DGKC promises to impress more

With nine-month net profits doubling in the period ending March 2013, DGKC’s recent result is something to write home about. A 5 percentage point jump in gross margins and an even bigger increase in operating and net margins during 9MFY13 showed that the company did well on its accounts, though the quarterly result did not match market expectations for 3QFY13.
It wasn’t merely revenue increases that helped the phenomenal bottom-line growth, though with an 8.5 percent year-on-year increase in 9MFY13 that did have a significant role to play.
Besides the trickledown effect of increased revenues, a reduction in selling and distribution expenses – down from 11 percent of sales in 9MFY13 to 7 percent in 9MFY13 – helped prop up DGKC’s operating margins for 9MFY13. Reduced export sales explain this decrease, with the company preferring to sell in local markets in the wake of lower price competitiveness internationally.
Adding on to the effect of lower distribution expenses were DGKC’s higher other income – that mainly includes dividend income from shareholdings in MCB – as well as lower finance costs which slid substantially due to receding interest rates and prepayment of DGKC’s long-term loans.
Yet, lower than expected EPS for 3QFY13 – Rs.3.03 against general expectations of Rs.3.4-3.5 – led to a decrease in the firm’s stock price by a small 0.07 percent yesterday. “Analysts had been quite bullish about the company and investors had taken positions based on that. The lower-than-expected quarterly result dampened investor sentiment and drove down prices yesterday,” explained Wajid Rizvi of IGI Securities.
However, it’s the future projects of DGKC that will likely revive investor interest in this company. DGKC is in talks with Sumaria [P1]Cement Holding Company of Mauritius for a green field project, the due diligence process for which is underway.
Besides that, the company is also planning to expand its rubber-derived fuel (RDF) facility, while another waste heat recovery (WHR) plant is expected to come online in the next quarter. “Once the WHR plant is operative, it can yield cost savings of up to Rs.400 million for the coming year,” foresaw DGKC’s CFO Inayat Ullah Niazi.
Add to this healthy local demand for cement, stable retention prices, and no expected upward turn in international coal prices, and prospects for the company appear quite promising. Therefore, yesterday’s marginal slide in the scrip’s prices is plausibly not a good indicator of its likely upward movement in the days to come.
[P1]Yes the spelling has been confirmed by SIjal

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DG Khan Cement Company Limited - P&L

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Rs (mn)                            9MFY13    9MFY12   Chg (%)

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Sales                              18,132    16,704        9%

Cost of sales                      11,305    11,192        1%

Gross profit                        6,827     5,512       24%

Gross margin                        37.7%     33.0%   470 bps

Administrative expenses               290       180       61%

Selling and distribution expense    1,282     1,823      -30%

Other operating expenses            1,085       890       22%

Other income                        1,085       890       22%

Operating profit                    5,931     4,079       45%

Operating margin                    32.7%     24.4%   830 bps

Finance cost                          802     1,303      -38%

Profit after taxation               4,242     2,072      105%

Net margin                          23.4%     12.4%  1100 bps

EPS (Rs/share)                       9.68      4.73

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