DGKC: Healthy margins, strong future

DG Khan Cement (PSX: DGKC) showed an 8 percent year-on-year growth in revenues in its half year financial results for FY17. The company earned sales of Rs14.69 billion in 1HFY17 against Rs13.63 billion in 1HFY16.

In quarterly performance, gross margins lowered from the first quarter of FY17 to the second, due to higher coal and oil prices but in 1HFY17, margins went up from 40 percent to 43 percent year-on-year. This is likely due to the 30MW of coal power plant that the company installed in June of last year which may have reduced pressure from costs.

Finance cost for the company went up significantly since 1HFY17increasing from Rs62 million in 1HFY16 to Rs163 million likely due to the increase in debt brought on by capital expenditure for the new line. After-tax profits rose by 10 percent with the company earning an after-tax profit of Rs4.5 billion in 1HFY17, against Rs4 billion in 1HFY16.

The company has two expansions in the worksa 2.8 million-ton plant in Hub, Balochistan and a brownfield expansion of 2.2 million tons at its existing site. Currently the company is operating at a production capacity of 4 million tons, contributing to about 9 percent of the total industrys capacity, but after expansions, this share is likely to go up to 12 percent or more in the next five years given other players are also expanding.

If the company can weather the increase in cost of production in coming quarters, it can further boost its margins. Even so, the new production capacity plans would definitely put DGKC at a superior position than other players, and closer to a player like Lucky. This is likely why it is such a popular stock in the cement industry lately.