Cement: PIONEER CEMENT LIMITED - Analysis of Financial Statements Financial Year 2004 - H 2001 Financial Year 2009
Pioneer Cement Limited (PIOC) project started in November 1994 when its first unit commenced production. The second unit was commissioned in January 2006. PIOC is a medium sized company in the cement sector which began its operations with an installed capacity of 2000 tons per day of clinker.
The company underwent many expansion plans due to which its capacity was increased to 2350 tons per day in 2005 and in 2006 a new production line of 4300 tons per day clinker capacity started production. Pioneer Cement was incorporated on 9th February 1986 as a public limited company. Presently, its shares are quoted on all the three stock exchanges of the country.
It is a part of the Noon group which holds the majority stake ie 60% in the company, followed by a leading brokerage house, First National Equity Limited (FNE) held 9% shareholding. The remaining shares held by financial institutions, insurance companies and the general public.
PIOC is involved in the manufacturing and marketing of cement. Its products include ordinary portland cement, suitable for concrete construction and sulphate resistant cement, ideal for construction in or near sea. The company's sulphate resistant cement has less than 2.0 C3A content whereas the maximum limit of C3A content set by British and Pakistan standards is 3.5.
Thus, the company's sulphate resistant cement is highly preferred in important projects such as the Thal Greater Canal project. PIOC's products are sold under the brand name of 'Pioneer Cement' and it was the winner of "Brand of the Year Awards 2006" in cement sector in the national category.
The company's state-of-the-art European (FLS) plant is equipped such that it allows stringent quality control measures. PIOC is ISO 9001:2000 QMS and ISO: 14001:2004 certified. It meets local as well as international quality standards. The cement sector had shown an impressive growth of 24.3% in the cement dispatches during FY'08, owing to a strong demand in the local market and supply deficits in the regional markets.
The major boost had come from the export sales (a growth of 142%) while local cement dispatches grew nominally by 6.5%. However, the sector could not maintain this strong performance and total cement dispatches during 1Q09 showed a nominal growth of 0.7% to 7.33m tons as against 7.28m tons in the corresponding quarter in FY08. Local cement dispatches declined by 15.4% due to slow economic activity and the cut down on PSDP expenditure by the government.
Capacity utilisation also declined to 78.9% in 1Q09 from 82.2% last year mainly due to poor local dispatches. Exports showed a growth of 59.5% and export market share rose from 21.5% in 1QFY08 to 34.1% in 1QFY09 and it was this increase that boosted the overall sales of the sector. The real estate boom in the Middle East and the reconstruction process in Afghanistan boosted the demand for cement.
Also better retention prices for exports also compelled the cement manufacturers to focus on tapping new potential markets of Iraq and Africa. As per the industry trend, PIOC's export performance was better as the company had 141,373 tons of total exports and showed an increase of 93% over the same quarter in FY08.
Local sales constitute a major portion of the total cement sales of PIOC, however, due to increasing demand from regional markets, the share of exports in the total cement sales of the company has increased. Exports contributed 17% towards overall dispatches and 14% towards capacity utilisation during 1QFY09.
The share of exports in the total cement dispatches had increased and was vital in achieving the growth in cement dispatches during FY08 as well. PIOC exported 293,431 tons of clinker in FY08, mostly to Middle East due to depleted limestone reserves and idle installed grinding capacities. PIOC is also exporting to Europe and Africa.
PROFITABILITY
During FY08, the cement sector experienced strong growth in cement dispatches but at the same time it was faced with declining profitability. Although the sales volume in the sector increased, the net sales revenue did not increase as much due to decrease in net retention. Over the years all cement manufacturers undertook huge capacity expansion plans which have now created a situation of excess supply in the local market.
Companies resorted to price wars and this led to a fall in prices. As per the industry trend of declining profitability, PIOC also posted an overall loss of Rs 179 million in FY08. The profitability ratios indicate that PIOC like many other companies in the cement sector, has been plagued by lower earnings.
The gross profit margin fell drastically in FY07 and fell slightly in FY08 as well. PIOC's rising operating expenses and financial costs have led negative net profit margin. Similarly return on assets and return on equity have also fallen.
The prices of imported coal had shot up during the last fiscal year and caused a major rise in the cost of production. Crude oil prices had also seen an unprecedented rise last fiscal year. As fuel costs are the largest portion of production costs of the PIOC, the price increase had deeply hit the profitability of the company in FY08.
For PIOC the prices of packaging material went up and formed 14% to total production costs. For PIOC fuel and electricity costs form 60% of the cost of sales and higher electricity tariffs and fuel costs affected the earnings of the company in FY08.
RECENT RESULTS (H109)
The cement industry showed good results in H1'09 based on higher retention prices both locally and internationally. Other than this, declining coal prices also contributed to the industry doing reasonably well. Volumetric sales of the industry increased by 3%, the top line growth was 101%, resulting in immensely high profits.
Pioneer Cement's production declined by 19% over the same period last year due to a slackening of demand, in the national market. The decline in the demand was a factor of cut in PSDP, inflationary pressures, and higher cost of financing in the domestic market in the wake of increase in discount to rate to 15%.
Although the key rate has been shifted downwards marginally to 14%, not much change is expected in the consumer borrowing patterns in the near future as uncertainty looms both on domestic and international fronts. Exports however showed good performance, with a growth of 44% in terms of volume.
Due to higher margins internationally, the gross margins increased by 350% to be Rs 757 million. The higher gross margins that were attributed to export also brought with them higher transportation charges, which along with exchange rate losses worth Rs 288 million and higher financial charges to the tune of Rs 229 million caused to company to remain in the red.
Gross sales increased by 50% to be Rs 3907 million, but due to above mentioned problems, Pioneer Cement recorded a loss after tax of Rs 57 million for H1'09 as compared to Rs 208 million in the same period last year which shows an improvement of 73%.
LIQUIDITY
The liquidity position of the company has been deteriorating over the years due to substantial rise in the current liabilities. Liquidity improved slightly during FY07. PIOC felt a liquidity crunch, like many other companies in the cement sector due to the price war and losses caused by that in FY08. The current liabilities of PIOC have also increased to Rs 2.987 billion during FY08, backed mainly by increased short-term borrowings by the company.
To solve the liquidity problem PIOC initiated a process of restructuring its debt by issuing Sukuk of Rs 2.5 billion in FY08. This will help the company to liquidate its excessive current liabilities. It will also help the company to control its financial costs.
In FY07 cash and bank balances were 32% of current assets while trade debts and inventory were 3% and 16% respectively of current assets. During FY08, the composition of current assets changed such that the most liquid assets: cash and bank balances constituted 18%, trade debts 5% and inventory 9% of total current assets. Stores, spares and tools are highly illiquid assets and they form a major portion of the company's current assets.
ASSET QUALITY
The asset management of the company seems to be quite effective during FY08 as the operating cycle of PIOC decreased to 9 days from 23 days in FY07. The operating cycle, however, has reduced due to faster sales turnover while days to collect trade debt remained the same in FY08. The days to sell the average inventory were 19 days in FY07 whereas in FY08 it took the company only 6 days to sell its inventory.
DEBT MANAGEMENT
The debt to assets ratio depicts how PIOC is financed. Each year, the company is being increasingly financed by equity rather than debt. In FY04 debt financed 87% of assets while in FY08 debt only contributed to 56% of total assets. The company's debt to asset ratio has not fluctuated much because over the years because assets and liabilities have grown more or less in the same proportions.
The debt to equity ratio of PIOC fell during FY05 and FY06 indicating that the company was financing its growth by equity. In FY05, equity of the company rose by 197% while liabilities increased only by 11%. In FY07 the equity fell as the reserves fell owing to the loss made during that fiscal year.
This caused the slight increase in D/E ratio in FY07. In FY08 the debt to equity ratio has declined owing largely to a fall in the debt. The company is trying to restructure its financing composition in favor of equity by issuing Sukuk financing and convertible loan into equity. This will reduce the current liabilities in the future. In the wake of rising interest rates in the economy, this strategy will prove to be beneficial for PIOC in the future.
The average price/share fell during FY07 to Rs 31.78 and it in FY08 it remained around Rs 31.84. The share prices declined due to the losses incurred during both the fiscal years. The price movement during 1QFY09 is depicted in the graph and shows that PIOC's share price remained below Rs 30/share during the three months (August-September 2008).
FUTURE OUTLOOK
In the budget FY09 the central excise duty on cement was increased to Rs 900 per ton from current Rs 750 per ton. On each bag the CED increased by Rs 7.50 per bag (from Rs 37.5 per bag to Rs 45 per bag). But this increase is not expected to impact the profits of the cement sector because this increment in CED will be passed on to the consumers. However, the rise in the GST by 1% will increase the local cement prices and may dampen the demand for cement.
The recent decline in the discount rate may give some relief in terms of financial charges; however other than that no significant change in consumer borrowing is expected. Moreover, with the government forced to maintain the fiscal deficit at a certain percentage, developmental spending a expected to remain at a minimal level.
Local cement dispatches are expected to remain depressed due to slow down in economy led construction activity in the country and also due to inflation. In the budget FY09, the government had allocated Rs 550 billion for PSDP, however, owing to budgetary deficit the government later decided to cut PSDP expenditure.
Cement consumption is correlated to GDP growth and as the economic condition now stands, we can predict a grave slow down in the GDP growth of the country. Thus the per capita cement consumption will also fall during FY09. However, exports are expected to maintain their strong growth and support the total cement dispatches.
Cement manufacturers will have to focus on the international markets to achieve growth in sales. Pakistan has been exporting to Afghanistan. Regional shortage of cement had presented a favorable opportunity for our cement manufacturers. Cement demand in Afghanistan is expected to be 1.5m-2.0m tons per annum for the next five years.
Cement manufacturers have growing opportunities in Middle East and African countries. New export markets like Russia and European countries have been identified. Growth in export sales may boost the margins of the industry and reduce the negative impact of rising costs on its profitability.
Pioneer Cement Limited is expected to have increased exports as it has received orders from new buyers such as Russia, Central Asia, Madagascar and Nigeria. During 1QFY08, Pioneer Cement Limited was approved by the Bureau of Indian Standards (BIS) to export cement to India. PIOC clearly benefited from the growth in demand for cement in India and Middle East.
As PIOC's plants are in close proximity to Indian border, the shortage of cement in India made it a lucrative and accessible market for the company and exports were made through roads. This was a window of opportunity for PIOC and the whole of the cement sector. But as a result of growing hostilities between the two countries, India halted its import of cement from Pakistan. This will cause the export sales of PIOC to be lesser than expected during FY09.
Expenses are expected to increase for cement manufacturers. This will negatively impact the gross margins of the cement sector. During the past, our cement manufacturers shifted production from oil to coal or gas. Pakistan has huge reserves of coal but manufacturers need to import coal due to high sulphur content.
The coal prices in the international market have fallen from their peak level of US $210 per ton. But the depreciation of Pakistani rupee will neutralize the impact of decreasing international coal prices. Also the government has raised the power tariff by nearly 50% with variable rates for peak and off peak hours. Gas prices have also risen. This will increase the cement manufacturers' cost of production and impact their profitability in FY09.
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PIONEER CEMENT LTD
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Key Financial Ratios
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PROFITABILITY Jun'04 Jun'05 Jun'06 Jun'07 Jun'08
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Gross profit margin 29.23% 32.91% 40.01% 11.68% 10.58%
Profit margin 32.07% 16.24% 21.98% -2.94% -3.71%
Return on Asset 9.93% 4.82% 8.04% -1.09% -1.72%
Return on Common Equity 77.81% 20.49% 29.11% -4.46% -7.81%
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LIQUIDITY RATIO Jun'04 Jun'05 Jun'06 Jun'07 Jun'08
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Current Ratio 1.03 0.92 0.44 0.47 0.26
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ASSET MANAGEMENT Jun'04 Jun'05 Jun'06 Jun'07 Jun'08
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Inventory Turnover 18.42 24.14 19.07 18.72 63.18
Days to sell the average
inventory (Days) 20 15 19 19 6
Day Sales Outstanding (Days) 7 3 1 3 3
Operating cycle (Days) 26 18 20 23 9
Total Asset turnover 0.31 0.30 0.37 0.37 0.46
Sales/Equity 2.43 0.91 1.05 1.19 1.07
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DEBT MANAGEMENT Jun'04 Jun'05 Jun'06 Jun'07 Jun'08
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Debt to Asset 0.87 0.60 0.65 0.69 0.57
Debt/Equity 6.84 2.56 2.36 2.83 2.57
Long Term Debt to Equity 6.14 2.25 1.76 1.84 1.28
Times Interest Earned 3.23 4.69 6.03 0.52 -0.03
Debt Service Ratio 1.45 2.95 6.03 0.52 -0.03
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MARKET VALUE Jun'04 Jun'05 Jun'06 Jun'07 Jun'08
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Earning per share 4.45 2.32 4.72 -0.55 -0.90
Price earning ratio 5.40 8.27 10.97 - -
Book value 5.71 11.32 16.22 12.34 11.55
Market prices 20.10 20.35 45.65 31.78 31.84
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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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