Fauji Cement Company Limited (FCCL)

Fauji Cement Company Limited (PSX: FCCL) is a publicly listed company with the plant located in Jhang Bahtar District Attock supplying primarily to domestic markets in the north as well as exporting to certain markets. The company operates two cement lines and started operations in 1997 with a capacity of over 3000 tons per day subsequently enhancing it in 2005 to 3,885 tons per day (1.2 million tons annually). The company added another production line in 2011 of 7,560 tons per day and subsequently raised capacity to 3.27 million.

During 2009, the company installed its first refuse derived fuel processing plant which helped with disposing off and turning municipal waste into fuel. The company also set up a 12 MW and 9MW of waste heat recovery unit (WHR) that converted waste into energy. During 2019, the company decided to commission a 12.5MW captive solar power plant. Moreover, the company has also introduced a new product called Pamir Cement which is a green product-a hybrid class of Portland cement that contains a required percentage of mineral additives. This product complies with international standards and reduced CO2 emissions by over 20 percent.

As per its shareholding pattern, Fauji Cement is owned by the Fauji group with 36 percent of the shares by the Committee of Admin Fauji Foundation while Fauji Fertilizer held 6.7 percent and Fauji Foundation held 3.53 percent shares in the company at the year end June-19. More than 32 percent of the shares are held by the general public while the rest are distributed amidst modarabas, mutual funds, joint stock companies, banks, DFIs and foreign companies.

Operational and financial performance

Currently, Fauji hails about 11,865 tons per day of capacity which is about 3.6 million tons annually giving the company a capacity share in the industry of about 6 percent, given some recent expansion across the sector. The company has maintained a capacity utilization of above 75 percent since FY15 and it never slid back even though the company has a setback during FY16 when it had an accident at one of its cement mill sites causing damage to one of the mills. During that time, Fauji started purchasing clinker from nearby plants and continued making its own cement.

Capacity utilization grew to 85 percent and 97 percent during FY17 and FY18 where demand continued to move up. During FY19, due to the economic slowdown setting in, the company could only get 85 percent in capacity utilization which is still pretty high given industry standards.

Financial performance has only improved, especially given the company's efforts to cut down on costs by utilizing waste and reducing dependence on the national grid. Revenues continued to grow on the back of solid demand coming through domestic markets particularly during FY15 and FY16 when economy was moving into expansion mode and in fact, after maintaining the same top-line in FY17 as FY16 despite the accident, the company's revenues grew 4 percent during FY18. This was the year when price competition among the companies had already started as many new expansions had come through, and demand had not catapulted to the levels that were expected.

During FY17, however, revenue was kept strong as demand was driven by mega infrastructure projects and development expenditure fronted by the then-government. Margins however are a different story. Mainly, cost of imported inputs, especially coal can put a dampener on margins during times when international fuel prices are on the incline. Moreover, during FY17, the company was buying expensive clinker to keep producing cement and keep its market presence intact-which though managed to keep capacity utilization high, brought margins tumbling down. Gross margins had grown to 46 percent in FY16 from 32 percent in FY13-a few steps ahead of many other players, though the improvement in margins was an industry wide occurrence during FY16. However, when repercussions of a shut-down silo set in, margins plunged to 22 percent during FY17-unlike other players.

Coal prices during that year were also shooting up which brought costs up further. Though the company stabilized its plant by FY18, overall industry demand was coming down from a major high in the two preceding years. The company did lose on earning hefty profits like its peers during those two years.

The company underwent several changes during FY18 while fixing its plant. It enhanced capacity of existing plants, upgraded its yard clinker feeding system at line-I to increase plant reliability, replaced old premising bin with a new one at raw mill-I, installed a waste clink hopper to handle the waste clinker moving out of the system, upgraded the cooler system, brought a new bucket elevator at silo-I for material transportation, added cement packing capacity in line-II and improved its coal stacking system.

The improvements continued during FY19 including replacement of old machineries and installing new ones, all to improve efficiency. By the end of FY19, the company was generating electricity which took care of nearly 43 percent of its total plants' needs that year. Margins improved to 26 percent during FY19 even though the economy was hit by several doses of rupee depreciation that was making inputs costlier. This was also despite a visible slowdown in demand that causes production and ultimately overall sales to suffer.

Recent operations and future outlook Despite the accident during FY16, the company retained its market share. And has invested back into its plant by enhancing efficiency, modernizing machinery and equipment, and enhancing capacity. It is also cognizant of environmental hazards associated with cement production and has launched a greener product.

These positive developments however don't make up for the loss in demand the industry is experiencing, both domestically and abroad. In the first three months ending Sep-19 which is the first quarter of

FY20, the company saw its top-line drop by 21 percent and margins drop to 14 percent (against 27% this period last year). Not all has government expenditure dried up; new commercial projects have been slow to pick up due to a variety of regulatory challenges, including the general forlorn business climate.

There may be some hope as the economy improves and trudges out of its current crises that private sector savings will translate into development. Meanwhile, Naya Pakistan Housing Program may also soon start at the procurement stage which will raise demand as well. All of this would prove hopeful for Fauji.

The company hopes to continue to grab the same market share and its entry into greener products may give it the much needed buffer, especially in exporting segments. Moreover, use of alternative fuels and waste conversion will allow it to use a better coal mix during times when coal prices are going up. For now, coal prices have been at their lowest for several months which is where good inventory management will have to come into play.