Cement:- PAKISTAN CEMENT COMPANY LIMITED - Analysis of Financial Statements Financial Year 2004 - Q 2001 2008
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 is known as Pakistan Cement Company Limited (PCCL).
Pakistan Cement is the country's fifth largest cement manufacturer with a manufacturing capacity of 2.11 million tons per annum, which is country's 5.9% of the total cement manufacturing capacity. It commenced commercial operations in December 2006 with an annual production of 2.5 million tons.
The plant is located at Kalar Kahar, District Chakwal in Punjab, an area rich in lime stone reserves. The quality of the 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 the seven companies who obtained certification from Board of Indian Standards (BIS) for the export of cement to India.
Being at the stage of infancy, PCC has undergone huge losses in the initial years under review. PCC has not been able to fare well so far. However, during 16 months of operation, the company got the status of country's second largest cement exporter, exported 276.9k tons of cement in 5mths'08 witnessing some uplift in the overall performance and it is hoped 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 2.4 million tpa. Moreover, it has also finalized the contract for its Coal Mill Project that 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 uplift the share of PCC in future.
Pakistan Cement is listed on all the three stock exchanges. Its major shareholders include Pakistan Cement Holding Limited and Camden Holding PTE Limited respectively own 44% and 25% stakes in PCCL. 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 cement 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.
Moreover, through the acquisition, Lafarge got access in Pakistan's emerging cement market via 69% stakes in Pakistan Cement.
RECENT RESULTS, Q1'08: During Q1'08, industry cement dispatches of 7.949 million tons were 25% higher than 6.344 million tons for the same period last year. Domestic dispatches registered a growth of 7% while exports up by 129% compared with the same period last year.
The sales increased by 95.9%, while the cost of sales increased by 46%. The company moved out of the red in terms of gross profit, however, net profit remained in the red, though lower than the same period last year.
PCCL's finance cost increased by more than double and its operating income shrunk drastically. The company earned gross profit of Rs 13.182 million on account of 96% higher sales and incurred a net loss after tax of Rs 271.443 million during the quarter under review, which is around 39% lower than the same period last year.
Primarily the loss was due to low prices as experienced by the cement industry as a whole and higher operating costs due to non-availability of gas coupled with higher prices of coal in the international market and increase in power tariff by the Wapda.
Overall, the management expects a positive outlook for the future periods by taking cost reduction initiatives with the support of its parent company (Lafarge).
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Recent Results (Q1'08) 31-Mar-08 31-Mar-07 (% chng)
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Sales - net 1,460,778,546 745,657,556 95.90%
Cost of sales -1,447,595,612 -990,840,512 46.10%
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GROSS PROFIT/(LOSS) 13,182,934 -245,182,956 -105.38%
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Selling, general and administrative expenses -97,814,659 -61,312,405 59.53%
Finance cost -307,081,395 -150,275,644 104.35%
Other operating income 1,596,212 23,959,091 -93.34%
Fair value adjustment of deferred
liabilities for - -10,234,385
custom duties and sales tax
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LOSS BEFORE TAXATION -390,116,908 -443,046,300 -11.95%
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TAXATION - Deferred 118,673,039
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LOSS AFTER TAXATION -271,443,869 -443,046,300 -38.73%
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Loss per share - Basic -0.24 -0.65
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FINANCIAL PERFORMANCE FY04-FY07: During the first half of FY07, cement industry dispatched 12.8 million tons of cement, which was 33% higher than the 9.6 million 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 2007.
The company incurred loss after tax of Rs 521 million in FY07 as against Rs 38 million in last year, depicting a significant decline due to low retention prices and high financial charges. Primarily the loss can be attributed to low retention price as experienced by the cement industry as a whole and higher operating costs due to use of furnace oil during the gas supply cut-off in the winter of 06/07.
As the company started commercial production on August 28, 2006, FY07 was the first full year of its operations after declaring the commercial production. However, during the period under review, sales volume figures are very encouraging and local sales volume stood at 5.1 million tons whereas the cement exports increased significantly to 1.1 million tons in FY07.
As a nascent company, it has witnessed negative growth in its initial years, as zero sales and zero inventories signify zero production for the company. In FY06, PCC started 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 the interest and penal charges. After that ROA and ROE have posted a negative growth continuing till FY07.
Since start of operations, Pakistan Cement is actively finalizing the ancillary facilities development and infrastructural projects to facilitate smooth operations. Work on the coal conversion project is commissioned, which after operation will bring substantial savings in the production cost compared to the furnace oil. PAKCEM has received a remarkable feedback from the market with ever growing demand from its customers.
The company has witnessed a very weak liquidity trend in the past 3 years due to its infancy and only 1-1/2 years of operation. There was 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 prior to FY07.
FY06 witnessed a sharp downturn in the current ratio mainly on account of high trade payables and short-term borrowing. However, its liquidity position improved considerably in FY07 with current ratio close to 1, mainly due to tremendous increase in current assets (in particular cash, bank balances and inventory) compared to fall in current liabilities. This shows that the company has started to take serious steps towards improving its liquidity position.
Presently, the liquidity position is well below the industry average trend. Once the company starts its operations in a sustainable manner, only then it will be able to come out of this impasse.
Pakistan Cement had 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 considerable amount in FY07 but remained well below the industry average. It has shown a sharp spike in FY07 mainly on account of numerator effect of higher sales. Consequently, TATO and ITO have also shown improvement in FY07.
The company now started 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 Rs 767 million being waiver of interest on Sojitz loan as per revised agreement between Pak Cement and Pakistan Cement Holding Limited which reflected a positive impact on its earnings which otherwise would have been negative.
Major financing for PCC comes through long-term debt that has subsequently risen in consequent of development and infrastructural projects. Further, the debt paying ability improved slightly as the company started cement production. Sales spurred, although at a lower rate of growth. The company plans a reduction in financial costs by replacement of interim funding facilities through injection of funds by way of rights issue and direct equity.
Pakistan Cement was under construction phase during FY06 and started its commercial production in Dec'06, it has not yet break even, therefore no dividends have been declared up-till now. As for the previous years, the company doesn't have a performance history because of being in the inception stage.
EPS is very low and worse than the industry. It has been negative in FY07 owing to huge losses. 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 FY07 signifying the poor performance and lack of investors' confidence in company's shares. Also as the price chart indicates the company's share price outperformed the 100-index till first quarter of FY05 but later it showed an erratic trend.
The company is expected to get profitability in the coming years by reducing the production costs due to availability of multiple fuel system and reduction in financial costs by replacement of interim funding facilities through injection of funds by way of rights issue and direct equity. Only then it can gain investors' confidence.
FUTURE OUTLOOK: In FY07, 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 which is expected to have positive impact on the company's profitability in the coming years.
A lot of opportunities exist for Pakistan Cement. The company requires prudence, efficiency in management and integrity in business performance, which would lead to a stable performance for the company. It is only when the company will be able to realize its full potential amidst cutthroat competition in the industry.
With an excess demand of 8-19 million tons in India, the cement industry should recognize it as a viable export market for the local producers. According to the Federal Minister for Commerce, the talks are underway with India, and the country is set to export 0.1 million tons of cement to India on a monthly basis. However, the Indian industry hopes to meet the excess demand, and bridge the demand/supply gap in the country by the end of this year. For this purpose, capacity expansion is taking place in India.
With its massive construction activities, Dubai also carries enormous potential as an export market for the local manufacturers. An increase in the cement prices had been registered in the region due to unprecedented rise in construction activities that has accompanied the overall economic boom in the UAE and the region. Recently, the UAE government has removed 5% customs duty on cement to support the rapidly growing construction activities in Dubai. This will further increase the demand for cement in the region, placing local producers in an advantageous position.
In future, PCCL is likely to get benefit in cement exports to Indian and other regional markets because of presence of well-reputed brand name of Lafarge in these markets.
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PAKISTAN CEMENT-KEY FINANCIAL DATA
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Income Statement (Rs) FY'04 FY'05 FY'06 FY '07
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Total Revenue 0 0 88,585,535 4,191,594,084
Cost of Goods Sold 0 0 230,399,966 4,690,913,001
Selling, General & Administrative Expenses 15,368,509 50,888,015 150,781,932 -355,790,406
Other Expenses 185,000 541,700 2,733,750 -3,187,200
Operating Loss (EBIT) -15,553,509 -50,879,700 -295,330,113 -140,341,311
Financial Charges 208,328,789 6,505,164 5,134,126 -795,984,503
Other Operating Income - 550,015 1,634,361 41,310,783
Net Loss Before Taxes -288,529,946 638,800,619 -301,294,934 -797,783,886
Net Loss After Taxes -288,529,946 615,300,619 -38,223,961 -521,096,900
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Balance Sheet (Rs) FY'04 FY'05 FY'06 FY '07
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Stores & Spares 0 0 273,440,674 1,249,318,008
Stock in Trade 0 0 158,358,236 498,784,914
Cash & Bank Balances 338,504 933,119 41,909,797 678,424,680
Total Current Assets 142,062,877 368,226,372 774,278,244 2,831,769,702
Total Non Current Assets 7,596,832,518 8,447,188,433 17,396,049,540 18,646,920,360
Total Assets 7,738,895,395 8,815,414,805 18,170,327,784 21,478,690,062
Total Current Liabilities 2,054,320,462 1,472,580,255 3,687,719,177 3,122,289,185
Total Non Current Liabilities 885,288,858 784,432,616 8,018,308,565 7,855,445,349
Total Liabilities 2,939,609,320 2,257,012,871 11,706,027,742 10,977,734,534
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 10,500,955,528
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LIQUIDITY RATIO FY'04 FY'05 FY'06 FY '07
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Current Ratio 0.07 0.25 0.21 0.91
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ASSET MANAGEMENT FY'04 FY'05 FY'06 FY '07
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Inventory Turnover(Days) - - 1754.77 112.60
Total Asset turnover - - 0.0049 0.1952
Sales/Equity 0.00 0.00 0.0137 0.3992
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DEBT MANAGEMENT FY'04 FY'05 FY'06 FY '07
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Debt to Asset(%) 37.98 25.60 64.42 51.11
Debt/Equity (Times) 0.61 0.42 1.81 1.05
Times Interest Earned (Times) -0.07 -7.82 -57.52 0.18
Long Term Debt to Equity(%) 18.45 14.49 124.04 74.81
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PROFITABILITY (%) FY'04 FY'05 FY'06 FY '07
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Gross Profit Margin 0.00 0.00 -160.09 -11.91
Net Profit Margin 0.00 0.00 -43.15 -12.43
Return on Asset -3.73 6.98 -0.21 -2.43
Return on Common Equity -6.01 11.36 -0.59 -4.96
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PER SHARE FY'04 FY'05 FY'06 FY '07
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Earning per share -0.51 1.03 -0.06 -0.59
Price-Earnings ratio -16.24 7.29 -173.67 -20.21
Dividend per share 0.00 0.00 0.00 0.00
Book value 8.53 9.63 9.55 9.26
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