Fauji Cement Company Limited (PSX: FCCL) was incorporated in Pakistan as a public company in 1992 and commenced its operations in 1993. The company is engaged in the manufacturing and sale of different kinds of cement.
Pattern of Shareholding
As of June 30, 2023, FCCL has a total of 2452.847 million shares outstanding which are held by 13,126 shareholders. Committee of Admin, Fauji Foundation (the parent company of FCCL) has the majority stake of 61.65 percent in the company followed by the local general public holding 15.81 percent shares of FCCL. Mutual funds account for 4.68 percent shares of the company while joint stock companies hold 4.43 percent shares. Around 3.9 percent of FCCL’s shares are held by Banks, DFIs, and NBFIs and 2.35 percent by insurance companies. The remaining shares are held by other categories of shareholders.
Financial Performance (2019-23)
FCCL’s topline and bottomline which posted a decline in 2019 and 2020 took an upward flight thereafter. In 2020, the company reported a net loss. FCCL’s gross and operating margins inched up in 2019; however, its net margin tumbled. In 2020, all the margins registered a drastic fall. The margins greatly recovered in 2021. In the subsequent years, gross and operating margins kept improving while net margins followed a downward trajectory. The detailed performance review of the period under consideration is given below.
In 2019, FCCL’s topline descended by 1.7 percent year-on-year. This was on account of tamed demand due to low PSDP allocation, high cost of borrowing, and increased cost of production due to surge in global commodity prices, high indigenous inflation, Pak Rupee depreciation, and hike in energy prices. The company operated at a capacity of 85 percent in 2019 versus a capacity utilization of 97 percent reported in the previous year. FCCL was able to enhance its gross profit by 5.7 percent in 2019 due to better retention prices and increased captive power generation which constituted 43 percent of the required power in 2019. GP margin improved from 23.8 percent in 2018 to 25.6 percent in 2019. An increase in the number of employees from 1211 in 2018 to 1236 in 2019 as well as inflationary pressure contributed in driving up administrative expenses by 7.87 percent in 2019. Distribution expenses also grew by 6.39 percent in 2019 due to inflation. Higher provisioning for WPPF resulted in a 4.98 percent spike in other expenses in 2019. Conversely, other income slumped by 10.71 percent in 2019 due to a reduction in gain from the sale of fixed assets. FCCL’s operating profit grew by 5.12 percent in 2019 with OP margin rising from 20 percent in 2018 to 21.46 percent in 2019. Finance costs drastically fell by 65.26 percent in 2019 despite a high discount rate. This was due to the repayment of long-term loans and lesser running finance obtained during the year due to improved cash flow generation from operations during the year. Furthermore, FCCL’s financial income also increased during the year. An increase in deferred tax expense due to a revision in corporate tax rate resulted in a 17.65 percent year-on-year decline in net profit which clocked in at Rs.2824.298 million in 2019 with EPS of Rs.2.05 versus EPS of Rs.2.49 reported in 2018. NP margin also slid from 16.21 percent in 2018 to 13.58 percent in 2019.
FCCL’s net sales reported a drastic year-on-year fall of 17.15 percent in 2020. The expected PSDP allocation couldn’t materialize. CPEC projects also didn’t initiate as expected and there was restriction on non-filers for the purchase of property. During the last quarter, the outbreak of COVID-19 further suppressed the demand. Massive capacity expansions in anticipation of increased demand resulted in price fall. Gross profit registered a steep year-on-year decline of 87.81 percent in 2020 with GP margin falling down to 3.77 percent. The decline in gross profit would have been much steeper had the company not enhanced its captive power generation to 15 MW in 2020. 12.66 percent year-on-year spike in administrative expenses in 2020 was on account of elevated communication, establishment, and other expenses, depreciation on right-of-use assets, and generous donations made during the year. The company streamlined its workforce to bring the tally down to 1220 employees in 2020, resulting in reduced payroll expense. Distribution expense also slipped by 2.85 percent in 2020 due to curtailed sales volume. Other expenses narrowed down by 99.83 percent in 2020 due to no profit-related provisioning made during the year. Loss on disposal of fixed assets resulted in a 61.12 percent year-on-year fall in other income in 2020. FCCL recorded a 99.74 percent lower operating profit in 2020 with OP margin falling down to 0.07 percent. Finance costs magnified by 260.18 percent in 2020 due to hefty short-term and long-term loans obtained during the year. The reversal of deferred tax of Rs.112.9 million during the year, resulted in tax credit of Rs.113.89 million in 2022. Despite that, FCCL made a net loss of Rs.59.38 million in 2020 with a loss per share of Rs.0.04.
In 2021, FCCL’s topline ascended by 40.85 percent year-on-year. The company attained capacity utilization of 98 percent during the year owing to the government’s affordable housing initiatives and increased infrastructure spending during the year. Cost-cutting measures initiated during the year coupled with robust volumes and higher retention prices resulted in 834.27 percent higher gross profit in 2021 with GP margin climbing up to 25 percent. Administrative expenses increased by 11.96 percent in 2021 due to increased payroll expenses and costs charged by the Fauji Foundation. Despite improved sales volume, FCCL was able to trim down its distribution expense by 7.25 percent in 2021 on account of lower payroll expenses. 665.57 times higher other expenses recorded in 2021 were on account of increased provisioning for WWF and WPPF. Other income also increased by 126.13 percent in 2021 due to deferred grants and gain on disposal of property, plant & equipment. FCCL posted an operating profit of Rs.5053.92 million in 2021, up 431.85 times. OP margin also flew up to 20.82 percent in 2021. The company posted finance income of Rs.50.92 million in 2021. This was due to the availability of improved cash flows which cut down FCCL’s borrowing requirements during the year. Besides, dividends and bonuses received on investments classified as FVTPL also contributed towards higher finance income in 2021. The company was able to post a net profit of Rs.3471.35 million in 2021 as against the net loss recorded in the previous year. EPS stood at Rs.2.52 and NP margin at 14.3 percent in 2021.
FCCL recorded an astounding 123.49 percent year-on-year rise in its net sales in 2022. This year marked the merger of Askari Cement Limited (ACL) into FCCL which increased its annual capacity to 6.36 million tons in 2022, up from 3.559 million tons until last year. The company operated at 88 percent capacity in 2022. The company sold 5.6 million tons in 2022 compared to sales volume of 3.5 million in the previous year. The Russia Ukraine crisis inflated global commodity prices in 2022. This coupled with Pak Rupee depreciation and elevated indigenous inflation pushed up the cost of sales by 113 percent in 2022. However, with better retention prices, the company was able to drive up its gross profit by 155 percent in 2022 with GP margin touching a new record height of 28.51 percent. During 2022, FCCL’s number of employees grew to 2226 from 1113 in the previous year on account of a merger. This resulted in a doubling of payroll expenses in 2022 which coupled with higher management consultancy fees; costs charged by Fauji Foundation and merger expenses resulted in a 147.65 percent spike in administrative expenses in 2022. Distribution expenses also escalated by 745.92 percent in 2022 on the back of higher payroll and amortization expenses incurred during the year. Other expenses hiked by 114 percent in 2022 due to higher profit-related provisioning. Other income strengthened by 182.334 percent in 2022 primarily due to deferred grants. All these factors translated into 137 percent improved operating profit in 2022 with OP margin rising up to 22 percent. FCCL recorded a finance cost of 455.76 million in 2022, which is against the finance income reported in 2021. This was due to monetary tightening and increased borrowings. Net profit built up by 104.893 percent in 2022 to reach Rs.7112.54 million with EPS of Rs.3.02 and NP margin of 13.11 percent.
FCCL recorded 25.49 percent improved topline in 2023. The decline in construction and infrastructure development activities due to the overall slowdown of the economy coupled with political upheaval took its toll on the sales volume of the entire industry. FCCL recorded a sales volume of 4.8 million tons in 2023, down 14.29 percent year-on-year. Capacity utilization stood at 65 percent in 2023. The company increased its reliance on local coal and captive power generation to reduce costs. This coupled with the rationalization of fixed cost resulted in a 32 percent improvement in gross profit in 2023 with the GP margin reaching its peak level of 30 percent. No management consultancy fee greatly offsets higher payroll, communication, and other expenses and merger expenses paid during the year. As a consequence, administrative expenses inched up by 6.325 percent in 2023. 68.73 percent higher distribution expense incurred during 2023 was the result of higher freight charges and amortization of the brand acquired during the merger with ACL. Other expenses dipped by 7.28 percent in 2023 due to lower provisioning for WWF and a decline in special purpose audit charges. Other expense was greatly offset by 89 percent higher other income recorded in 2023 on account of gain on disposal of fixed assets, deferred government grant, and income from disposal of Foundation Solar Energy (Private) Limited, an associate company. Operating profit strengthened by 33.78 percent in 2023 with OP margin rising up to 23.53 percent. Finance costs escalated by 584 percent in 2023 due to higher discount rates, increased debt for expansion projects, and exchange loss incurred during the year due to Pak Rupee depreciation. Higher finance costs coupled with the imposition of an additional 6 percent super tax diluted the bottom line growth to 4.6 percent in 2023. Net profit stood at Rs.7439.681 million in 2023 with EPS of Rs.3.16 and NP margin of 10.93 percent.
Recent Performance (9MFY24)
14.43 percent year-on-year improvement in FCCL’s net sales in 9MFY24 was primarily the effect of higher retention prices and increased exports to Afghanistan. Despite depressed demand, cement companies didn’t curtail their prices out of the belief that lower costs would not bring more volume, and overall economic and political stability would. Due to the increased utilization of local coal, the company hedged against exchange loss. Moreover, increased captive power generation also kept the company immune from exorbitant hikes in energy tariffs. This resulted in a 16.72 percent higher gross profit recorded by FCCL in 9MFY24 with a GP margin of 30.66 percent versus a GP margin of 30 percent recorded in 9MFY23. Administrative expense inched down by 0.65 percent during the period while distribution expense surged by 30.23 percent due to axle load requirement which pushed up the freight charges. Other expenses slid by 8.25 percent due to lower profit-related provisioning which was to a great extent counterbalanced by 99.72 percent improved other income supposedly on account of deferred government grant. FCCL registered 18.76 percent higher operating profit during 9MFY24 with an OP margin of 24.10 percent versus an OP margin of 23.23 percent recorded during the same period last year. 72.17 percent higher finance cost signifies an elevated discount rate and curtailed finance income during 9MFY24. Net profit inched up by 1.07 percent year-on-year to clock in at Rs.7042.515 million in 9MFY24 with EPS of Rs.2.87 versus EPS of Rs.2.84 recorded in 9MFY23. NP margin dropped from 13.42 percent in 9MFY23 to 11.86 percent in 9MFY24.
Future Outlook
With anticipation of improved local dispatches due to higher expected PSDP allocation and signs of improved economic outlook will bode well for the local dispatches of the cement industry This coupled with the prospects of higher exports to Afghanistan will result in stronger topline of FCCL. If the company continues to embark on its cost optimization initiatives, its margins and profitability will surely pick up.
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