Cement:- PIONEER CEMENT LIMITED - Analysis of Financial Statements Financial Year 2004 - Financial Year 2007
Pioneer Cement Limited (PCL) was incorporated on 09 February 1986 as a public limited company.
Its shares are quoted on all the three stock exchanges of the country. Its principal activity is to manufacture and sale of cement. Its plant is located at Chenki, District Khushab in Punjab, 250 km away from Lahore and 120km away from Motorway (M2).
RECENT RESULTS OF H1FY08:
The current situation in the cement sector of Pakistan is characterised by a combination of rapidly declining profitability and a healthy growth in cement dispatches. In HY08, the cement sector suffered a massive decline in profitability of 87.9%, mainly on the back of volatile cement retention prices. Average retention prices declined by 13.2% during the six-month period, compared to HY07.
At the same time, cement dispatches witnessed a growth of 38.5% during the period from 11.18 million tons in HY07 to 13.83 million tons in HY08, with a consequent growth in sales revenue of 20.3%. This can be attributed largely to the enhanced construction activities in the country, due to which an increase of 9% was witnessed in cement demand.
A major portion of the increase in dispatches, however, came from the exports, which grew by an impressive 148% during the half-year period. The construction activity in Afghanistan and the UAE as well as exports to other regional markets like Iraq, Kuwait and Sri Lanka has contributed significantly to the demand.
The developments and changes in the overall situation in the sector are reflected in the profitability trends of PIOC. The cement production of the company increased from 514,173 tons in 2007 to 774,420 tons registering an increase of 51%. Clinker production also improved from 494,282 tons in 2007 to 842,765 tons showing a phenomenal growth of 71%. The company was able to capitalize on the growing cement demand in the country, realizing a commendable growth in sales volume of 53%. At the same time, export of cement/clinker has increased from 57,674 tons to 150,717 tons over the period, showing a significant increase of 161%.
The profitability of the company, which had been shrinking even in HY07, has deteriorated even further in HY08. The first half of the current fiscal year witnessed an increase in the gross profit margin compared to HY07, despite the uncertainty of retention prices. The gross margin increased from 6.75% to 8.33% in HY08. However, an increase in the price of coal, an extended winter season, logistics problem due to political turmoil in the country, affecting production and transport of goods within the local market, had a negative impact on profitability. The company experienced a loss of Rs 208.029 million for the above mentioned period. This is in line with the industry's trend of declining profitability.
The major increases in the cost of production were due to increase in packaging costs, as well as a substantial increase in the fuel and power costs. A significant rise in the distribution and the financial costs, have contributed notably to the decline in profit before tax for the period. The higher distribution costs maybe attributed to the above mentioned factors, but at the same time, the rise in exports and the accompanying transportation costs maybe responsible for the inflation in distribution costs.
The TIE ratio remains at dangerously low levels. This situation has been further aggravated by the net loss from operations. Consequently, the TIE has turned negative. This presents a negative picture of the financial strength of the company, with respect to its ability to service debts. The persistence of the low current ratio raises further doubts about the financial position of the company.
The debt ratios have faded slightly during the period, resulting in an improvement in the company's financial leverage. The company is in the process of repaying its debt, and hence the improvement in the debt situation. Moreover, the company is in the process to restructuring its debts by issuing Sukuk worth Rs 2.5 billion.
The re-profiling will enable the company to liquidate its excessive current liabilities to resolve the current ratio problem, in the short term and long-term, this will prove beneficial to the company, as it will reduce the cost of financing. In addition, there has been a sharp increase in the trade debts of PIOC. This might indicate an underlying change in the credit policy of the company, or a drop in the ability to manage assets and recover receivables.
A record of stock data for PIOC reveals that the stock of the company remained above the KSE 100 Index during the first three months of the current fiscal year. During the second quarter, however, the stock plunged below the KSE 100 level.
Although the profitability position of the company looks dim, but comfort may be drawn from the trend seen during the last year. The high negative margins experienced in HY07 had been considerably pacified in the second half of the year, reducing the negative figure. Keeping in mind the seasonal fluctuations in demand and the recent move by manufacturers to increase the price of cement by Rs 2-3 per bag, it is hoped that the profitability condition will improve in future.
Moreover, the company was awarded a PACRA rating of 'A-' and 'A2' for long-term and short-term in 2008. These ratings denote a low expectation of credit risk arising from a strong capacity for timely payments of financial commitments.
In addition, the demand for clinker and cement by the neighbouring countries provides opportunities for the cement sector and PIOC. One source of rise in export demand emerges from India, which plans to increase imports from Pakistan in order to tame inflation in the country. However this opportunity for the local industry may not last very long, as capacity expansion takes place in India. It is expected that the supply/ demand situation will be balanced by this year.
Due to massive construction activities, Dubai also carries enormous potential as an export market for export by the local manufacturers. An increase in the cement prices has registered in the region due to the unprecedented rise in construction activities that has accompanied the overall economic boom in UAE and the region.
Consequently, it is expected that exports from Pakistan will reach 6m tons by the end of the current year, depicting an impressive growth of 88% over last year. Hence the ability of a company to exploit the market potential will determine its profitability and future performance. The FY07 was a period of declining profitability for the cement industry as a whole, with an industry wide decline of 56% in profits.
During FY07, clinker production of PIOC accelerated significantly, increasing by 19% in the first quarter, 51% in the second quarter and 93% in the third quarter. Total cement production grew by 55% over FY06.
The volume of cement sales for the year registered a rise of 59% in the domestic market as the company enhanced its distribution network. At the same time, the cement exports also grew by 12%, as the company in light of the depressed domestic market, sought foreign avenues for sales of its product. For the industry, the dispatches increased by 31.8% due to construction-related demand and regional demand as well.
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Cement Dispatches(FY'07)
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Industry FY'07 FY'06 YoY Chg.
(%)
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Local 21,076 16,907 24.7%
Exports (Cement & Clinker) 3,199 1,505 112.5%
Total 24,275 18,412 31.8%
Capacity Utilization 75.7% 96.9% -21.9%
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PIOC
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Local 1,135 719 57.8%
Export 133 118 12.5%
Total 1,267.3 836.9 51.4%
Capacity Utilization 60.5% 113.1% -46.5%
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As can be observed from the above tables, the dispatch for Pioneer Cement has shown a higher increase than the industry. Also in line with the industry, the capacity utilization in FY07 has declined because of an increase in the capacity of the company as well as the industry.
However this increase in sales volume was not matched by an increase in sales revenue, which grew by a meagre 12% during the sale period. This low growth in sales revenue was a result of the low retention price of cement during the year. A 35% decline in the average price of cement, triggered by fierce competition and surpluses amongst the industry players, severely hit the company's revenues and profits.
As a result of low price and a number of other factors, the profits of the company turned negative in FY07. The gross profit declined by 75% for the year, despite the increase in sales, leading to the bottom line being red. Consequently, gross profit margin tumbled to 10% from over 40% in FY'06.
The pressure on profits from the decline in cement prices increased further with an increase in cost of production. The cost of production went up during the period, mainly due to an increase in the prices of input items and mounting fuel costs. The hike in fuel costs led to an average increase of 37% in cost of production. An upward revision of power tariffs also contributed to the rise in cost of production. Cost of production thus rose by 52.5% over FY06.
Moreover, an 85% increase in its financial costs also added to further pull down profits. This can be attributed to an increase in long term loans and other means of long term financing of the company for capacity expansion, which led to an increase in debt servicing costs.
The efficiency of PIOC in terms of asset management has also registered a decline during the FY07, as indicated by the longer period of inventory turnover in days and an increase in the time taken by the company to recover its cash from sales. These higher ratios had the combined effect of prolonging the operating cycle of PIOC. The FY07, then, saw an aberration in asset management as the turnover (days) of inventory and debtors lengthened, as against the declining trend since the FY04.
The sales to equity and total asset turnover ratios, however, depict a different picture of asset management efficiency during the year as the TATO and sales to equity both rose during FY07. This reflects a better management of the assets of the company to generate higher sales. The capacity utilization of the plant, at 74% was also higher for FY07, compared to 69% in the preceding year.
The liquidity stance of PIOC has improved slightly during FY07. This improvement in the current ratio is partly attributable to efforts by the company to reduce the pressure on current liabilities. In this respect, the company managed to secure a Rs 250 million disbursement from NBP. Also, the Bank of Punjab converted Rs 250 million of short-term liabilities into a long-term loan. Despite this, the total current liabilities rose during FY07 as a result of the servicing of the long term musharaka financing undertaken by the company.
Current assets, on the other hand, rose during the year. The increase in current assets underlying this trend can be attributed largely to an increase in the cash and bank balances held by the company. At the same time, the inventory levels of the company also built up, backing the trend of rising current ratio. The effect of higher current assets was somewhat marred by the increase in current liabilities of the company for the same period.
The degree of financial leverage of PIOC has increased slightly during the FY07. This is evident from the higher long-term debt to equity ratio and the total debt to asset and equity ratios of the company. However, the increase in long term debt to equity ratio reflects a decline in the equity of the company because of losses incurred during the year. The equity decreased despite a 17.5% Rights issue amounting to Rs 359 million. Hence these figures may present a misleading picture of the company's gearing. The increase in debts can be traced back to an increase in current liabilities whereas the long term debt of the company decreased for the same period.
The Times Interest Earned (TIE) ratio plunged in FY07. This was caused by an 85% surge in financial costs compounded by a drastic decline in EBIT of the company. The resulting TIE of 0.52 casts serious concerns over the company's ability to service its debts. Hence the low TIE may be a potential threat for the company as well as the industry until the retention prices rise.
The decline in profitability has adversely impacted the EPS so that the company posted an EPS of Rs -0.55 in FY07. Consequently the P/E ratio also plummeted for the period.
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2006-07 2005-06 2004-05 2003-04 2002-03 2001-02 2000 01
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PRODUCTION & SALES
Clinker Production Tons 1,238,168 769,397 690,529 458,545 441,321 439,221 401,473
Cement Production Tans 1,263,627 815,231 720,214 483,742 504,947 401,050 422,090
Cement Sales - Domestic Market Tons 1,136,958 716,728 553,461 478,806 503,284 396,853 432,459
- Export 130,284 118,028 166,486 3,100 1,013 - -
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1,267,242 834,756 719,947 481,905 504,297 396,853 432,459
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Capacity Utilization 62% 77% 114% 77% 80% 64% 67%
(based on installed capacity)
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OPERATING RESULTS
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Gross Sales Rs /Mn. 4,649 4,154 2,800 1,958 1,798 1,632 1,649
Excise Duty & Sales Tax Rs./Mn. 1,415 1,027 734 614 730 616 637
Net Sates Rs./Mn. 3,131 3,076 2,009 1,323 1,031 992 979
Gross Profit Rs./Mn.. 318 1,231 637 387 114 268 35
Net Profit/(Loss) Before Tax Rs./Mn. (184) 933 394 238 (152) 50 (290)
Net Profit/(Loss) After Tax Rs./Mn. (93) 676 332 424 (157) 44 (295)
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FINANCIAL POSITION
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Assets Employed By:
Operating Assets Rs./Mn. 7,511 7,683 6,362 3,657 3,648 3,806 3,832
Current Assets Rs./Mn. 966 618 463 395 276 347 254
Other Assets Rs./Mn. 133 104 44 223 24 28 38
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Rs./Mn. 8,610 8,405 6,888 4,275 3,948 4,181 4,124
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Assets Financed By:
Shareholders' Equity Rs./Mn. 2,096 2,322 1,621 545 121 278 263
Surplus on Revaluation
of Fixed Assets Rs./Mn 574 605 629 - - - -
Long Term Loan/Deposits Rs./Mn. 2,930 2,781 2,469 2,107 2,466 2,518 2,863
Deferred Liabilities Rs./Mn 1,010 1,299 1,179 1,239 1,027 799 569
Current Maturity Rs./Mn. 1,251 659 117 196 202 224 224
Other Current Liabilities Rs./Mn. 749 739 872 188 131 362 206
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8,610 8,405 6,888 4,275 3,948 4,181 4,124
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COURTESY: Economics and Finance Department, Institute of Business Administration, Karachi, prepared this analytical report for Business Recorder.
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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