Bestway Cement Limited

Bestway Cement Limited (PSX: BWCL) was incorporated in Pakistan as a public limited company in 1993. The company is engaged in the manufacturing and sale of cement. BWCL is the subsidiary of Bestway International Holdings limited (BIHL) which holds 56.43 percent shares of BWCL. BICL is the subsidiary of Bestway Group Limited (BGL) which is the ultimate parent company of BWCL.

Pattern of Shareholding

As of June 30, 2022, BWCL has an outstanding share capital 596.252 million shares which are held by 8856 shareholders. 60.34 percent of the company’s shares are held by Associated Companies, Undertakings and Related Parties which includes its holding company, BIHL. Local General Public holds 21.24 percent of BWCL’s shares followed by Directors, CEO, and their spouse and minor children with a stake of 17.16 percent in the company. The remaining shares are held by other categories of shareholders.

Financial Performance (2018-23)

Since 2018, BWCL’s topline has only seen a drop in 2020. Conversely, its bottomline plunged in 2019, 2020 and 2022 despite topline growth. BWCL’s margin which had been shrinking until 2020 posted a tremendous rise in 2021. Gross margin continued to grow in 2022, however, operating margin remained static and net margin faded. In 2023, operating margin posted a rise to reach its optimum value, however, gross and net margin deteriorated. The detailed performance review of each of the years under consideration is given below.

In 2019, BWCL’s topline could hardly muster a 1 percent year-on-year growth. During the year, the overall industry volumes dropped by 2 percent on account of slowed construction activity amidst slow disbursement of PSDP funds. Moreover, India also imposed import duty of 200 percent and restriction on import of cement from Pakistan which resulted in depressed export volume. BWCL’s sales volume nosedived by 5 percent year-on-year in 2019 to clock in at 8.126 million tons as against 8.590 tons in 2018. Due to depressed demand, the company utilized 76 percent of its plant capacity in 2019 versus 97 percent in the previous year. Cost of sales grew by 11 percent year-on-year in 2019 on account of steep depreciation of Pak Rupee, high inflation and energy cost. This translated into a 15 percent decline in gross profit in 2019 with GP margin inching down from 35.8 percent in 2018 to 29.9 percent in 2019. Distribution expense dropped by 18 percent year-on-year in 2019 due to a massive cut in export freight and handling charges incurred in 2019. Administrative expense posted a plunge of 66 percent in 2019 which was the result of a massive drop in amortization Other expense also slid by 32 percent year-on-year in 2019 which was on account of lower compensation to the land owners as per the Supreme court’s directive for the land acquired at Hattar plant. Other income couldn’t prove to be encouraging either and lost its footing by 28 percent in 2019 on the back of lower income from the disposal of waste materials. All these factors contributed towards a 7 percent dive in BWCL’s operating profit in 2019 with OP margin sliding down to 24.8 percent versus 26.9 percent in 2018. Finance cost gave another major blow as it ballooned by 150 percent in 2019. High discount rate as well as increased borrowing to set up a new plant with an annual capacity of 1.8 million tons; were the culprits behind high finance cost. However, finance cost was largely offset by share of profit of equity accounted investees which grew by 8 percent in 2019. The bottomline plummeted by 23 percent year-on-year in 2019 to clock in at Rs.10,097.29 million with an NP margin of 18.8 percent versus 24.9 percent in 2018. EPS dropped from Rs.22.07 in 2018 to Rs.16.93 in 2019.

2020 witnessed a 31 percent dive in BWCL’s net sales. While the industry was already grappling against macroeconomic headwinds which had culminated into lackluster construction activity in the country, COVID-19 further fueled the fire resulting in a 1 percent plunge in the industry’s domestic sales. Industry wide export sales posted a 20 percent growth in 2020 which mainly came on the back of robust clinker exports during the year. BWCL’s sales slumped by 10 percent year-on-year in 2020 to clock in at 7.311 million tons. The company utilized only 69 percent of its plant’s capacity during the year on the back of depressed demand. Higher input cost coupled with low cement prices resulted in a 93 percent decline in BWCL’s gross profit in 2020 with GP margin considerably thinning down to 3 percent. Distribution and administrative expense dropped by 41 percent and 19 percent respectively in 2020. BWCL didn’t book any provisioning against WWF and WPPF in 2020, resulting in a 98 percent fall in other expense. Gain on the sale of property, plant and equipment coupled with compensation from supplier culminated into a 103 percent growth in other income in 2020, however, other income was still less than 1 percent of BWCL’s in 2020. BWCL incurred an operating loss of Rs.25.91 million in 2020. Finance cost showed no mercy and grew by 44 percent in 2020 due to higher discount rate in the three quarters of 2020 coupled with low cash generation from operations. Share of profit from investees grew by 15 percent in 2020 due to superior performance of UBL during the year. BWCL posted a loss before tax of Rs.506.48 million in 2020, however, a tax credit culminated into a net profit of Rs.49.25 million. NP margin stood at a skimpy 0.1 percent in 2020 while EPS slid down to Rs.0.08.

The demand that remained suppressed for the two successive years posted a staggering rebound in 2021 owing to construction package announced by the government as well as rise in infrastructure and real-estate projects in the country. Cement industry’s domestic volume grew by 20 percent in 2021 while exports registered a 16 percent surge. BWCL made the most of the improved macroeconomic scenario and attained a stunning 53 percent growth in its topline in 2021. This came on the back of an 18 percent rise in the company’s off-take which clocked in at 8.66 million tons coupled with improved prices. In 2021, BWCL’s capacity utilization stood at 81 percent. Cost of sales only rose by 12 percent in 2021 due to relatively stronger Pak Rupee compared to the previous year and also because the company met 45 percent of its power requirements through its internal Waste Heat Recovery plant, boilers and genets. Better pricing and cost control measures resulted in gross profit escalating by around 14 times with GP margin jumping up to 29.2 percent in 2021 from mere 3 percent in the previous year. The company was able to curtail its distribution expense by 23 percent in 2021 by managing freight and handling expense and payroll expense despite higher sales volume. Administrative expense also grew marginally by 5 percent in 2021 despite an increase in the number of employees from 1501 in 2020 to 1537 in 2021. Other expense multiplied by around 56 times to clock in at Rs.949.79 million in 2021 as the company booked provisioning against WWF and WPPF in 2021 which it didn’t do in the previous year. Other income didn’t show any significant movement in 2021 and rose by a mere 3 percent. The company was able to post an operating profit of Rs.14,690.56 million in 2021 as against an operating loss of Rs.25.91 in the previous year. This translated into an OP margin of 25.83 percent in 2021. Better cash generation as well as monetary easing also enabled the company to push its finance cost down by 50 percent in 2021. Better share of profit from UBL offset the finance cost and translated into net profit of Rs.11,577.724 million in 2021 which was up 234 times when compared to the last year’s net profit. NP margin clocked in at 20.4 percent in 2021 while EPS posted a strong rebound to settle at Rs.19.42.

The growth trajectory of BWCL’s continued in 2022. However, the growth didn’t come on the heels on improved volumes. Rather, the impetus was provided by upward revision in cement prices in 2022. The local industry shrank during the year whereby the domestic off-take plunged by 1 percent whereas export off-take registered a 44 percent fall in 2022 on the back of deteriorating macroeconomic conditions, political mayhem, high inflation and cost of borrowing as well as depreciation of Pak Rupee which dented demand. BWCL’s sales volume dropped by 10 percent year-on-year in 2022 to clock in at 7.839 million tons. Plant capacity utilization also stood at 73 percent in 2022 due to dampened demand. Cost of sales grew by 23 percent year-on-year in 2022; however, passing the onus of cost hike on to the consumers, BWCL was able to attain a higher GP margin of 31.8 percent in 2022. Distribution expense grew by a massive 59 percent year-on-year in 2022 which came on the back of a huge spike in payroll expense and freight charges during the year. Administrative expense also registered a steep 161 percent jump on account of higher payroll expense as the number of employees grew from 1537 to 1921 during the year, and also because of generous donations. Other expense also considerably grew on account of WWF, WPPF and write off of receivables related to excise duty paid on sales in the previous years. Operating profit grew by 27 percent in 2022; however, OP margin remained stagnant at 25.8 percent. Higher discount rate, working capital requirements as well as capital expenditure requirements drove the finance cost up by 38 percent in 2022. However, once again, the share of profit from UBL was robust enough to offset the finance cost. While profit before tax grew by 25 percent year-on-year in 2022, 130 percent increase in taxation expense due to the imposition of super tax resulted in a 12 percent plunge in net profit which stood at Rs.10,238.086 million in 2022 with an NP margin of 14.1 percent. EPS slipped to Rs.17.17 in 2022.

Recent Performance (FY23)

In the year ended June 2023, BWCL’s topline posted a 21 percent year-on-year growth. While the construction activity remained sluggish during the year on account of dejected macroeconomic indicators, the growth was led by high prices. Overall industry volumes also dwindled in 2023 whereby local and export sales volume dropped by 16 percent and 13.13 percent respectively as higher construction cost, political chaos and hike in discount rate kept the potential investors at bay.

BWCL’s GP margin slightly reduced from 31.8 percent in 2022 to 31.1 percent in 2023 due to passing on cost hike burden to the consumers. Distribution expense also posted a meager 2 percent spike in 2023 which also speaks volume of the depressed off-take during the year. Low capacity utilization reduced the human resources requirement resulting in a reduced payroll expense. This pushed the administrative expense down by 37 percent in 2023. Other expense also followed the suite and registered a 22 percent cut in 2023. However, other income proved to be encouraging and clocked in at Rs.1382.99 million in 2023 as against the operating expense of Rs.445.32 million in 2022 due to write off of receivables related to excise duty. Operating profit grew by 37 percent year-on-year in 2023 translating into an OP margin 29.3 percent versus 25.8 percent in 2022. Finance cost continued to be the source of concern for the company and posted a 361 percent hike on the back of high discount rate and increased borrowings. Share of profit from UBL, despite posting a 75 percent growth in 2023, couldn’t offset the huge finance cost which dampened the bottomline growth to 16 percent in 2023. Net profit stood at Rs.11,891.698 million in 2023 with an NP margin of 13.6 percent versus 14.1 percent in 2022. EPS grew to Rs.19.94 in 2023.

Future Outlook

The cement industry kicked off FY24 on a cheerful note with 47 percent year-on-year rise in local dispatches and 184 percent year-on-year rise in export dispatches witnessed in the month of July. While this could be attributed to low-base effect on account of destructive floods in 2022, the industry seems to be on the right track as not only the PSDP budget has increased but the local players have also explored new export destinations. Rise in exports amidst Pak Rupee depreciation and escalating cost of production will prove to be a positive omen for the local industry and provide relief to their margins. Furthermore, the sector also pins hope on the downward correction in the international coal prices off-late which will also provide significant cost advantage.