Shakarganj Mills Limited

Managerial Accounting Project

9/4/2012

Submitted To: Mr. Athar Ikram Khan

Group Members
M.Omer Fayyaz Nouman Maqsood Usman Nisar Sarmad Butt

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Dedication
Dedicated To, Our loving, sweet & respectable Parents, whose constant encouragement and support together provides us strength and opportunity to complete this tiresome but interesting project and by virtue of whose prayers we have been able to reach at this position. Our brothers and sisters, whose at most love and affection brought to the height of the knowledge. May Allah always shower His blessings upon them & blesses them with the best of their health & long life. (Ameen)

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Acknowledgment
All glory to Almighty Allah, the creator of this universe, The Gracious and compassionate whose bounteous blessings gave us potential thoughts, talented teachers, helping friends, loving parents, co-operative sisters and brothers and opportunity to make this humble contribution and all praises to, respect and Darood-O-Salam are due to His Holy Prophet(P.B.U.H) Whose blessings and exaltations flourished our thoughts and thrived our ambition to have cherished fruit of our modest effort in form of this write-up. We offer our sincerest words of thanks to our teacher Mr. Athar Ikram Khan, from his inspiring guidance, affectionate supervision and valuable suggestion during the entire study period.

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Table of Contents
Contents Executive Summary ---------------------------------------------------------------------------Introduction---------------------------------------------------------------------------------------Cost Method Used -----------------------------------------------------------------------------Analysis of Income statement ---------------------------------------------------------------Analysis of Cost of Goods Sold -------------------------------------------------------------Break even Analysis ---------------------------------------------------------------------------Results to orient Outsider --------------------------------------------------------------------Results to orient insider ----------------------------------------------------------------------Conclusions -------------------------------------------------------------------------------------Recommendations ----------------------------------------------------------------------------References -------------------------------------------------------------------------------------Appendix ----------------------------------------------------------------------------------------Page 6 7 10 11 15 16 17 19 20 21 22 23 Page | 5

Executive Summary
Shakarganj mills limited have been one of the most renowned and pioneer group among the sugar producers in Pakistan. The particular project includes the introduction of the company by just giving glance of companys major operations and subsidiaries and its growth over the period. Cost method used by the Shakarganj mills and the sugar processing process is clearly defined in the analysis part. Analysis of income statements both vertically and horizontally from financial year 2009-2011 has been performed in order to analyze companys performance over three years that showed an increasing turnover and negative profit margins. Breakeven analysis has been done in order to check companys internal efficiency to increase sales over to the breakeven sales and how they are able to manage units sold in order to increase their margin of safety. In order to give a glance of both the insider and outsider orientation ratios have been calculated such as for outsider current ratio, ROA, Net profit margin, Gross margin is analyzed which shows a very confused status specially for the outsider as the negative profit margins and low level of current ratios are alarming for outsiders. Insider outlook defines a bit better picture as companys cost of goods manufactured is well controlled till year 2011. Conclusion and recommendations has been given to just conclude the Shakarganj overall financial and managerial position that shows an alarming situation for the company as most of its revenues are going in finance its long term borrowings.

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Introduction
Shakarganj Mills Limited was incorporated on September 1967 as a public limited company and listed on Pakistan's Stock Exchange in June 1979. The first manufacturing plant was designed on 1,500 metric ton per day crushing capacity (TCD). Over the years the plant capacity was gradually increased and now the company operates from two locations. The current capacity is 12,000 TCD at principal location in Jhang, and 8,000 TCD extendable to 10,000 TCD at the satellite facility in Bhone. In addition a further capacity of 4,000 TCD is being added at Dargai Shah. As the sugarcane consumption increased from increase in capacity, the need for high quality raw material and improved yields at farm level became critical for a sustainable supply chain. Realizing that this is a critical factor for sustainable growth, Shakarganj made substantial investment in research and development. Shakarganj Sugar Research Institute was established by the company in 1983. This is the only private sector research facility in Pakistan working on development of high quality cane varieties. SSRI has introduced a number of new varieties of sugarcane in the country developed by its pioneering scientists. As the company became a substantial producer of sugar in Pakistan, a planned diversification strategy was adopted to maximize return on inputs by production of coproducts. This resulted in establishment of the first ethanol production plant, producing 40,000 liters per day in 1985. Using molasses, a byproduct of sugar manufacturing, the distillery plant in Jhang produces 160,000 liters of ethanol per day. The Bhone facility has capacity to produce further 100,000 liters of ethanol per day. Further value addition efforts were made in ethanol production and two dehydration units are installed at Jhang, enabling us to produce up to 100,000 liters of Fuel grade ethanol per day. The plant at Bhone is capable of producing Extra Neutral Ethanol used in pharmaceutical and perfumery business. Page | 7

The distillery waste is treated in a specially designed Effluent Treatment Plant which converts the waste from distillery operations into Bio Gas which is used as a replacement fossil fuel. Additional investments have been made to use this gas even more efficiently in an environment friendly manner. In January 2008, Shakarganj pioneered the first power generation plant at Jhang, capable of producing up to 8 megawatts of electricity from bio gas. In fact in the power sector Shakarganj also has the distinction of being the first private sector power supplier on the national grid. Before diversification into co products, the company had surplus electricity generation from sugar operations which was sold to WAPDA. With growth in size, the focus on efficiency was always at the forefront. As the operations became more efficient the company produced surplus biogases to its fuel requirements. In order to maximize returns a Particle board plant was installed to convert this surplus into building materials. We are capable of producing 30 cubic feet of particle board per day. In 2003-2004 Crescent Ujala Limited was merged in SML through the amalgamation scheme effective from October 01, 2003. As a result of this merger the share capital of the company increased from Rs.292.860 million to Rs.388.430 million. This unit has an operational capacity of 28,000 spindles. In 2004 Farming Division was set up as an independent business unit. This unit serves multiple purposes. It is used as the incubator for our research operations and as showcase of good farming practices for our family of cane suppliers. At the same time with adaption of modern and scientific agriculture practices it is expected to contribute positively towards our bottom line. This would also be our primary source of value added raw materials like organically grown sugarcane. Currently the Farming Division has around ten thousand acres of land under cultivation.

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Shakarganj Engineering Division was established in 2006, the objective of this division was to acquire capabilities of supplying fabricated units of machinery to the existing plants of the company with the passage of time this unit would become capable of catering the need of engineering industry beyond the requirements of various Shakarganj business units. All through this journey of 40 years there has never been any compromise at Shakarganj on being anything less than an exemplary corporate citizen. We are committed to follow the highest social standards in every way we conduct our business. Shakarganj Foundation and the Sukh Char programs are the mainstays of our contribution back to the communities from which we generate our revenues. The commitment of the company to investment in manufacturing technology, business expansion and diversification and research and development has enabled them to remain at the forefront of our core businesses and continue our record of growth. We are poised to take full advantage of the inherent strength of our business, our scale, our reputation for quality, our well invested assets and skill and professionalism of our people.

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Cost Method Used

Shakarganj mills limited use process costing that means it measures separately the cost of performing each process and then allocates these costs to the unit processed during the month. Actually the process costing is a method for accumulating the direct and indirect costs of a production process and averaging those costs over the identical units produced by that process. This method is used as the units of fertilizer produced by the company are not separately distinguishable from one another during the manufacturing process. The work performed on each unit is standardized or uniform where a continuous mass production or assembly operation is involved. Shakarganj mills use the following processes: Cleansing and crushing of sugar cane. Juicing Clarifying Evaporation Crystallization Refining Separation and Packaging

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Analysis of Income Statement

(Rs.000)
Years Sales Cost of Sales 6,110,885 Gross Profit 678,687 Administrative Expense (212,433) Distribution and selling cost (164,080) Other Operating Expenses (171,832) Other Operating Income 78,126 Profit from operations 208,468 Share of income from associates net of tax Finance Cost (930,339) Profit/(loss) before taxation (721,871) Taxation 11,121 (Loss)/profit for the year from continuing operations (Loss)/profit for the year from discontinuing operations Profit for the year (732,992) (73,033) (806,025) 2011 6,789,572 2010 5,262,787 5,093 ,014 169 ,773 (188, 083) (93 ,359) (81 ,648) 2,233 ,809 2,040 ,283 (859, 152) 1,181 ,131 (425, 445) 755 ,686 (134, 507) 621 ,179 2009 5,410,521 5,143 ,938 266 ,583 (211, 754) (73 ,581) (183, 082) 607 ,687 405 ,853 (701, 689) (295, 836) 362 ,475 66 ,639

The increase in sales from 2010 to 2011 is due to increase in demand of sugar. The Gross Profit of the company is increasing in year 2011 and also showing a declining trend in 2010 because of decreasing sales. The expenses for the company are increasing from 2010 2011, and its operating income is declining in 2011, so all of these factors lead to rapid decline in the companys Operation profit. Whereas the Financial charges are also increasing for the company which shows that company is getting more and more loans over the time period and ultimately all these factors results in Net loss in year 2011. EPSs falling over the time period which indicates the rate of growth a companys Earnings is reducing in between this specific time Period.

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Common Size Analysis of IS

Percentages %

Years Sales Cost of Sales Gross Profit Administrative Expense Distribution and selling cost Other Operating Expenses Other Operating Income Profit from operations Share of income from associates net of tax Finance Cost Profit/(loss) before taxation Taxation Loss from discontinued operations Profit for the year

2011 100 90 10 3.13 2.42 2.53 1.15 3.07 13.70 10.63 0.16 (1.08) (11.87)

2010 100 96.77 3.23 3.74 1.77 3.94 42.45 36.21 16.33 22.44 8.08 (2.56) 11.80

2009 100 95.07 4.93 3.91 1.36 3.38 11.23 7.50 12.97 (5.47) 6.70 1.23

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Common Size IS Analysis The Cash calculations above indicated how much each of the entry is in relation to Net sales of the company. Gross Profit is decreasing in 2010 and then shows an increase in 2011 followed by a decrease in Net Profit from 11.80 in 2010 to -11.87 in 2011.

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Horizontal Analysis Income Statement

(Rs.000) Varianc e vs. Last Year Increase / (Decrea se) % 29.0% 20.0% 299.4% 12.8% 76.3% 109.8% -96.5% -89.8% 8.3% -161.1% -97.4% -45.9% Variance vs. Last Year Increase / (Decreas e) % (2.70) (1.00) (36.30) (11.20) 26.90 (55.40) 267.60 402.70 22.40 (499.30) (217.40) Varianc e vs. Last Year Increase / (Decrea se) % 9.0% 14.8% -44.5% 66.9% 27.6% (58.0) (172) 78 208 (930) (722) (11) (73) (82) 2,234 2,040 (859) 1,181 (425) (135) (183.00) 608.00 406.00 (702.00) (296.00) 362.00 369.2% (39.0) 201.0% 202.0 -11.5% 151.6% -264.4% 1192.9% ___ 459.0 (279.0) 180.0 28.0 -229.8% (806) 621 832.20 67.00 -67.6% 207.0

Operating Results

2011

2010

2009

2008

Net sales Cost of sales Gross profit Administrativ e expenses Distribution and selling expenses Other operating expenses Other operating income Profit from operations Finance costs Profit / (loss) before taxation Taxation Loss from discontinued operations Net profit / (loss) after taxation

6,790 (6,111) 679 (212) (164)

5,263 (5,093) 170 (188) (93)

5,411.00 (5,144.00) 267.00 (212.00) (74.00)

4,962.0 (4,481. 0) 481.0 (127.0)

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Net sales of the company shows a mix trend as from 2009 to 2010 a decreasing sale trend is followed however in 2011 the percentage net sales increased to 29% as compared to previous year. Horizontal analysis also reflects that the gross profit margin has increased more than 200% in 2011 as compared to last year due to increased to sales. Other operating income has shown an approximate of 95% decline in 2011 as compared to 2010 as been one of major reasons for losses of country. Finance cost of company has also shown an increasing trend as most of its operation and assets financing was done from borrowings. Net loss of negative 229% has shown in the analysis due to above described factors.

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CGS Statement
(Rs.000) 2011 4,831,054 273,462 1,002,210 6,106,726 8,600 9,885 6,105,441 1,032,410 949,151 2010 3,404,983 221,810 861,457 4,488,250 20,982 8,600 4,500,632 1,632,219 1,032,410 2009 5,018,160 162,852 957,891 6,138,903 22,521 20,982 6,140,442 344,870 1,632,219 Direct Method used Direct Labor used Manufacturing Overhead Total Manufacturing Cost Add Beginning WIP Less Ending WIP Cost of Goods Manufactured Add Beginning F/G Inventory Less Ending F/G Inventory Cost of sales - goods purchase for resale Less own goods capitalized Cost of Goods Sold

337,726 77,815 7,427 46,881 6,110,885 5,093,014 5,143,938

It is clearly seen from above table that the cost of goods sold is showing a gradual decline from 2009 to 2010 but then increase in 2011. On the other hand growing sales leads to higher gross margin. It is interesting to note that company is not only supplying locally but is also exporting to other countries as well in order to fulfill the growing needs of other countries. The increase in total manufacturing cost is due to increase in indirect costs related manufacturing of units. One of the main reasons of the overall increase in cost of goods sold of the company from 2010 to 2011 is its increase in fuel and power cost.

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Break Even Analysis

(Rs.00 0)
2010 5,262,787 2,982,818 545964

2011 Sales Variable Cost** Fixed Cost* Contribution Margin Ratio Break-Even Sales 41% 1538462.4 6,789,572 4,002,933 631430

2009 5,410,521 4,894,155 534267

43% 1260233

10% 5598089

The Breakeven analysis is a measure used to check companys alarming sales or units sales level. It portrays the level at which the company is at a position of paying itself. Thus this motivates and allows the management of the company that how much they should now be working hard to strive and how much they need to work to increase their margin of safety. Companys performance can be judged from breakeven analysis as how much it is above its breakeven sales. In case of Shakarganj mills the breakeven analysis suggests that the companys breakeven sales has increased from the year 2010 to 2011 due to rise in their Net sales which contributed to higher breakeven sales , this also led to an increase in the margin of safety as comparing the percentage difference in year 2010s sales and breakeven sales and 2011s. It can be said that in 2011 the margin of safety has comparatively increased. Despite of been an effective tool for the management of the company, breakeven results cannot portray the complete picture as instead of having profits the company is undergoing losses in the last two financial years due to other related costs.

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Evaluating Annual Results to orient the outsider

(Rs.000) Units Measure Current Assets Current liabilities Current Ratio Current assetsinventories Current liabilities Acid-test ratio Sales Income before taxation Net Income Net income to sales Income before tax to sales Gross Profit to Sales Total Assets ROA Year 11 4,269,970 6,375,012 0.67 2,998,172 6,375,012 0.47 6,789,572 (721,871) (806,025) -0.11 Year 10 3,035,994 4,545,163 0.67 1,966,064 4,545,163 0.43 5,262,787 1,181,131 621,179 0.22 Year 09 5,244,363 6,761,064 0.78 3,420,557 6,761,064 0.51 5,410,521 (295,836.00) 66,639.00 -0.05 0.01 0.05 11,718,890 0.01

Ratio

Ratio

Ratio Ratio Ratio

-0.11 0.12 0.10 0.03 12,406,788 10,910,513 (0.06) 0.06

Current ratio Indicates how much current assets are available to pay off the current liabilities of the company. Over all the companys current ratio is less than 1 which indicates that companys current assets are less than its current liabilities, so this ratio suggests that the company would be unable to pay off its obligations if they came due at that point another thing to notice is that the ratio is decreasing from 0.78 in 2009 0.67 in 2011 showing that the companys ability to pay short-term obligations is reduced over the time period. Acid Test Ratio - Indicates whether a company has enough short-term assets to cover its immediate liabilities without selling inventory. SMLs Quick ratio is fluctuating throughout the years but is below 1 in each of the years, which shows that the company Page | 18

cannot pay their short term liabilities completely through its most liquid assets without selling inventory. The companys initial Acid test ratio in 2009 was 0.51 which decreased to 0.47 in the last year. Difference between income before estimated income tax and net income : The Difference between income before estimated income tax and net income for year 2011 is zero which means that no portion is claimed by the government as the company faces a net loss in the current year. But in the last year 10% of the portion is claimed by the government. Gross Profit to Sales Ratio: The ratio of gross profit to sales is 10% for year 2011. This 10% is available for operating expenses, other income, income tax and net income. The thinner the margin the more venerable the profit position is, so as according to the other related costs involved after gross margin the percentage is not enough to cover the further expenses of the company. Since this ratio is showing a mix trend but eventually increasing over the last year we can say that the company profit position is also getting better yearly.

Return on Assets: An indicator of how profitable a company is relative to its total assets. ROA gives an idea as to how efficient management is at using its assets to generate earnings. ROA in 2011 is decreasing as compare to previous year which shows that the company is not earning profit in accordance with the assets of the company.

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Evaluating results to orient the insider

In (Rs. 000) CGM Units manufactured CGM per Unit CGS Units Sold CGS per unit 2011 6,105,441 169,596 36.00 6,110,885 169,739 36.00 2010 4,500,632 116,265 38.71 5,093,014 131,570 38.71 2009 6,140,442 161,463 38.03 5,143,938 135,263 38.03

The per unit cost of goods manufactured have decreased over time which shows that the company cost of manufactured is now divided by quite larger number of units and Thus a concept of costing is truly applicable here because as the number of units increased it will lead to a decreased unit fixed cost which further move towards lower overall unit cost. However the increase in cost of goods manufactured is majorly because of the variable component but the rate of decrease in the fixed cost per unit is quite higher than that of variable cost.

The per unit cost of goods sold have decreased over time which shows that the company cost of goods sold is now divided by quite larger number of units and Thus a concept of costing is truly applicable here because as the number of units increased it will lead to a decreased unit fixed cost which further move towards lower overall unit cost.

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Recommendation and Conclusion

The group has faced liquidity crunch in its parent company during the current and the prior year due to a variety of factors including continued financing of assets and operations through high level of borrowings and an overall sugar industry crisis, the economic recession has tremendously effected the other sugar manufacturing units, however the company has not been in to such a crisis as the other competitors did because of companys diversification to its other subsidiaries. The companies was able to manage its other diversified products or by products thus able to survive in such a long recessionary periods. However if we take a glance from the start the company was performing quite well and still has a good image in front of the public thus the company might be able maintain its shareholders value despite of not giving dividends in year 2008 due to net losses however there were dividends declared in the prior years. Analysis of Income statements has also acknowledged that the company was performing well in year 2009 and 2010 but year 2011 was a bit alarming for them as regards to their decreased profitability and increased finance costs. However it is expected that the company might perform well in future years as recession hit all and Shakarganj is just their prey. Ratio analysis is also showing alarming situation especially in the context of current ratio as the current liabilities have exceeded the current assets. That reflects Shakarganj is not able to cover its short term liabilities so how it will cover up its long term obligations.

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Recommendations can be give in such context specially in case of borrowings, Shakarganj might call up the banks and other financial institutions and consultants to restructure their long term payments so that the company can balance its obligations and can concentrate on other strategic areas of businesses. Shakarganj group can concentrate on those subsidiaries that are generating the maximum income for them so that they can balance the losses of other divisions. Expansion of divisions such as energy production can be performed in order to minimize their own fuel and power costs. Shakarganj group can also concentrate on to the export markets in order to reduce its local market risk and can expand in size overtime. Shakarganj group can seek ways on improving both local and international turnover; in order survive in this recessionary era.

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References:
www.shakarganj.com.pk www.dailytimes.com www.businessrecorder.com www.wikipedia.com Zahid Mahmood (DGM Engineering) Iqbal Mehar (Management)

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