Kohat Cement Company Limited

Kohat Cement Company Limited (PSX: KOHC) was established in 1980 under the Companies Act, 1913. It produces and sells cement. As of June 2021, it has an annual production capacity of 135,000 metric ton white clinker and 4.8 million metric ton grey clinker. The company also caters to the international market.

Shareholding pattern

As at June 30 2021, over 55 percent shares are with the associated companies, undertakings and related parties. Within this category, nearly all the shares are held by ANS Capital (Pvt) Limited. The directors, CEO, their spouses and minor children own 17 percent shares within which, majority is owned by Mrs Hijab Tariq. Close to 14 percent shares are held in mutual funds, followed by nearly 11 percent shares held by the local general public. The remaining roughly three percent shares are with the rest of the shareholder categories.

Historical operational performance

The company has seen a growing topline between FY11 and FY14. After that, topline has been fluctuating. Profit margins, on the other hand, have declined between FY16 and FY20, before improving again in FY21.

In FY18, revenue contracted marginally by less than one percent. However, total dispatches have been higher by 8.3 percent year on year. Most of this growth was attributed to domestic consumption, while export dispatches have witnessed a decline particularly due to the presence of Iranian cement in the Afghan market. Domestic consumption also drove industry growth as total industry dispatches grew by almost 14 percent. Despite the marginal fall in revenue for the company, gross margin was significantly impacted as it reduced to 32 percent as cost of production increased to almost 68 percent of revenue, from nearly 57 percent in FY17. This was due to currency devaluation and a rise in coal prices. Thus, net margin also declined to 22 percent.

At 16.4 percent revenue growth in FY19 stood at a five-year high, crossing Rs 15 billion in value terms. Total dispatches for the industry were higher by two percent. Unlike the previous years, export dispatches grew by almost 38 percent. The company’s dispatches were higher by 4.7 percent. However, with production cost increasing to consume over 73 percent of revenue, gross margin declined to 26.7 percent. This was again attributed to currency devaluation, as well as a rise in electricity and packing material prices. Coupled with this was the decline in cement prices that reduced net margin to 15.78 percent.

The company witnessed the biggest contraction in revenue in FY20 by almost 28 percent, with topline falling to Rs 11 billion, a level last seen in FY13. This was attributed to a number of factors such as low demand, increased capacities that drove prices downwards and Covid-19 pandemic that affected production and construction activities. Export dispatches fell by over 16 percent, while local dispatches were lower marginally by less than one percent. Unable to cover costs, the company posted a gross of Rs 24 million that increased to Rs 443 million as net loss when operating and finance expenses were incurred.

Revenue in FY21 more than doubled year on year as it crossed Rs 24 billion in value terms. With resumption of business activities, along with the government’s efforts for the real estate sector encouraged demand. The company also had its new production Line 4 operational for the entire to meet the higher demand. This is also reflected in higher clinker and cement production, as well total dispatches higher by 69.3 percent. This was also reflected in the bottomline that stood at Rs 3.5 billion and a net margin of 14.5 percent. However, if one were to ignore the unusual financial results of FY20, profitability in FY21 was not significantly better as between FY12 and FY19, the company had mostly seen net margin above 20 percent.

Quarterly results and future outlook

Revenue in the first quarter of FY22 was higher by 31.5 percent year on year. While local sales volumes grew by 3.17 percent, export sales nearly disappeared that dampened the total sales growth. However, topline improved on the back of stable cement prices as well as low-cost coal inventory. Combined with a substantial support from other income and a decline in finance expense, net margin for the quarter was notably better at 20.5 percent versus nearly 10 percent in 1QFY21.

The second quarter also saw higher revenue year on year by over 38 percent. Similar to 1QFY22, better selling prices drove the topline while total sales volumes were lower by nearly three percent. The latter was due to a decline in export sales, while local sales increased only marginally. With better gross profit margins, net margin was also improved in 2QFY22 at 19.3 percent compared to 16.26 percent in 2QFY21.

Revenue was higher year on year in third quarter as well by close to 28 percent. This was again attributed to better selling prices as sales volumes continued to decline. The company attempted to reduce input prices by utilising Afghan coal that was reflected in the higher gross margin for 3QFY22 at over 29 percent versus nearly 26 percent in 3QFY21. With significant support from other income, net margin was also better at 19.2 percent compared to 15.8 percent in 3QFY21. While demand continues to exist on the back of CPEC related projects and housing finance from banks, procuring coal at sustainable prices is a major challenge for the company.