Cement:- BESTWAY CEMENT COMPANY LIMITED - Analysis of Financial Statements Financial Year 2003 - H 2001 2008

Bestway Cement Company Limited (BWCL) was set-up first cement plant at Hattar, Haripur in NWFP. This was an initial investment of US$ 120.0 million. The contract for supply of main plant was signed with Mitsubishi Corporation of Japan in June 1995. The major equipment, cement mill and instruments were supplied from USA and Germany.
The plant is environment-friendly with emission standards that far-exceed the prevailing acceptable standards. The plant's emission levels are less than 50 microns whereas the government's approved standards are 200 microns and international standards are 100 microns per cubic meter of air at NTP. Bestway Cement is driven by high standards of efficiency and quality. Strict quality control procedures are applied to ensure that these aims are achieved. The best quality control equipment in Pakistan is in use at the plant. Apart from the usual equipment, Bestway's laboratories are equipped with state-of-the-art X-ray fluorescent analyzer and diffractometer technology.
Prior to 2001, the company's plant at Hattar was using furnace oil as fuel for firing the kiln. In anticipation of further hike in petroleum prices, the plant was converted on natural gas for cost efficient production. In 2003, the plant was converted from gas to coal. Now, the Bestway Cement Hattar has the operational flexibility to utilize all the three major fuels. The plant's initial capacity was 0.99 million tons per annum. As a result of management's insight on growing domestic demand and untapped export potential, Hattar's capacity was enhanced to 1.17 million tons per annum in 2002. In 2005, the plant's capacity was further increased to 1.20 million tons per annum of clinker. Bestway Cement was listed on Karachi Stock Exchange in February 2001.
BESTWAY CEMENT CHAKWAL-I
In February 2004, Bestway Group decided to expand its operations through setting up a 1.8 million tons per annum cement plant near Village Tatral of District Chakwal in Punjab in the wake of resurgent demand of cement in the domestic market. This was the second Greenfield development project at a cost of US$ 140.0 million. The plant was inaugurated in 2006.
MUSTEHKAM CEMENT
To augment its presence in the cement industry, Bestway bid for 85.29% equity of Mustehkam Cement Limited following an offer by the Privatisation Commission. The company's bid of approximately US$ 70.0 million was accepted in September 2005. Mustehkam's plant is in close vicinity of existing operations in Hattar, District Haripur NWFP. Though the production of the enterprise had been discontinued in 1999, it started production in Dec'05 with a total capacity of 0.63 million tons per annum. Later, the capacity was expanded to 0.9 million tons per annum.
BESTWAY CEMENT, CHAKWAL-II
In July 2006, a second 1.8 million tons capacity plant was set-up adjacent to Chakwal, which is so far the third Greenfield project by the Bestway.
LARGEST EXPORTER TO AFGHANISTAN
The company has been able to maintain its presence due to superior quality of cement, effective marketing, and customer focus and staff dedication. Presently, Bestway enjoys a market share of 5%. Successful introduction of its brand in Afghanistan has captured 18% market in Afghanistan.
RESULTS UPDATE HY08
The first half of FY07 was characterized by a declining trend in profitability, even as a healthy growth was witnessed in cement dispatches. Cement dispatches grew 26% in HY08, reaching 13.83 million tons during the six months, compared to 11.18% in the same period of FY07. This resulted in a 20.3% growth in sales revenue for the sector. The 9% surge in cement demand and accompanying growth in sales can be attributed largely to an increase in construction activities taking place in the country.
This increase in local demand was augmented by a massive swell in exports by 148% triggered by rising construction activity in Afghanistan and UAE and exports to other regional markets like Iraq, Kuwait and Sri Lanka. At the same time, however, volatile cement retention prices led to an 87.9% decline in profitability as average retention prices declined by 13.2% during the six-month period. Consequently, gross margins of the sector declined to 12.6% in HY08 as compared to 21.4% in the same period last year because of reduced cement prices. The capacity utilization of the cement industry has also improved during the period, reaching 77% utilization, compared to 74% in HY07.
The developments in overall cement industry are reflected in the operations and financial results of Bestway Cement for HY08, albeit on a smaller magnitude. The cement dispatches of the company grew 11% to reach 1,142,949 tons, with a corresponding increase in sales revenue of 6%. The capacity utilization of the company stood at 75% for the six months, against 77% utilization in the industry. Hence Bestway was not able to fully capitalize the market opportunities during the period, with the result that it was not able to perform up to the average industry standards.
The weakening profitability situation as a result of lower retention prices was further aggravated by rising costs of production. Therefore, the gross margin of Bestway declined from Rs 410 million in HY07 to Rs 171 million in HY08. The gross profit margin thus declined to 6.15% for the six months, while the net loss also increased to Rs 345 million compared to a loss of Rs 101 million for the corresponding period of last year.
Financial charges, however, showed a favourable movement during the period, registering a decline of 5% over the corresponding period last year.
Overall cement dispatches during FY07 registered an increase of 32%, reaching 24.29 million tons at the end off the year, compared to 18.4 million tons during the preceding year. This growth can be traced back to a 24% growth in the domestic market and a 112% growth in exports demand.
FY07 witnessed a decline in profitability of the cement sector for a number of reasons. The most significant of these was a sharp decline in cement prices due to a supply overhang for most of the year. The prices in the South Zone exceeded the prices in the North Zone by a considerable margin, whereas prices in international market exceeded the prices in the domestic market. In addition, the industry was also plagued with rising fuel costs due to surging prices of oil and coal in the international market. As a result, the industry's profits declined significantly, with the combined industry profits falling to Rs 5.3 billion, a 56% decline compared to Rs 12.3 billion in FY06.
Although clinker and cement production for the year remained largely stagnant for the Hattar plant, but the running of Chakwal plant for the whole year has considerably boosted sales for the company. The latter plant had been able to run for only a few days of the last fiscal year. However, the production of clinker and cement during the year under review was restricted due to lower volumes of exports and planned plant shutdowns.
As a result, the sales revenue of the company has increased 24% during FY07, to reach Rs 8,409 million. Despite tough market conditions, Bestway managed to retain its market share of 6% in the north zone during the year, making it one of the largest cement producers in the country. Moreover, the company still remains one of the largest exporters of cement to Afghanistan and achieved an impressive 9.5% share of cement exports of the country.
These factors have taken a toll on the profits of Bestway, as depicted a sharp decline in profit margins in FY07. The growth in sales revenue can be attributed to better selling prices achieved during the year both in the local and export markets. At the same time, the low retentions and high energy costs have driven down the gross profit of the company, which fell 56% during the said period.
In addition, the charges on money borrowed for the acquisition of Mustehkam Cement, increased borrowing for running Chakwal Line-I and the higher cost of borrowing resulted in a 158% rise in financial charges of the company. This further aggravated the profitability position of the company, resulting in a net profit margin of 0.91% compared to 27% in FY06. Profit after taxation declined 96% in FY07 to reach Rs 52 million, compared to Rs 1,226 million in FY06.
The production of clinker and cement witnessed a temporary dip in FY06 due to lower volumes of exports and planned plant shutdowns. Nevertheless, the capacity utilization during the same year stood at 98%, which is amongst the highest in the industry and also well above the industry average of 91%.
Profitability ratios of BWCL showed a rapid upward movement throughout the years under review owing to realization of better cement prices and higher capacity utilization, which consequently boosted the net income of the company. Other income decreased in FY05 due to decline in dividend income from UBL. The company has 39.63 million stake (7.65%) in UBL as the long-term investment. UBL declared cash dividend of Rs 1.50 per share in FY04 compared to Rs 2.25 per share in FY03.
Moreover, BWCL achieved 116% capacity utilization in the same year by producing 1.21 million tons cement as compared to 1.04 million tons (100% capacity utilization) in FY04. It was the highest capacity utilization achieved by any plant in FY05, while the industry's overall capacity utilization stood at 80% in FY05. This may be attributed to the acquisition of 85.3% stakes (10.5m shares) of Mustehkam Cement by giving a bid of Rs 305 per share.
The company borrowed Rs 3.2 billion at Kibor+2% for the acquisition of Mustehkam Cement, which increased the cement manufacturing capacity of the group by 0.49mntpa (1,628tpd) to 3.52mntpa. The increasing trend continued in FY06 owing to better cement retention price and completion of expansion plan at Chakwal, which raised its capacity by more than twice to 3.03mntpa from 1.23mntpa.
However, financial charges soared up in FY06 due to upward trend in the interest rates and borrowing of Rs 3.2 billion by the company for the acquisition of 85.3% stake of Mustehkam Cement. The impact of high financial expenses was mitigated by higher net income coming from dividend income (through acquisition of stakes in UBL).
The current ratio has shown an improvement during FY07; however, the company's liquidity position still remains in the doldrums, lingering below the minimum requirement of 1. Furthermore, the fact that much of the current assets are held up in the form of inventory does not shed good light on the liquidity of the company. On the liabilities side, a large part of the amount comes from the current portion of long term debt.
The liquidity of BWCL has increased only marginally over the years under discussion. The current ratio also remains well below the industry averages signifying the liquidity crunch that the company has to go through. However, constant expansion in the form of new plants as discussed above is a reasonable justification of this liquidity downturn. Owing to the new plant set-up, Bestway has done reasonably well in managing its liquidity position. The recent decline in the current ratio can be attributed to the subsequent pay-off of the long-term loans acquired for Mustehkam Cement and Chakwal Plant-II. Consequently, the current liabilities soared up in the same year resulting into a decline in current ratio.
FY07 ended with a further deterioration of the company's debt situation, as the debt to assets and equity ratios continued to rise due to an increase in long term loans taken by the company. The increase in loans, compounded with an increase in the cost of borrowing has had an adverse affect on the financial position of the company, as the TIE ratio dropped to a dangerous level. The 158% rise in financial charges and a decline in profitability of the company resulted in a TIE of below 1.
BWCL is a highly leveraged company in the industry as evident from its enormously high long-term debt to equity and debt to asset figures. Considerable part of financing comes through long-term debt mainly from banks, modarbas and syndicate financing. Long-term debt to equity jumped up in FY06 with the acquisition of 85.3% stakes in Mustehkam cement, which was totally financed through long-term debt.
Thus, the financial expenses for BWCL are at a higher side, in consequent of constant expansions on loan and set-up of two Greenfield projects at Chakwal. Financing comes mainly through debt as shown by greater than 1 debt-equity ratio trend. As a result interest-paying ability of BWCL has dampened considerably in FY06. On the whole, debt management of the company is not better than the industry and thus BWCL constantly faces the interest rate risk.
Bestway realized capacity utilization of 79% during FY07, which is slightly lower than the 81% utilization of the average industry. This was partly a result of plant shutdowns during the year. In terms of the operating cycle, the asset management of Bestway has slipped slightly, but the total asset turnover and sales/equity have remained stagnant during the period.
Ever increasing efficiency in capacity utilization and capacity enhancement had an inflated effect on BWCL's asset management ratios. Increased capacity resulted in accumulation of inventory (raw material and work-in-progress) and PPE consequently depressing the inventory turnover (days) total assets turnover ratio respectively. Operating cycle has prolonged as a result. The company, however, is efficient in receiving credit payments as indicated by its DSO trend. The prolonged operating cycle of the company can be a future threat to the company even though it is better than the industry averages. Strategic planning to control excess supply can cushion the turnover ratio. Sales/Equity has been erratic and worse than the industry averages. Lately, the ratio has been declining and can be attributed to lower sale price, depressed sales and high reserves.
Dividend policy of the company reflects investor confidence. The company declared 10% cash dividend (Re 1.0 per share) in FY05 same as in FY04. It also announced 10% bonus shares in FY05. DPS has been constant since 3 years irrespective of the profit margins. BV and EPS have also posted a commendable trend, rising throughout the years under discussion. The rising net worth and EPS is a very positive sign for the investors who generally look for sustained growth in EPS and DPS figures. When compared with other industry players, BWCL fared well in terms of its Dividend policy but lagged reasonable behind in EPS. Marketability ratios however are not comparable with the industry averages owing to varying shareholder base for each player.
FUTURE OUTLOOK
The outlook for the cement industry has improved due to the recent developments in the local and regional markets. Firstly, after the prolonged period of depressed cement prices, the prices are now showing a positive trend. During the last three months, cement producers have increased the cement prices five times, within the range of Rs 5-15 per bag, from an average price of Rs 225 per bag in Jan'08. This has resulted in an increase of Rs 1,043 per ton (Rs 52 per bag) at the retention level, which will improve gross margins.
During the first half of FY08, Bestway embarked on a waste heat recovery project, which is aimed at reducing the cost of production by utilizing waste gases from the plant for generating electric power. During the half year ended 31st December 2007, the company entered into an agreement with a Japanese supplier for the supply of equipment for its Chakwal plant. The project expected to be completed during 2nd half of the financial year 2008-09. The utilization of waste gases will also reduce carbon dioxide emission from the plant, thus positively impacting the environment.
Moreover, the upward momentum of sales volumes and dispatches bodes well for the industry, especially with the end of winter season approaching.
With its massive construction activities, Dubai also carries enormous potential as an export market for the local manufacturers. An increase in cement prices has been registered in the region due to unprecedented rise in construction activities that has accompanied the overall economic boom in UAE and in the region. Recently, the UAE government has removed the 5% customs duty on cement to support the rapidly growing construction activities in Dubai. This will further increase the demand of cement in the region, placing local producers in an advantageous position.
Consequently, it is expected that exports from Pakistan will reach 6 million tons by the end of the current year, depicting an impressive growth of 88% over the last year. Hence the ability of a company to exploit the market potential will determine its profitability and future performance.
The increase in excise duty from Rs 750/ton to Rs 900/ton on cement in the budget is bound to increase the prices for the consumer. Increasing fuel and coal prices in turn, are all set to depress the manufacturers margins. However, the government has allocated Rs 550 billion for the PSDP in 2008-09 budget, compared to Rs 520 billion in 2007-08. Under the sectoral distribution of the PSDP, an amount of Rs 165b has been made for infrastructure. This bodes well for the sector in terms of local demand.