Cement: DG KHAN CEMENT COMPANY LIMITED - Financial Statements Analysis June 2002 to December 2006

DGKC was established in 1978 under the management control of the State Cement Corporation of Pakistan (SCCP) and commenced production in April 1986. The company is a unit of the Nishat Group and is the largest cement manufacturing unit in Pakistan.
The company is listed on all the three stock exchanges of Pakistan. The company manufactures two types of cement: Ordinary Portland Cement (OPC) and Sulphate Resistant Cement (SRC). The Ordinary Portland Cement is marketed under the DG brand and Elephant brand. SRC is marketed as the DG brand Sulphate Resistant Cement.
DGKC is one of the market leaders in cement industry, with a market share of 10.5%, second only to Lucky Cement. It is one of the most cost efficient companies in the industry.
In the half year ended December 2006, the sales of the company were increased upto 12%. The exports of the company were declined, but the expansion in capacity with the commencement of the Chakwal plant, may lead to more exports, as the company would be able to cater to the needs both local and foreign demand.
DG Khan Cement situated in the heart of the country with an expanded capacity of 4.2mtpa, substantial investment in MCB and Nishat Mills, improving fuel efficiency, seems all set to benefit from the economic growth of Pakistan. The company holds a strong position in the northern region, which caters to 80% of the total demand. This is evident from the fact that despite a decline in the capacity from 10% to 7% due to early expansion by other players, DGKC managed to maintain its market share of 11%.
The company has improved its asset management in terms of inventory turnover, so that now, it enjoys a position better than that of the average industry. In HY07, a sharp upturn was registered. The DSO for the company hovers around 4, compared to the much higher industry average of about 11 days. This leads to DGKC's operating cycle being much shorter than competitors.
The total assets turnover and sales to equity ratios have registered a decline over the last few years. This was largely due to the expansions underway which increased the total assets and equity of the company. This led to the decline in the ratios despite increases in sales value. In HY07, reduction in sales value was occurred due to the price war with other companies.
The capacity utilisation stood at 111% in HY07 and 110.7% in HY06, therefore, the below average TATO may not be reflective of inefficiencies in productions. The recent completion of the Chakwal expansion plant would bring about a change in this ratio as DGKC increases its sales volume to cater to the growing demand in the country. The plant was expected to start commercial production in June 2007.
DGKC has been enjoying increasing gross profit margins in recent years except in HY07. The net profit margin, on the other hand has been going downhill since FY05. In FY06, profit margin fell despite higher sales prices and a 51% increase in net sales.
A 48% hike in financial expenses was also an important factor that year. In the first half of FY07, a supply glut triggered price war, led to an erosion of the gross as well as net profit margins. This decrease in profit margins in HY07 occurred despite a 13% increase in sales compared to the same period last year. The profit margins have remained higher than industry averages throughout the period under analysis. Cost efficiencies due to fuel-efficient plants and economies of scale are the major reasons for this trend. The recent expansion using state-of-the-art EU technology will lead to more cost efficiency.
The ROA and ROE of the company have followed a trend similar to the profit margin and remained below that of competitors' averages except for the ROA in HY07. This situation may improve with the commencement of operations in the newly expanded lines and plants when they will start generating returns. Other than being cost-efficient, DGKC has an advantage due to its equity investments, which act as a buffer in times of low prices. The companies in the portfolio are stable, safe and profitable, and dividend income is subsequently expected to increase in the coming years.
The liquidity position of the DGKC has been strengthening since FY05, remaining above the industry average at the same time. Growth in equity investments was the major contributing factor leading to the improvement in liquidity over the last few years. This increase in investments has yielded results in the form of higher dividend income, which have accentuated the profits.
The debt to asset ratio has shown marked improvement over the last five years decreasing from 59.7% in FY02 to 41% in HY07. This has also brought it below the industry average. The long-term debt to equity for DGKC has been declining over the last few years in contrast to the increasing industry averages. This has been a result of retention of profits as well as issuance of new shares. The ratio has declined in the face of increasing long-term liabilities. The TIE has also shown good performance over the years. In FY06, the ratio fell despite a 48% increase in financial charges.
The book value ratio of DGKC has been on a positive trend although it saw a decline in the HY07. The DPS stayed at 1.5, which is a slight improvement over the previous years. The increasing trend of EPS was broken in the HY07, as it fell to 3.4 from 5.46 during the same period last year. This can be attributed to the lower profits due to lower sales prices as well as an increase in the number of shares issued.
Overall the company has performed well during the last few years. Its strong marketing enabled it to maintain its market share at 11% in the face of capacity addition by rivals. With the commissioning of its plant at Chakwal, DGKC will be able to take advantage of the increasing demand in the industry, increasing its sales volume as well as profits.
Furthermore, DGKC is considered to be the best beneficiary of exports to India due to its location close to the Wagah border. Hence with the newly installed capacity, the company will be able to benefit from greater exports. Besides this, DGKC has also decided to set up its green field project in the south. This will ensure proximity to the sea, reducing transport cost and expediting exports. Hence DGKC has potential to do well in the future.
Budget 2008 and its impact on the sector. The government announced a PSDP of Rs 520bn this year ensuring a growth in cement demand as infrastructure constructions increase. Besides this, healthy GDP growth rate of around 7% this year, will lead to an increase in local demand for cement. However, the budget did not discuss the opening of the land route for cement exports to India, which may be a setback as DGKC is poised to be the main beneficiary of such a decision because of its unique location.

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INCOME STATEMENT

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(Rs in '000)                     FY'03        FY'04        FY'05        FY'06        HY'07

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Sales                        2,992,006    3,882,756    5,279,560    7,955,665    3,247,507

Cost of Sales                2,314,330    2,497,262    3,330,769    3,992,822    2,059,328

Gross Profit                   677,676    1,385,494    1,948,791    3,962,843    1,188,179

Operating Expenses              78,645      168,940      231,171      348,155      157,230

Other Operating Income         185,204      128,462      707,692      294,114      248,466

Finance Cost                   410,014      224,601      304,041      450,696      250,624

Taxation                      -128,082      325,922      439,193    1,030,078      163,000

Profit for the Year            483,592      794,493    1,682,078    2,418,455      854,556

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BALANCE SHEET

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(Rs in '000)                     FY'03        FY'04        FY'05        FY'06        HY'07

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Total Non Current Assets     7,459,588    8,833,476   13,819,736   24,394,481   27,537,712

Current Assets:              2,051,813    2,881,143    4,196,769    9,909,895   11,740,693

Total Assets                 9,511,401   11,714,619   18,016,505   34,304,376   39,278,405

Paid-Up Share Capital        2,029,816    1,676,306    1,843,937    1,843,937    2,535,412

Reserves                     3,051,680    4,389,088    7,196,568   15,085,354   19,504,100

Total Equity                 7,114,911    7,993,361   11,161,935   21,112,137   25,589,415

Non-Current Liabilities        3057914      3020575      5642649      9020740   11,034,398

Current Liabilities            1517392      2628435      3055858      6015436    5,190,004

Total Liabilities              4575306      5397564      8698507     15036176   16,224,402

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ASSET MANAGEMENT                 FY'03        FY'04        FY'05        FY'06        HY'07

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ITO (Days)                      102.85       105.33        77.47        48.07        78.22

Days Sales Outstanding            1.83         4.88         5.20         3.36         4.34

Operating Cycle                 104.68       110.21        82.66        51.43        82.56

Sales/Equity                      0.42         0.49         0.47         0.38         0.13

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DEBT MANAGEMENT                  FY'03        FY'04        FY'05        FY'06        HY'07

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Debt To Asset                    47.36        46.08        48.28        43.83        38.80

Debt /Equity                      0.64         0.68         0.78         0.71         0.63

Times Interest Earned             1.91         5.99         7.98         8.67         5.10

Long term debt to equity         42.98        37.79        50.55        42.73        43.12

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PROFITABILITY                    FY'03        FY'04        FY'05        FY'06        HY'07

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Gross Profit Margin %            22.65        35.68        36.91        49.81        36.59

Profit Margin on Sales %         16.16        20.46        31.86        30.40        26.31

Return on Assets %                5.01         6.78         9.34         7.05         2.18

Return on Equity %               10.22        12.58        18.05        12.55         3.34

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LIQUIDITY                        FY'03        FY'04        FY'05        FY'06        HY'07

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Current Ratio:                    1.34         1.21         1.37         1.65         2.26

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PER SHARE                        FY'03        FY'04        FY'05        FY'06        HY'07

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Earnings Per Share                2.88         4.74         9.12        13.12         3.40

Dividend Per Share                1.00         1.00         1.50         1.50

Price Earning ratio               8.18         9.80         7.42         6.61        25.17

Book Value                       42.44        47.68        60.53       114.50       100.93

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INCOME STATEMENT (Rs in '000)             DEC'05          DEC'06

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Sales                                  3,686,556       3,247,507

Cost of Sales                          1,864,927       2,059,328

Gross Profit                           1,821,629       1,188,179

Administrative expenses                   38,288          50,209

Selling and dist expenses                 14,565          24,723

Other operating expenses                  92,038          82,298

Other operating income                   132,104         248,466

Finance costs                            212,360         250,624

Taxation                                 464,000         163,000

Profit for the period                  1,132,482         854,556

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KEY RATIOS                                DEC'05          DEC'06

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Gross Profit Margin %                      49.4%          36.59%

Profit Margin on Sales %                   30.7%          26.31%

Earnings Per Share                          5.46             3.4

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