DG Khan Cement Company (KSE: DGKC), one of Pakistans prominent cement-makers, closed the first quarter ending September 2014 on a sound footing. Interestingly, the firms healthy bottom line expansion happened despite a slight top line slump. Looking at its financials, DGKCs standalone profitability is partly determined by what happens outside the cement industry.
DGKCs sales were largely flat, down by a nominal 0.7 percent on account of weak falling exports. As per latest data by the All Pakistan Cement Manufacturer Association, overall cement despatches had grown by 4.68 percent to 8.16 million tons in 1QFY15. Local despatches grew by 9.85 percent but exports were down 8.13 percent year-on-year.
The industrys local sales - which were nearly 75 percent of total despatches in 1QFY15 - were lower in July year-on-year, but picked up pace in double digits in August and September. DGKC presumably cashed in on that growth along with other players.
However, being a major player in the North region - which had a 62 percent export share in the quarter - DGKC was perhaps also a big loser out of the industrys export drop, which occurred mainly due to lower despatches to Afghanistan (down 29% YoY). The sales surge to India and sea-borne destinations, of 81 percent and 7 percent, respectively, somewhat stalled an otherwise sharp decline in industry exports.
Despite falling top line, DGKCs cost of sales increased over same period last year. The core costs consumed 68.58 percent of sales in the quarter, 265 bps more than the same period last year. The toll that this slippage took on gross margin was, however, contained for margin, thanks to a sharp 35 percent dip in distribution expenses (mainly on account of lower exports) and nearly 20 percent growth in other income.
DGKC derives its other income mainly from investment returns and dividends from its subsidiaries. This income - which comes from Nishat Group entities like Nishat Hotels and Properties, Nishat Paper and Nishat Dairy - continue to strengthen the cement firms bottom line. DGKC clearly espouses diversification ideals. After other recent beef-ups, the latest announcement is that DGKC would inject more equity investment in Adamjee Insurance, worth Rs450 million.
Further support to companys net profits came from a nearly 69 percent drop in finance costs, apparently due to recent loan repayments and better cash flows. DGKC is doing well on local scene, and that is evident in its expanding profitability. But the financials could have looked a whole lot better had exports lent some support.
The industrys local sales have remained strong despite the political turmoil and the August/September floods in central and southern Punjab. With floods-related reconstruction, growing semblance of security and an anticipated uptick in PSDP funds disbursements in upcoming months, local cement sales are expected to grow accordingly. But a continued export slump would subdue overall industry sales growth, taking the sheen away from the financials of players like DGKC that are otherwise doing well.
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DGKC (UNCONSOLIDATED)
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Rs (mn) 1QFY15 1QFY14 Chg
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Sales 5,812 5,854 -0.7%
Cost of sales (3,986) (3,859) 3.3%
Gross margin 31.4% 34.1% -
Selling & distribution expenses (209) (321) -34.9%
Other income 437 365 19.6%
Operating margin 29.4% 30.1% -
Finance cost (67) (213) -68.7%
Profit/ (loss) after taxation 1,157 1,067 8.5%
Net margin 19.9% 18.2% -
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Source: KSE announcement
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