Cement: BESTWAY CEMENT COMPANY LIMITED - Analysis of Financial Statements Financial Year 2003-Financial Year 2006
Bestway Cement Company Limited (BWCL) set its first cement plant at Hattar, Haripur in the North West Frontier Province, Pakistan. This was an initial investment of US $120.0 million.
The contract for the supply of main plant was signed with Mitsubishi Corporation of Japan in June 1995. Major equipments, Cement Mill and instruments were supplied by Germany, USA and Germany.
Bestway's plant is environmentally friendly with emission standards that far exceed prevailing acceptable standards. The plant's emission levels are less than 50 microns whereas the Government of Pakistan's acceptable standards are 200 microns and international standards are 100 microns per cubic meter of air at NTP. Bestway Cement is driven by high standards of efficiency and quality.
Strict quality control procedures are applied to ensure that these aims are achieved. The best quality control equipment in Pakistan is in use at the plant. Apart from the usual equipment, Bestway's laboratories are equipped with state-of-the-art X-ray Fluorescent Analyzer and Diffractometer technology.
Prior to 2001 the Bestway Cement plant at Hattar was using furnace oil as fuel for firing the kiln. In anticipation of further hike in petroleum prices, the plant was made to operate on natural gas. This was the first step in restoring cost efficient production. In 2003, the plant was converted from gas to coal.
Today, Bestway Cement Hattar has the operational flexibility to utilize all three major fuels namely Furnace Oil, Natural Gas and Coal. The plant's initial capacity was 0.99 million tons per annum. As a result of the management's insight on growing domestic demand and the untapped export potential, Hattar's capacity was enhanced to 1.17 million tons per annum in 2002. In 2005 the plant's capacity was further increased to 1.20 million tons per annum of clinker. Bestway Cement was listed on the Karachi Stock Exchange in February 2001.
BESTWAY CEMENT CHAKWAL-I:
In February 2004 on the back of resurgent demand in the domestic market, Bestway Group decided to expand its operations through setting up a 1.8 million tons per annum cement plant near Village Tatral of District Chakwal, Punjab Province, Pakistan. This was the Group's second Greenfield development project at a cost of US $140.0 million. The plant was inaugurated in 2006.
MUSTEHKAM CEMENT:
To augment its presence in the cement industry, Bestway bided for 85.29% equity of Mustehkam Cement Limited following an offering by the Privatization Commission, Government of Pakistan. The Company's bid of approximately US $70.0 million was accepted in September 2005. Mustehkam's plant is in close vicinity of existing operations in Hattar, District Haripur NWFP. Though the production of the enterprise had been discontinued in 1999, it started production in Dec'05 with a total capacity of 0.63 million tons per annum. Later, the capacity was expanded to 0.9 million tons per annum.
BESTWAY CEMENT - CHAKWAL - II:
In July 2006, a second 1.8 million tons capacity plant was setup adjacent to Chakwal, which is so far the third Greenfield project by Bestway.
LARGEST EXPORTER TO AFGHANISTAN:
The company has been able to maintain its presence due to superior quality of cement, effective marketing, and customer focus and staff dedication. Presently, Bestway enjoys a market share of 5%. Successful introduction of its brand in Afghanistan has captured 18% of the market in Afghanistan.
The production of clinker and cement witnessed a temporary dip in FY'06 because of the lower volumes of exports and planned plant shutdowns. Nevertheless, capacity utilization of the company during the same year stood at 98%, which is amongst the highest in the industry and also well above the industry average of 91%.
The liquidity of BWCL has increased only marginally over the years under discussion. The current ratio also remains well below the industry averages signifying the liquidity crunch that the company has to go through. However, constant expansion in the form of new plants as discussed above is a reasonable justification of this liquidity downturn. Owing to the new plant setup, Bestway has done reasonably well in managing its liquidity position.
The recent decline in the current ratio can be attributed to the subsequent pay off of the long-term loans acquired for the acquisition of the Mustehkam Cement and Chakwal Plant-II. Consequently, current liabilities soared up in the same year resulting into a decline in current ratio.
Profitability ratios of BWCL showed a rapid upward movement throughout the years under discussion owing to realization of better cement prices and higher capacity utilization, which consequently boosted the net income of the company. Other Income decreased in FY'05 due to decline in dividend income from UBL. The company has 39.63m stake (7.65% stake) in UBL as the long-term investment. UBL declared cash dividend of Rs1.50 per share in FY'04 as compared to Rs2.25 per share in FY'03.
Moreover, BWCL achieved 116% capacity utilization in the same year by producing 1.21m tons cement as compared to 1.04m tons (100% capacity utilization) in FY'04. It was the highest capacity utilization achieved by any plant in FY'05, while the industry's overall capacity utilization stood at 80% in FY'05. This may be attributed to the acquisition of 85.3% stakes (10.5m shares) of Mustehkam Cement by giving a bid of Rs305 per share. The company borrowed Rs3.2b at Kibor+2% for the acquisition of Mustehkam Cement, which increased the cement manufacturing capacity of the group by 0.49mntpa (1,628tpd) to 3.52mntpa.
The increasing trend continued in FY'06 owing to better cement retention price and completion of expansion plan at District Chakwal, which raised its capacity by more than twice to 3.03mntpa from 1.23mntpa. However, financial charges soared up in FY'06 due to upward trend in the interest rates and borrowing of Rs3.2b by the company for the acquisition of 85.3% stake of Mustehkam Cement. The impact of high finance expenses was mitigated by higher net income coming from dividend income (through acquisition of stakes in UBL).
Gross margins improved from 40.2% in FY'04 to 43.8% in FY'05 due to company's partial switch from Chinese to cheaper Indonesian coal. The ratio of Indonesian coal in a fuel mix improved to 60% in FY'05 from about 50% in FY'04. Furthermore, better sales volume as well as high retention price was able to capture a significant amount of gross profit margin in all the years under discussion.
ROA and ROE also continued to augment until recently when a slight dip was posted in ROA figures owing to rapid increase (almost 50%) in total assets of the company brought about by expansion in Property, Plant and Equipment (PPE).
All profitability ratios remained well above the industry averages. This shows that despite stiff competition in the industry and not-so-significant share of BWCL, the company has proven itself in some areas of management.
BWCL is highly leveraged company in the industry as evident from its enormously high long-term debt to equity and debt to asset figures. Considerable part of financing comes through long-term debt mainly from banks, modarbahs and syndicate financing. Long-term debt to equity jumped up in FY'06 with the acquisition of 85.3% stakes in Mustehkam cement, which was totally financed through long-term debt.
Thus, finance expenses for BWCL are at a higher side, in consequent of constant expansions on loan and setup of two Greenfield projects at Chakwal. Financing comes mainly through debt as shown by greater than 1 debt-equity ratio trend. As a result interest-paying ability of BWCL has dampened considerably in FY'06. On the whole, debt management of the company is not better than the industry and thus BWCL constantly faces the interest rate risk.
Ever increasing efficiency in capacity utilization and capacity enhancement had an inflated effect on BWCL's asset management ratios. Increased capacity resulted in accumulation of inventory (raw material and work-in-progress) and PPE consequently depressing the inventory turnover (days) total assets turnover ratio respectively. Operating cycle has prolonged as a result.
The company, however, is efficient in receiving credit payments as indicated by its DSO trend. The prolonged operating cycle of the company can be a future threat to the company even though it is better than the industry averages. Strategic planning to control excess supply can cushion the turnover ratio. Sales/Equity has been erratic and worse than the industry averages. Lately, the ratio has been declining and can be attributed to lower sale price, depressed sales and high reserves.
COURTESY: FNETRADE.COM:
Dividend policy of the company reflects investor confidence. The company declared 10% cash dividend (Rs1.0 per share) in FY'05 (same as in FY'04). It also announced 10% bonus shares for FY'05. DPS has been constant since 3 years irrespective of the profit margins. BV and EPS have also posted a commendable trend, rising throughout the years under discussion. The rising net worth and EPS is a very positive sign for the investors who generally look for sustained growth in EPS and DPS figures. When compared with other industry players, BWCL fared well in terms of its Dividend policy but lagged reasonable behind in EPS. Marketability ratios however are not comparable with the industry averages owing to varying shareholder base for each player.
FUTURE OUTLOOK:
The impact of Budget'08 will be positive for the cement sector and so for Bestway. GoP has allocated PKR 520 billion in PSDP, which is 32% higher than the preceding year. Out of the total PSDP allocation 52% of PSDP allocated for Infrastructure Development Program against 30% allocation last year. Thus, cement demand will further "cement its place". Higher PSDP bodes well for cement demand, particularly due to the infrastructure development component that requires higher quantities of cement. GoP has ambitious plans regarding the public sector development that includes Highways, building of houses and canals. It also includes building of new dams like Bhasha Dam for which Rs 500m has been allocated.
This all will result in better-utilized capacity by the cement industry along with an expected increase in demand from 11.3mntpa to 13.7mntpa. On the other hand Central Excise Duty (CED) has not been reduced as was expected. The cement manufacturers have therefore, indicated their intentions to pass on much of the costs to the end users. Furthermore, the exemption of duty on bitumen suggests that the GoP is no longer interested in cemented roads, which might lead to a nominal decrease in demand. All in all, the industry is going to fare reasonably well in the near future in consequent of the growing avenues, which will boost the demand for cement.
Bestway cement has an expansion plan to set up a new cement plant in District Chakwal with a capacity to produce 6000tpd (1.8mntpa) by Jun'06. It will increase the total cement manufacturing capacity to 3.12mntpa by FY'07 from the current rated capacity of 1.32m tons.
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BESTWAY CEMENT-KEY FINANCIAL DATA
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Income Statement (Rs) FY'03 FY'04 FY'05 FY'06
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Total Revenue 1,792,221,196 2,665,965,550 3,535,841,713 4,543,808,323
Cost of Goods Sold 1,334,003,860 1,595,508,136 1,986,891,718 2,250,304,518
General & Administrative Expenses 32,024,468 56,552,781 97,064,331 124,952,073
Selling and Distribution Expenses 20,745,232 19,720,580 20,876,316 24,563,397
Operating Profit (EBIT) 405,447,636 994,184,053 1,431,009,348 2,143,988,335
Financial Charges 269,329,080 139,126,913 139,637,148 468,727,103
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Net Income Before Taxes 159,693,707 929,768,412 1,297,921,990 1,730,467,597
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Net Income After Taxes 112,643,459 678,575,296 930,831,812 1,225,853,177
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Balance Sheet (Rs) FY'03 FY'04 FY'05 FY'06
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Stores & Spares 318,619,484 365,845,980 578,150,212 795246779
Stock in Trade 155,641,894 113,143,807 93,439,984 150269307
Cash & Bank Balances 41,617,196 293,181,265 605,636,439 419561826
Total Current Assets 1,344,102,566 906,486,303 1,463,229,017 1965007143
Total Non Current Assets 5,190,209,502 5,081,866,510 7,560,788,419 16,052,992,154
Total Assets 6,534,312,068 5,988,352,813 9,024,017,436 18,017,999,297
Total Current Liabilities 2,632,779,832 1,176,637,691 1,684,347,665 2,588,832,543
Total Non Current Liabilities 1,720,887,498 2,145,964,643 3,743,117,480 10,579,203,976
Total Liabilities 4,353,667,330 3,322,602,334 5,427,465,145 13,168,036,519
Paid Up Capital 1,934,695,550 1,934,695,550 2,128,165,100 2,340,981,610
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Total Equity 2,259,644,738 2,665,750,479 3,596,582,291 4,849,962,778
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LIQUIDITY RATIO FY'03 FY'04 FY'05 FY'06
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Current Ratio 0.51 0.77 0.87 0.76
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ASSET MANAGEMENT FY'03 FY'04 FY'05 FY'06
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Inventory Turnover(Days) 95.26 64.68 68.38 74.91
Day Sales Outstanding (Days) 12.87 5.62 4.86 2.63
Operating Cycle (Days) 108.13 70.30 73.23 77.54
Total Asset turnover 0.27 0.45 0.39 0.25
Sales/Equity 0.79 1.00 0.98 0.94
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DEBT MANAGEMENT FY'03 FY'04 FY'05 FY'06
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Debt to Asset(%) 66.63 55.48 60.14 73.08
Debt/Equity (Times) 1.93 1.25 1.51 2.72
Times Interest Earned (Times) 1.51 7.15 10.25 4.57
Long Term Debt to Equity(%) 76.16 80.50 104.07 218.13
PROFITABILITY (%) FY'03 FY'04 FY'05 FY'06
Gross Profit Margin 25.57 40.15 43.81 50.48
Net Profit Margin 6.29 25.45 26.33 26.98
Return on Asset 1.72 11.33 10.32 6.80
Return on Common Equity 4.99 25.46 25.88 25.28
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PER SHARE FY'03 FY'04 FY'05 FY'06
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Earning per share 0.58 3.51 4.37 5.24
Dividend per share 7.50 10.00 10.00 10.00
Book value 11.68 13.78 16.90 20.72
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COURTESY: Economics and Finance Department, Institute of Business Administration, Karachi.
DISCLAIMER: No reliance should be placed on the [above information] by any one for making any financial, investment and business decision. The [above information] is general in nature and has not been prepared for any specific decision making process. [The newspaper] has not independently verified all of the [above information] and has relied on sources that have been deemed reliable in the past. Accordingly, the newspaper or any its staff or sources of information do not bear any liability or responsibility of any consequences for decisions or actions based on the [above information].
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