Cement) according to the BUET
test and relative strength of cement, so high quality cement producers will be
encouraged by the shareholders in the capital market.
Return on capital
Return on capital is higher than the other industries of the economy because of
customer need. There is no real substitute of cement that is why the return on capital is
high in this industry.

VRIN Framework for Lafarge Surma Cement Ltd

Applying Barney's (1991) VRIN framework can determine if a resource is a source of
sustainable competitive advantage. To serve as a basis for sustainable competitive
advantage, resources must be -

Valuable -- meaning that they must be a source of greater value, in terms of relative
costs and benefits, than similar resources in competing firms. Lafarge Surma cement
has its own source of raw materials from its subsidiary company named Lafarge
Umiam Mining Private limited situated in Meghalaya, India. So it has a competitive
advantage over other companies in the industry for easy and unlimited access of
lime stones.

Rare -- rareness implies that the resource must be rare in the sense that it is scarce
relative to demand for its use or what it produces. Its 17 kilometer belt conveyor is
rare in the industry; in fact it is the only company that has this advantage.

Inimitable -- it is very difficult to imitate Lafarge Surma cement ltd for any other
company in the industry.

Non-substitutable -- other different types of resources cannot be functional

substitutes, but Cement is a non- substitutable product. And the raw materials are
non-substitutable also.

The criteria of the VRIN Framework clearly rules out best practices as a source of
competitive advantage. If other firms can easily understand and copy a capability, it is not a
source of advantage. But the fact is that other firms most likely cannot avail the
opportunities that Lafarge Surma has. Major part of the raw materials consists of Clinker
which is made from limestone. Lafarge has its own limestone mining company and has an
absolute advantage that is sustainable advantage over other companies.

22

Financial Statement Analysis and Valuation

Course Code: F--401

Valuation of Lafarge Surma cement Ltd. (Using Free cash Flow)

A. With the help of actual data of Lafarge Surma cement Ltd of the last 5 years the Proforma Income Statement and pro-forma Balance sheet was prepared. These are given in
the appendix portion.
B. Assumptions Made:
1. Perpetual growth rate is 2%.
2. Capital expenditures will be financed by long-term loan.
3. Since there was no purchase of PPE, it was assumed that the existing long-term
loan will be repaid in equal 5 yearly installments.
4. Risk-free rate is 8%.
5. For maintaining a no-arbitrage scenario, the return from investment was
considered to be equal to the interest rate.
6. Since the investment in subsidiary is not changing rapidly, Average investment is
taken for upcoming years.
7. Contribution to WPPWF is 5% of EBT according to the labor act 2006.
8. The company entered into a forward contract with commercial banks regarding
exchange rate exposures. So no derivative instruments after 2012.
9. Because of accumulated loss no dividend was declared, however Lafarge Surma Ltd.
can declare dividend from 2014.

C. Beta calculation:
In the calculation of Beta Monthly closing price of Lafarge Surma Cement Ltd and the
DGEN index value has been used.
Covariance
Variance of market return
Beta
Market return
Market return -yearly

0.007657615
0.009217089
0.830806254
0.010937234
0.131246802

D. Calculation of WACC
Risk-free rate
Market return
Beta
Cost of equity
Cost of debt
After tax cost of debt

0.08
0.131246802
0.830806254
0.122576164
0.1
0.0711218

Total market value of

equity
Book value of debt
Weight of equity
Weight of debt

38209188150
3834634
0.999899651
0.000100349

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Financial Statement Analysis and Valuation

Course Code: F--401

WACC

0.122571

E. Calculation of Net Working Capital is given in the appendix

F. Determination of free cash flow & Terminal value
2013
2056860887
1462876487
24209987.16

2014
2015
2016
2017
2485992314 2997222908 3609056298 4341289339
1768082483 2131678883 2566825804 3087603123
23474166.5 22760709.83 22068937.44 21398190.28
-358367891 -347475919 -336914990 -326675042 316746319.4
2306955627 222704059.4 254227176.2 298283473.6 354338246.9
-461501262 1916328509 2237127407 2617286310 3071409386

Particulars
EBIT
EBIT (1-tax rate)
Plus: Depreciation
Less: Capital expenditure
Less: Change in NWC
Free cashflow
Present value discount factor
Present value of free cashflow

2018

3132837574

0.890812252 0.793546467 0.706900915 0.629715996 0.560958724

-411110978 1520695719 1581427412 1648147055 1722933891
17133425277

Terminal value

G. Enterprise value and Value per share.

Enterprise value
Cash
Interest-bearing debt
Equity value
Value per share

23195518376
143503000
3834634000
19504387376
16.7942418

The price of the companys share was 32.9 Tk in 31-12-2013. As the intrinsic value per share is 16.79
Tk the share is Over-priced according to my analysis. So investors should sell the share of Lafarge
Surma cement Ltd. Investors should not buy the share as it is over-priced.

Relative valuation of Lafarge Surma Cement Ltd

1. In the relative valuation the value of Lafarge Surma Cement Ltd is compared to three other
cement companies in the industry. They are: Heidelberg Cement Ltd, Aramit Cement Ltd,
and Confidence Cement Ltd.
2. Ratios Used:

a)
b)
c)
d)

Price to Book Value (NAV) Ratio

Price to Cash Flow Ratio
Price to sales Ratio
Price Earnings Ratio

3.
Average Price as per Relative Valuation

40.6667
24

Financial Statement Analysis and Valuation

Course Code: F--401

4. As the other companies are doing well in the capital market and in the operations the price
of Lafarge Surma cement Ltd should have been Tk 40.6667 in 31-12-2012 the price was Tk
32.9. Lafarge Surma should continue its good performance and should gain confidence of
the shareholders for the increase in value per share.

Growth Share Matrix (BCG Matrix)

BCG-matrix, Boston matrix, Boston Consulting Group analysis, portfolio diagram) is a chart that had
been created by Bruce D. Henderson for the Boston Consulting Group in 1970 to help corporations
with analyzing their business units or product lines. This helps the company allocate resources and is
used as an analytical tool in brand marketing, product management, strategic management, and
portfolio analysis
To use the chart, analysts plot a scatter graph to rank the business units (or products) on the basis of
their relative market shares and growth rates.

Cash cows are units with high market share in a slow-growing industry. These units typically
generate cash in excess of the amount of cash needed to maintain the business. They are
regarded as staid and boring, in a "mature" market, and every corporation would be thrilled
to own as many as possible. They are to be "milked" continuously with as little investment as
possible, since such investment would be wasted in an industry with low growth.

Dogs, more charitably called pets, are units with low market share in a mature, slow-growing
industry. These units typically "break even", generating barely enough cash to maintain the
business's market share. Though owning a break-even unit provides the social benefit of
providing jobs and possible synergies that assist other business units, from an accounting
point of view such a unit is worthless, not generating cash for the company. They depress a
profitable company's return on assets ratio, used by many investors to judge how well a
company is being managed. Dogs, it is thought, should be sold off.

Question marks (also known as problem children) are business operating in a high market
growth, but having a low market share. They are a starting point for most businesses.
Question marks have a potential to gain market share and become stars, and eventually cash
cows when market growth slows. If question marks do not succeed in becoming a market
leader, then after perhaps years of cash consumption, they will degenerate into dogs when
market growth declines. Question marks must be analyzed carefully in order to determine
whether they are worth the investment required to grow market share.

Stars are units with a high market share in a fast-growing industry. They are successful
question marks and become a market leader in a high growth sector. The hope is
that stars become next cash cows. Stars require high funding to fight competitions and
maintain a growth rate. When growth slows, if they have been able to maintain their
category leadership stars become cash cows, else they become dogs due to low relative
market share.

25

Financial Statement Analysis and Valuation

Course Code: F--401

Figure: BCG Matrix

According to the above discussion Lafarge Surma Cement has High Business growth and Low
Market share. So the company fall into Question marks Criteria. There is both the possibility
of succeeding the company and liquidation according to the BCG Matrix. But the reality is
the industry shall have high growth in the upcoming years, with the unique production
advantage Lafarge Surma cement Ltd has the potential of becoming Star soon. And then the
company will move to the cash cow criteria afterwards.

Conclusion
After all the calculations and all the analysis we can say that Lafarge Surma Cement has
potential for future expansion and growth. Their earning quality is quite good but they gone
bad when there were exogenous shock occurred. They have no control over the matter. As
soon as the problem resolved they get back on track. Cement industry has a lot of potentials
for future. And in this situation Lafarge Surma Cement has competitive advantage over
other Cement companies as they have their own mining company. Supply of raw materials is
not an issue for them. They have a cost advantage as other participants in the market must
have to import the raw materials. Their capital market record is not good in the recent past.
But we can say that their time will come and with these conditions they can be the market
leader in the future.

26