Cement:- LUCKY CEMENT COMPANY LIMITED - Analysis of Financial Statements Financial Year 2003 - Financial Year 2008

Lucky Cement is the largest cement manufacturer of Pakistan and also, the current market leader in capacity and sales. It has the capacity to produce 6.55m tpa (tonnes per annum) cement, which is 18.7% of the total cement capacity of the country.
This admirable position of the company is the result of proactive planning and initiative decision-making and the fact that Lucky Cement is the only cement manufacturer, which has the manufacturing facilities in northern and southern region of the country.
Lucky Cement is pursuing an expansion plan to increase its manufacturing capacity by 2.52m tpa (9.07m tpa from current capacity of 6.55m tpa) by adding two new lines of 1.26m tpa, parallel to the existing Karachi plant. One pipeline will be completed by the end of current year, while the demand situation will decide the fate of the other.
The company has made an investment of over US $8 million to develop its infrastructure and logistics and further developing a fleet of cement bulkers to carry loose cement from its Karachi plant to the ports. For loading cement from the bulkers to vessels, Lucky Cement has a dedicated system for discharging cement directly from the bulkers to the vessels; at very fast discharge rates, reducing the vessels idle time in turn making the shipments timely as per the customer requirements. Lucky Cement has also installed Jumbo Packers at its Karachi plant to dispatch cement in one tonne packing requirement.
In regards, the growing concern in the cement industry over raising costs of fuel and power, which constitute almost 68.7% of total cost, Lucky Cement has deployed measures to reduce such costs through converting to cheaper fuels. One of such measures is to convert existing power generators of Pezu plant from furnace oil to gas.
The project is expected to be complete by the year-end. This conversion will bring substantial cost saving, almost 50%, in power generation, which will be visible in next year. Also, another plan is to use technology to recover the heat wasted in the process for generation of electricity without use of any fuel. After installation of these systems, cheap electricity to the extent of 15MW at Karachi plant and 10MW at Pezu plant would likely to be generated by recycling waste heat from the process. Total investment of this project would be US $40 million and it is expected to complete by Jun'09. The company has also recently signed an agreement with the City District Government Karachi for supply of solid municipal waste, which will be processed and used as a replacement fuel for coal consumption at Karachi Plant.
The company has provisioned itself against further hike in interest rates through five interest rate swap agreements. Under the swap arrangements, the company would receive 6 months T-Bills or KIBOR rates and pay fixed rates of mark-up ranging between 7.25% to 9.32%. In addition, the company has also entered in cross currency swaps agreement where the company will pay 6-months LIBOR plus spread (0.85%) and receive 6-months KIBOR.
FY08 was marked by the cement sector as not only the year which saw growth in cement prices, both locally and internationally, helping the companies to secure more profits; but also the year in which they faced massive growth in operation costs, primarily fuel and electricity costs. This led the cement companies of the country to face massive problems in continuing productions and even to obtain profits from sales after the deduction of operation costs. Eventually at the nine months of FY08 many companies were facing losses due to these costs.

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Cement Sector Review (9 mths'08)

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                                PAT (Rs m)              EPS (Rs)

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                          9 mths'08   9 mths'07   9mths'O8  9 mths'07  Chg.(%)

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1 Al-Abbas Cement             (26)      (175)     (0.14)     (0.96)      85.1%

2 Attock Cement               349        613       4.83       8.49      -43.1%

3 Bestway Cement             (298)       (57)     (1.05)     (0.20)    -421.9%

4 Cherat Cement                (9)       156      (0.09)      1.63     -105.7%

5 Dedebhoy Cement             228         38       2.32       0.38      507.4%

6 Dendot Cement              (331)      (400)     (3.49)     (4.22)      17.2%

7 Dewan Cement               (157)        23      (0.44)      0.06     -792.4%

8 OG Khan Cement              487      1,154       1 92       4.55      -57.7%

9 Fauji Cement                156        468       0.23       0.68      -66.6%

10 Fccto Cernent Limited      (46)        21      (1.02)      0.46     -321.2%

11 Flying Cement             (100)       126      (0.57)      0.71     -179.3%

12 Gharibwal Cement          (125)      (323)      (054)     (1.39)      61.4%

13 Javedan Cement             (29)       (92)     (0.51)     (1.65)      68.9%

14 Kohat Cement              (227)       198      (1.94)      1.69     -214.8%

15 Lucky Cement             2,014      1,345       7.65       5.11       49.7%

16 Meple Leaf Cement         (373)        80      (1.00)      0.22     -564.6%

17 Mistehkam Cement          (212)      (208)    (14.11)    (13.67)      -1.8%

18 Pakistan Cement           (271)      (443)     (0.24)     (0.39)      38.7%

19 Pakistan Slag Cement       (18)       (24)     (2.82)     (3.72)      24.3%

20 Pioneer Cement            (163)      (118)     (0.82)     (0.59)     -38.5%

21 Zeal-Pak Cement           (288)      (248)     (1.69)     (1.46)     -15.9%

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                              562      2,133                            -73.6%

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We see here that even in such difficult times for the entire cement sector, Lucky Cement managed to obtain profits, as they anticipated these events and quickly employed counter strategies, like shifting to exports and reducing financial costs, resulting in high profits for the company. Also the energy and fuel crisis has also been spotted by the company in due time and preventive measures are employed with the hope that they will reduce operations and fuel costs in the future.
Financial performance (Jun'03-Jun'08):
Overall, Lucky Cement showed a growth in sales of 35.4%, from Rs12.25bn in FY07 to Rs16.95bn in FY08. This growth was mainly reflected through an increase in exports, coupled with the rise in cement retention prices over the year. Local retention prices showed an increase of Rs133.7 per bag in FY08 from Rs129.7 per bag last year, having a growth of 3.1%. Export retention prices, on the other hand, showed an increase of US $55.7 per tonne (Rs152.6 per bag) in FY08 as against US $47.2 per tonne (Rs133.2 per bag) in FY07.
Although, sales volume of the company grew by 19.7% to 5.56m tonnes as compared to 4.64m tonnes last year, yet domestic sales for the same period declined by 9.2% to 2.89m tonnes as against 3.18m tonnes last year. This occurred due to more focus toward high yield exports, which showed a growth of 83.0% to 2.67m tonnes in FY08 from 1.46m tonnes last year. During FY08, ratio of local sales to export was 52:48 against 69:31 in FY07.
The gross margin showed a declining trend this year of 25.73%, compared to last year of 29.36%, which is primarily due to the rising costs of production, especially in terms of rising fuel prices like coal, which rose from US $80 per ton to US $210 per tonne from FY07 to FY08. Also, the price of furnace oil was increased. Net margin showed a similar decline although finance charges were reduced since last year from Rs836m to Rs127m, representing a decline of 85.3%, as the company entered into cross country swap agreements with the banks. The distribution charges showed a large increase mainly on account of freight charges incurred on export sales.
Long-term assets of the company were raised through purchases in machinery and also by the inclusion of the borrowing costs of around Rs349m, which have been included in operating assets and capital work-in-progress for new expansion projects. Current assets increased mostly through an increase in stocks and spares. This resulted in the large amount of assets owned by the company, causing ROA to decline for the first time in three years. Similarly ROE also showed a decline due to the reserves obtained on the issuance of 15,000,000 GDRs, equivalent to 60,000,000 shares, at Rs110 per share, causing the equity of the company to swell in a large proportion. However, it is quite evident that the real issue being faced the Lucky Cement is to reduce its costs, especially those relating to fuel and electricity consumption. The plans made for this purpose, already discussed, are underway and the results of those will be visible by the end of the year.
The company's performance in terms of recovering cash from debtors has been fairly consistent with its last year performance. Inventory management, on the other hand, has shown a decline in efficiency. This is due to the reason that most of their stock is in transit. This leads to the increase in operating cycle. Hence although the inventory management efficiency has shown a decline it is not altogether the fault of the company as exports take that much time in travelling.
On the other hand, total asset turnover has been on a steady trend reflecting the volumetric growth of sales in line with the growth of assets. Sales over equity have declined, primarily due to the fact that the increase in reserves due to the issuance of GDR has led to a far greater increase in equity as compared to sales.
In terms of liquidity, the company has shown a positive trend in the year. The current assets were raised by sales tax refundable by the company and by the increase in stock in trade, mainly stock in transit. On the other hand, current liabilities were less, but still there were quite a few short-term borrowings done by the company as financing facilities, along with many bills payables. Hence although liquidity is once again on a positive trend, but still its position is weak until the company reduces its bills payables and short-term borrowings.
Lucky Cement has a strong position when it comes to debt management. Since the end of FY06, the company has taken strict measures to keep its debts under control. This futuristic preventive measure has helped the company a lot in these times when interest rates are continuously on the rise. The action to reduce loans and to depend on equity for expansionary purpose finances has been critical in saving the company valuable profits that would have been otherwise lost in the name of finance costs. The swap agreements are another preventive measure the company is employing to save itself further from interest rates.
The results of the preventive measures are visible in the debt to asset ratio and the long-term debt to equity ratio, which show a downward trend since FY06. Total debt to equity has also been on a declining rate. In FY08, although the total debt has risen significantly, critically due to the rise in current liabilities, yet the overall effect has been declining owing to the rise in equity by the issuance of GDRs. Yet the debt to asset ratio signifies that the company has succeeded in lowering its overall debts and strengthening its financial position.
The long term debt has reduced by 20%, but the long-term finances carry floating mark-up rates ranging between 9.41% to 14.55% (2007: 3.95 % to 11.65 %) per annum. To manage these costs, the company is currently engaged in interest rate swap and cross currency swap arrangements. The three interest rate swap agreements with banks are for a notional amount of Rs 1,600 million (2007: 3,600 million), maturing up to March 17, 2009. The outstanding balance of these arrangements is Rs 650 million (2007: 2,100 million) as at the balance sheet date. Under the swap arrangements, the Company would receive 6 months KIBOR rates and pay fixed rates of mark-up ranging between 7.25 percent to 9.32 percent as per the respective arrangements, which will be settled semi-annually. As at the balance sheet date, the net fair value of these interest rate swaps was Rs 22.012 million (2007: 20.486 million) in favour of the company.
The four cross currency swaps against long term finances are for a notional amount of Rs 7,174 million (2007: 3,000 million), maturing up to March 28, 2010. The outstanding balance of these arrangements is Rs 6,901 million (2007: Rs 2,909 million) as at the balance sheet date. Under the swap arrangement the principal payable amount of Rs 6,901 million is swapped with US $ component at Rs 60.69 to 62.84 per US $ making the loan amount to US $112.421 million which will be exchanged at the maturity of the respective swap agreements. Besides foreign currency component, the Company would receive 6 months KIBOR rates and pay 6 months LIBOR + spread ranging between 0.50% to 1.27% as per the respective arrangements, which will be settled semi-annually. As at the balance sheet date, the net fair value of these interest rates and cross currency swaps were Rs 851.994 million (2007: 138.619 million) in favour of the company.
The TIE ratio has been declining for the past four years (ie from FY04 to FY07) but in FY08 the TIE raised significantly, ie from 4.28 to 24.48 times. Although the EBIT for the year was less than that of FY07 (3,077,660 as compared to 3,695,402), but this year the finance costs were reduced drastically through swap agreements, causing the rise in TIE. Still, for future times, the company would have to reduce its operating costs along with its finance costs to maintain the positive stream of TIE.
The earning per share of the company continued positive trend that has been established since FY05. In FY08, due to the rising operating costs, profits were low, but still managed to provide an earning per share of Rs9.84, which is slightly higher than last time Rs9.67. This has also resulted in an increase in the dividend paid, which rose to Rs1.25 in FY08 from Re1.00 in FY07. The book value of Lucky Cement has also risen sharply in the year from Rs35.51 per share to Rs57.69 per share, having a 62.44% rise in the year. This clearly showed the local investor confidence in the company.
Since the past year, the shares of all the companies witnessed a rough time due to uncertain political and economic condition of the country, causing the market price of the shares and the trading in the stock exchanges to plummet. In such times of difficulty, we see that the shares of Lucky Cement have been repaid for their efforts by the investor confidence in them. As we see that even in such difficult times, Lucky Cement shares were among the most traded shares in the market, and its share price, although deteriorated with the market still managed to maintain its volume traded and as a result its prices were declining by a smaller percentage than most of the other companies in the market. Also since September 2008 Lucky Cement prices have shown a steady trend than a declining one. This reflected and strengthened the investor confidence in Lucky Cement.
Also the recent issuance of GDR in the recent political scenario of Pakistan reflected the international community's confidence in the company and hence its positive standing in the global market. Lucky has recently raised $109.3 million (Rs7.21b) against target of $150 million (Rs9.9b). Each GDR was priced at $7.28, containing 4 ordinary shares of the company, therefore, pricing each share at $1.82 (Rs120). The existing paid-up capital of Rs263.4m has been increased to Rs323.5m (a rise of 23pc). This shows that the international community is willing to put its trust in the company based on its results till date.
Future outlook:
The cement industry of Pakistan is sill very lucrative with its rising prices and already established brand name of Pakistan through Lucky Cement in the international markets. Especially for Middle East and African countries, there are much untapped markets there for Pakistani companies. This is especially applicable for Lucky Cement with its already developed international markets and established buyers in the Middle East and South Africa. The only hurdles in making grand profits from cement manufacturing are the rising costs of fuel (coal and furnace oil) and electricity.
This has already led the industry to lose countless profits as operating expenses. In this issue Lucky Cement has started many strategies to reduce these expenses to be completed shortly. When completed, these measures will be able to reduce the costs of production and help the company to generate more fuels.
In conclusion we can say that during the year Lucky Cement has taken many measures in view with the cement business environment per its proactive planning nature, which could in turn give the company the edge in the business. These measures like initiating fuel cost reduction plans like to convert existing power generators of Pezu Plant from furnace oil to gas, to use technology to recover the heat wasted in the process for generation of electricity without use of any fuel and to sign an agreement with the City District Government Karachi for supply of solid municipal waste, which will be processed and used as a replacement fuel for coal consumption at Karachi Plant will reduce its costs if properly employed. Also the decision of Lucky Cement to lower debts and rely on equity has paid not only in investor confidence, both locally and internationally, but also helped to lower finance charges.
Lucky Cement is also undergoing expansionary plans, which means it still has in its eyes more markets to secure. So we can say that Lucky Cement has established a fine name and market in today's cement industry, both locally and internationally, and keeping in view its recent actions and plans, it is highly probable that it will go to more heights from where it is now.
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].
Copyright Business Recorder, 2008