Cement: PAKISTAN CEMENT COMPANY LIMITED - Analysis of Financial Statements Financial Year 2004 - third quarter 2007
The first foreign investment in the cement industry of Pakistan was from Orascom Construction Industries (OCI) when it acquired the Chakwal Cement Company in March 2005. Now it was known as Pakistan Cement Company (PCC).
Pakistan Cement Company Limited is the country's fifth largest cement manufacturer with a manufacturing capacity of 2.11m tons of cement per annum, which is 5.9% of the total cement manufacturing capacity of the country. Its plant commenced commercial operations in December 2006 with an annual cement production capacity of 2.5m tons.
The plant is located at Kalar Kahar, District Chakwal in Punjab, which is rich in lime stone reserves. The quality of limestone in this area is considered to be the best in the region. In addition to Ordinary Portland Cement (OPC) the plant can also produce Sulphate Resistant Cement (SRC). PCC manufactures cement under the brand name of PAKCEM.
PAKCEM is the first cement in Pakistan to comply with European Standards (EN 197) and also far exceeding the requirements of Pakistani Standard (PS 232). The company has also one of those seven companies who obtained certification from Board of Indian Standards (BIS) for cement export to India.
Being the stage of infancy, PCC has to undergo huge losses in the initial years under discussion. PCC has not been able to perform well so far. However, during 16 months of operation, the company got the status of being the country's second largest cement exporter, exporting 276.9k tons of cement in 5mths'08 witnessing some progress in the overall performance. It is expected that the company will soon move towards the stability.
In FY06, the company achieved many technical milestones. The company's kiln started operation in July. In cooperation with FLSmidth, PCC upgraded its capacity to 2.4mntpa. Moreover, it has also finalized the contract for its coal mill project that is expected to be operational soon. Currently there are 18 cement producers in Pakistan with 28 plants. PCC has a very marginal market share of 4%. Constant innovation, expansion and investment can lift up the share for PCC in future.
The company is listed on all the three stock exchanges. Major shareholders of the company include Pakistan Cement Holding Limited and Camden Holding PTE Limited currently own 44% and 25% shares respectively. Orascom Construction Industries is the parent company of the Pakistan Cement Holding and Camden Cement Holding.
Recently, Lafarge S.A., a world leader in cement, aggregates, concrete and gypsum, operating in over 70 countries, acquired entire cement operations of the Orascom Construction Industries Cement Group. The group includes all aggregates, ready-mix concrete and cement bags manufacturing operations. It owns and operates cement plants in Egypt, Algeria, Iraq, Pakistan, UAE, Turkey and Spain, which have a combined annual gross production capacity approaching 35m tons. New investments in Nigeria, Saudi Arabia, Syria, DPRK and South Africa will increase the annual gross production capacity to 45m tons by 2010.
Under the terms of agreement, OCI will receive a total payment of euro 8.8b (US $12.9b) and Lafarge will assume euro 1.4b (US $2.0b) of Orascom's debt. The transaction is subject to the approval of the shareholders and is expected to complete by the end of March 2008. Moreover, through the acquisition, Lafarge got access in Pakistan's emerging cement market via 69% stake in Pakistan Cement.
RECENT RESULTS: During the first half of FY07, cement industry dispatched 12.8m tons of cement, which was 33% higher than the 9.6m tons for the same period last year. Domestic demands registered a growth of 21% while exports sharply rose by 172% as compared to the same period last year. On the other hand, capacity utilization level declined as the industry capacity has increased from 26mntpa in June 06 to 32mntpa in June 07. As a result, industry utilization levels have dropped to 82% with a market price level touching as low as Rs 4000/ton during June 07.
The company declared Rs 788m loss after tax (LPS: Re 0.69) in 9mths'07 compared to loss after tax of Rs 70m (LPS: Re 0.06) in the corresponding period last year, depicting a significant decline due to low retention prices and high financial charges.
As company started its commercial production on August 28 2006, last comparable period ie 9mths'06 showed only one month of operations. However, during the period under review, sales volume figures are very encouraging and local sales volume stood at 1.29m tons while cement exports increased significantly to 0.28m tons in 9mths'07.
Since the start of operations, Pakistan Cement Company Limited is actively finalizing the ancillary facilities development and infrastructure projects to facilitate smooth operations. Work on the coal conversion project is at its final stages, which after operation will bring substantial savings in production cost as compared to the furnace oil.
The company has shown a very weak liquidity trend due to its infancy and only 1-1/2 years of operation. There is an acute dearth of liquid assets such as cash, bank balances and other current assets which reflected in the company's less than 0.5 current ratio.
FY06 has witnessed a sharp downturn in the current ratio, mainly on account of very high trade payables and short term borrowing. Once the company starts its operations in a sustainable manner, only then it will be able to come out of this impasse. Presently, the company is facing worse liquidity position as it is well below the industry average trend. Q3'07 CR is slightly above 1 showing that the company has started to take serious steps towards improving its liquidity position.
Pakistan Cement has no history of sales as such. FY06 started showing some results with some sales and that too was of nominal amount. In real sense, PCC has not demonstrated asset management ability as such as it started its commercial production only 1-1/2 years ago. Sales/Equity ratio has risen by a negligible amount in FY06 but remained well below the industry average. It has shown a sharp increase in Q3'07 mainly on the account of numerator effect of higher sales. TATO and ITO have also shown improvement in the 3rd quarter of FY07.
The company has now started the commercial production and likely to show some positive results in the coming years. The company can use better marketing strategies to develop its reputation in the market. In this regard, its brand PAKCEM can prove to be a competitive edge if it capitalizes on it prudently.
On March'05 there was a reversal of 767 million being waiver of interest on Sojitz loan as per revised agreement between Pak Cement and Pakistan Cement Holding Limited which reflected positive impact on the earnings of the company which otherwise would have been negative.
Major financing for PCC comes through long-term debt and that has subsequently risen due to development and infrastructure projects. Furthermore, the debt paying ability has improved slightly as the company started its cement production. Sales spurred, although at a lower rate of growth. A slight deviation from this trend can be witnesses in the Q3'07 but this cannot be sufficient to say that the company has decided to lower its reliance on debt financing unless we have the year end figures.
As a nascent company, it has witnessed negative growth in the initial years, as zero sales and zero inventories signify zero production for the company. In FY06, when the PCC started its production and with its commencement, the company showed negative profit margins that are way too lower than the industry trends. ROA and ROE are positive in FY05 as a result of waiver of interest and penal charges. After that ROA and ROE have posted a negative growth.
Pakistan Cement was under construction phase during the year FY'06 and started its commercial production in Dec'06, therefore no dividends were declared during the year. As for the previous years, the company doesn't have a performance history because of being in the inception stage. EPS of the company is very low and worse than the industry. It has been negative in FY06 owing to huge losses due to low sales. The positive EPS (Rs 1.09) in FY05 can be attributed to the waiver of interest and penal charges on long term financing expensed during FY04 otherwise the EPS would have been negative by Rs 0.27. Similarly price-earning ratio has also been negative till FY '07 signifying the poor performance and lack of investors' confidence in company's shares. In Q3 '07 however, one can see an overall better picture as both EPS and p/e ratios have been positive showing that perhaps the company has improved its performance and is trying to win the investors confidence.
At the current price of Rs 12.45 per share (as on 19th Dec, 2007), PCCL seems undervalued, trading at a low P/BV multiple of 1.20 (based on book value of Rs 10.36 as on Sep'07).
FUTURE OUTLOOK:
The future outlook of the company seems positive. In 3Q'07, PCCL has successfully commissioned its local coal firing system that has fulfilled the partial requirements of fuel substitution while the work on imported coal firing is in final stage after which company can substitute 100% of its fuel requirement with coal, resulting in cost saving.
A lot of opportunities exist for Pakistan Cement. Having a sizeable production base will be a favorable point in times of lower retention prices and while taking advantage of the higher export prices. Through its location in Punjab, PCC can tap the Indian and Afghanistan markets. Its linkage with Lafarge may lead to its better perception in the international market and hence a competitive advantage.
In future, PCCL is likely to get benefit in cement exports to Indian and other regional markets because of the presence of well-reputed brand name of Lafarge in these markets.
The impact of Budget 2007-08 will be positive for the cement sector. GoP has allocated Rs 520 billion in PSDP, which is 32% higher than the preceding year. Out of the total PSDP allocation 52% of PSDP allocated for Infrastructure Development Program against 30% allocation last year.
Thus, the cement demand will further "cement its place". Higher PSDP bodes well for the cement demand, particularly due to the infrastructure development component that requires higher quantities of cement. GoP has ambitious plans regarding the public sector development that includes highways, building of houses and canals besides building of new dams like Bhasha Dam for which Rs 500 million has been allocated.
This all will result in better-utilized capacity by the Cement industry along with an expected increase in demand from 11.3mntpa to 13.7mntpa. On the other hand Central Excise Duty (CED) has not been reduced as was expected. The Cement manufacturers have therefore, indicated their intentions to pass on much of the costs to the end users.
Furthermore, the exemption of duty on bitumen suggests that the GoP no longer interested in cemented roads, which might lead to a nominal decrease in demand. All in all, the industry is going to fare reasonably well in the near future in consequent of the growing avenues, which will boost the demand for cement.
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PAKISTAN CEMENT-KEY FINANCIAL DATA
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Income Statement (Rs) FY'04 FY'05 FY'06 Q3 '07
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Total Revenue 0 0 88,585,535 2,947,630,630
Cost of Goods Sold 0 0 230,399,966 3,369,327,575
Selling, General & 15,368,509 50,888,015 150,781,932 247,396,512
Administrative Expenses
Other Expenses 185,000 541,700 2,733,750 30,779,689
Operating Loss (EBIT) -15,553,509 -50,879,700 -295,330,113 -699,873,146
Financial Charges 208,328,789 6,505,164 5,134,126 531,754,332
Other Operating Income - 550,015 1,634,361 27,391,460
Net Loss Before Taxes -288,529,946 638,800,619 -301,294,934 -1,204,236,018
Net Loss After Taxes -288,529,946 615,300,619 -38,223,961 -788,384,589
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Balance Sheet (Rs) FY'04 FY'05 FY'06 Q3 '07
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Stores & Spares 0 0 273,440,674 743,895,144
Stock in Trade 0 0 158,358,236 393,301,791
Cash & Bank Balances 338,504 933,119 41,909,797 1,156,861,256
Total Current Assets 142,062,877 368,226,372 774,278,244 2,874,324,587
Total Non Current Assets 7,596,832,518 8,447,188,433 17,396,049,540 18,687,141,674
Total Assets 7,738,895,395 8,815,414,805 18,170,327,784 21,561,466,261
Total Current Liabilities 2,054,320,462 1,472,580,255 3,687,719,177 2,789,550,181
Total Non Current Liabilities 885,288,858 784,432,616 8,018,308,565 7,017,868,241
Total Liabilities 2,939,609,320 2,257,012,871 11,706,027,742 9,807,418,422
Paid Up Capital 5,624,563,630 5,624,563,630 6,768,378,870 11,345,149,360
Total Equity 4,799,286,075 5,414,586,694 6,464,300,042 11,754,047,839
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LIQUIDITY RATIO FY'04 FY'05 FY'06 Q3 '07
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Current Ratio 0.07 0.25 0.21 1.03
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ASSET MANAGEMENT FY'04 FY'05 FY'06 Q3 '07
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Inventory Turnover(Days) - - 1754.77 104.17
Total Asset turnover - - 0.0049 0.1367
Sales/Equity 0.00 0.00 0.0137 0.2508
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DEBT MANAGEMENT FY'04 FY'05 FY'06 Q3 '07
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Debt to Asset(%) 37.98 25.60 64.42 45.49
Debt/Equity (Times) 0.61 0.42 1.81 0.83
Times Interest Earned (Times) -0.07 -7.82 -57.52 -1.32
Long Term Debt to Equity(%) 18.45 14.49 124.04 59.71
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PROFITABILITY (%) FY'04 FY'05 FY'06 Q3 '07
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Gross Profit Margin 0.00 0.00 -160.09 -14.31
Net Profit Margin 0.00 0.00 -43.15 -26.75
Return on Asset -3.73 6.98 -0.21 -3.66
Return on Common Equity -6.01 11.36 -0.59 -6.71
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PER SHARE FY'04 FY'05 FY'06 Q3 '07
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Earning per share -0.51 1.03 -0.06 0.91
Price-Earnings ratio -16.24 7.29 -173.67 13.20
Dividend per share 0.00 0.00 0.00 0.00
Book value 8.53 9.63 9.55 10.36
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COURTESY: Economics and Finance Department, Institute of Business Administration, Karachi, prepared this analytical report for Business Recorder.
DISCLAIMER: No reliance should be placed on the [above information] by any one for making any financial, investment and business decision. The [above information] is general in nature and has not been prepared for any specific decision making process. [The newspaper] has not independently verified all of the [above information] and has relied on sources that have been deemed reliable in the past. Accordingly, the newspaper or any its staff or sources of information do not bear any liability or responsibility of any consequences for decisions or actions based on the [above information].
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