Fauji Cement (PSX: FCCL) is one of the more prominent cement manufacturers in the industry with its two cement lines located in Jhang Bahtar, Punjab. The company which was incorporated in 1992 has a capacity of 3.27 million annually, after undergoing expansions. The plant's initial capacity was 945,000 tons per annum which was expanded in 2005 and subsequently another production line was introduced in 2011. As per capacity today, Fauji has about 7-8 percent market share in the cement industry.
Over the years, the company went through expansions as well as embarked on the journey to gain efficiency especially in power and energy consumption. The company installed a refuse derived fuel processing plant and also set up a 12 MW of waste heat recovery unit that start to produce electricity for the plant. Lately, the company has been going through a hard time as a recent accident at the manufacturing site resulted in a raw meal cement silo collapsing on a coal mill which affected production at the plant. The costs of the company went up substantially as the line could not operate for most of the year of 2017.
The company is part of the larger Fauji group with many associate companies holding shares in Fauji cement as well. As at June 2017, majority of the company's shares were held by Committee of Admin Fauji Foundation with 36.87 percent shares whereas Fauji Fertilizer, Fauji Foundation and Fauji Fertilizer Bin Qasim also hold shares in the company (see table). The company supplies cement to local markets in the north of the country as well as caters to an audience abroad, exporting to Sri Lanka, India, Afghanistan, South Africa, and the MENA region.
Operational and financial performance
Fauji has improved its capacity utilization over the years keeping at pace with the demand. By the time it expanded its capacity in 2011, the company had capacity utilization of about 62 percent which it grew through the years, going up to 85 percent in FY17. Despite the accident during FY16, the company kept supplying to its customers and maintained operations as the rework and commissioning of the destroyed plant was underway. During FY16, the utilization was 82 percent.
Dispatches too have grown over the years. Local demand has been on the rise and despite a decreasing demand of Pakistani cement overseas, dispatches for most of the sector have grown. The key markets of Afghanistan, India and South Africa have all shown a decline in demand for the variety of reasons such as competition from Iranian cement and anti-dumping duties imposed on Pakistani cement by South Africa. Other markets for Pakistani cement have not been as receptive either. This is probably why Fauji's export share in its total sales has dropped from 20 percent in FY14, to 14 percent in FY16 and only 4 percent in FY17. This used to be 32 percent during FY12.
Some claim cement manufacturers are merely adjusting the sales mix by focusing on local demand. However, the problem is that prominent markets for Pakistani cement are diverting their attention toward other sources. It seems whatever footprint Pakistani cement had created in Afghanistan has slowly been wiped out by Iranian cement.
For the past year, the company has been focusing on reconstruction of the destroyed coal mill and bringing the plant back to operation but meanwhile, financial standing has floundered. Though there is insurance claim for the damage, for the past year, Fauji has been buying clinker from nearby companies at a high premium.
During FY17, clinker purchase costs were about 53 percent of cost of goods sold. This helped push down the company's margins to 22 percent during the year, from 46 percent during FY16. Sales revenue remained pretty much the same even as dispatches grew. The company experienced a drop in earnings of about 52 percent between the two fiscal years. As a result, net profit margin was 13 percent during FY17 (FY16: 27 percent).
Recent operations and future outlook
Though FY17 was tough, tougher times are ahead. Even during Q1FY18, the company's margins dropped from 24 percent during this period last year to 17 percent. This was despite a 9 percent growth in revenues. Purchasing clinker was detrimental to the bottom-line even the company entered FY18.
However, there are some silver linings. Fauji was able to revive its plant in October. While the reconstruction of the second production line was underway, the company upgraded its capacity from 7200 tons per day to 7600 tons per day of clinker. Meanwhile, the company is now installing another waste heat recovery unit of 7.6MW for its line-1 and a 16MW dual-fuel captive power plant for its energy requirements. These are expected to be operation by March 2018. Total self-generation of electricity will go up to 39.3 MW, according to the company's annual report. This is likely to help in reducing costs and reliance on national grid.
Even as we look at the first quarter of FY18, we see trouble within the cement industry. Costs have been much higher because of the fluctuations in the prices of imported coal-during Q1FY18, coal prices went by 30 percent. Meanwhile, in the north, retention prices have dropped as competition grew. This would mean, for the same quantity of dispatches, the revenue per unit has fallen and will fall further. This is because the reliance on local demand will increase and by the time, all of the 30 million tons of expansions come through, demand will not be able to absorb all the capacity. Capacity utilization will move down, and prices will fall.
From that sense, Fauji's fate is tied to the dynamics of the rest of the industry. Even though the touted infrastructure boom and CPEC related activities are strong drivers of cement and construction demand, earnings will not grow as much as volumetric sales. Meanwhile, little change is expected in key export markets. Even if cement companies resort to exporting by taking significant price cuts, they would be disposing off their product at a discount which would affect the bottom-line. The next few years will be critical for the sector, with Fauji not being an exception.
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Pattern of Shareholding (as on July 30, 2017)
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Categories of Shareholders Share
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Directors and their spouse (s) and minor children 0.04%
Associated Companies 48.9%
Committee of Admin Fauji Foundation 35.87%
Fauji Foundation 3.53%
Fauji Fertilizer Bin Qasim 1.36%
Fauji Oil terminal 1.36%
Fauji Fertilizer 6.79%
Modarabas and Mutual Funds 0.02%
Mutual Funds 5.35%
Insurance Companies 0.91%
Investment Companies 0.12%
Joint Stock Companies 6.08%
Foreign Companies 5.08%
Pension Funds 0.33%
Others 0.90%
Banks, development finance institutions,
non-banking finance companies etc. 3.94%
General Public 28.31%
Total 100%
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Source: Company accounts
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Fauji Cement-First Quarter FY18
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Rs (mn) Q1FY18 Q1FY17 YoY
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Sales 4,793.94 4,391.57 9%
Cost of Sales 4,001.17 3,344.65 20%
Gross Profit 792.77 1,046.92 -24%
Administrative 74.16 77.76 -5%
Distribution costs 40.36 34.09 18%
Other operating expenses 45.18 61.25 -26%
Other income 11.97 35.10 -66%
Finance cost 31.86 77.71 -59%
Profit before tax 613.19 831.21 -26%
Taxation 169.07 222.29 -24%
Net profit for the period 444.13 608.91 -27%
Earnings per share (Rs) 0.32 0.44 -27%
GP margin 17% 24% -31%
NP margin 9% 14% -33%
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Source:PSX notice
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