Cement: DG KHAN CEMENT COMPANY LIMITED - Analysis of Financial Statements Financial Year 2002 - Financial Year 2010
DG Khan Cement Company Limited (DGKC) is a unit of Nishat Group. It is a producer and seller of ordinary portland and sulphate-resistant cement. DGKC was established in 1978 under the management control of State Cement Corporation of Pakistan Limited (SCCP). The company started its commercial production on April 1986 with 2000 tons per day (TPD) clinker based on dry process technology.
In 1992, DGKC was acquired by Nishat Group under the privatization program of the government. Since its privatization, DGKC has undergone intensive capacity expansion. As a result of this, DGKC is presently the second largest cement producer of the sector (second only to Lucky Cement). DGKC had a market share of 17% in the local cement industry in FY10, largest in the cement industry.
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NAME OF COMPANY D.G KHAN CEMENT COMPANY LIMITED
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Ticker DGKC
Assets (June2010) Rs 47,046,043,000
Share Capital Rs 3,650,993,000
(365,099,266 ordinary shares of Rs 10 each)
Sales Revenue (June 2010) Rs 16,275,354,000
PAT (June 2010) Rs 233,022,000
Market Share Price (30 June 2010) Rs 23.62
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DGKC has two plants at Dera Ghazi Khan and a new Greenfield cement plant at Khairpur village, which was started in FY04 and began commercial production in June 2007. The plant has a capacity of 2.1mtpa. Commencement of production at the new plant and effective and efficient operations management led to 70% and 66% increase in the volume of clinker and cement production respectively. The company has its own power generation plant along with WAPDA supply. A dual fuel power generation plant at Khairpur cement plant also started its commercial operations successfully in FY08.
COMPARISON WITH CEMENT INDUSTRY
Amid adverse economic conditions, the overall cement sector's performance was sluggish during FY10, Pakistani cement companies continued to perform well in terms of better profitability and higher interest coverage. A decline in average coal prices by 16 percent YoY also provided relevant support to the sector, as overall cost of sales remained static during the period despite volumetric growth. Still, the adverse impact of drop in top line was visible on profitability of the sector as total gross profit went down 49 percent YoY while gross margin turned out at 17 percent compared to last year' 29 percent. On per-tonne-basis, retention prices were lower by 21 percent YoY while gross profit was lower by massive 53 percent YoY on cost pressures.
Cement sales in the industry witnessed a growth of 15% in FY10 whereas DGKC witnessed a growth of 27% of sales volume. It also comprised of a 17% market share in local sales.
DGKC has a gross margin and profit margin which is almost similar compared to the industry average of 15.15% and 1.4% respectively.
However, its current ratio is 1.19:1 whereas the industry average is of 0.71:1. This means that DGKC is in a good position to meet its short-term debt. The current liabilities decreased mainly as the provision of taxation reduced as profits fell and also export sales fell. Current assets increased mainly due to increase in short-term investments.
The company is reasonably leveraged with a Debt to Asset ratio of 44% compared to the industry average of 50%. This can be owed to its repayment of long-term loans The Return on Assets of 0.5% is marginally lower than the industry average of 1% mainly due to a reduced sales revenue.
Owing to such factors, its Earning per Share is also Rs 0.72 as compared to an average of Rs 2 which results in lower investor confidence.
Sales
The cement sector posted a reasonable growth of 9.4% as the total sales volume increased by 2.94 million tons to reach 34.22 million tons by June 2010 from 31.28 million tons. Although, the DGKC's volumetric sales grew by 28%, the sales revenue fell by 10% in FY10 to Rs 16,275 million in FY10 from Rs 18,038 million in FY09. This was mainly due to lower selling prices internationally plus the tough competition within the cement manufacturers leading to price wars.
Although, there was a decrease in sales revenue, the local dispatches increased by 45% from FY09 to FY10 due to increased private sector spending and higher support prices for agricultural products by the government whereas the export sales decreased by 20% mainly due to a fall in exports to India. Hence an overall increase of 28% in FY10.
The total cement and clinker sales of DGKC had increased in FY10 as higher production enabled it to largely tap the local market. Cement sales rose by 28% but clinker sales fell by 60%.
RECENT RESULTS FY10
DGKC posted PAT of Rs 233.022 million in FY10 as compared to Rs 525.581 million in FY09. This decline was mainly due to lower prices and reduced exports. The net sales revenue of the cement sector in FY10 was 10% lower than the net sales revenue generated in FY09. Although the sales volume increased by 28% - 45% increase in local sales and 20% decrease in export sales, the revenue fell down mainly due to lower selling prices.
Costs of sales increased by 9.8% from FY09 to FY10. Increasing coal prices to US$ 115/ton, rising gas and electricity tariffs along with increasing costs of packing material all contributed to this increase. This resulted in a decline of 9.8% in the gross profit from the last year; reporting to Rs 2,705.36 million from Rs 5,679.73 million.
The operating expense decreased by 56% on the whole in FY10 mainly because of large decline in export-related selling and distribution expenses. Also there was a 27% decline in the financing costs as the company paid off its long-term loans. Despite a decline of 25 percent YoY, the sector's interest coverage deteriorated to 0.50x in FY10 compared to 1.69x realised in FY09. The deterioration was more severe in north zone owing to higher levels of leverage employed by northern players alongside a more severe hit in prices in the said region.
PAT declined by 56% in FY10 to be Rs 233 million. Therefore the earnings per share (EPS) also fell from Rs 1.63 to Rs 0.72 in FY10.
Profitability - FY02-FY09
The profitability ratios of the company have shown a declining trend since after FY05. The gross profit margin increased in FY06 only to fall in FY07 and FY08. The profit margin of the company has decreased continuously along with return on assets (ROA) and return on equity (ROE). The profit after taxation had declined by 33% in FY07 due to lower net retention prices caused by a supply overhang in the overall industry. Also the problem of rising input costs had begun in FY07. This rise in cost of production and raw material had continued into FY08. However in FY09, the boost in export sales lead to an increase in the PAT and the profit margin was 2.91%. The operating expenses had also increased due to higher selling and distribution expenses but the increased sales revenue contributed to an increase in PAT.
Increased production facilitated higher sales volume which in turn translated into almost doubling of sales revenue in FY08. The company had earned the highest sales revenue of Rs 12.445 billion in FY08. However, despite this, the gross profit of DGKC in FY08 (amounting to Rs 1.9 billion) was around 6% lower than the gross profit posted in FY07 (Rs 2.0 billion). The reason for lower gross profit was a 140% increase in the cost of sales during the fiscal year.
However in FY09, major distribution costs increased when exports increased. Also finance charges rose due to higher interest rates and increased long-term borrowing. But the sales revenue had increased by 45% improving the profitability of DGKC and resulted in a profit after taxation of Rs 525.581 million in FY09 against a loss after taxation of Rs 53.23 million in FY08.
LIQUIDITY
The liquidity position of DGKC improved in FY10 due to a 24% increase in current assets and a 13% decrease in current liabilities of the company causing a current ratio of 1.19:1. The current liabilities of the company decreased mainly due to 55% decrease in provision for taxation as the profit before tax had reduced in FY10 plus exports also fell and a 35% decrease in outstanding finances. On the other hand, current assets of the company increased due to20% increase in advances and other receivables and 38% increase in short-term investments as they were revaluated, from Rs 7 billion at the end of FY09 to Rs 10 billion at the end of FY10. Thus, decrease in current assets and a corresponding increase in current liabilities resulted in a less favorable liquidity position as compared to that in FY08.
DGKC's liquidity stance had been strengthening since FY04 and in FY07 its liquidity position was the most favorable. The increase in current assets had brought about this change. There was a 98% increase in short-term investments. Furthermore, the cash and bank balances had also risen considerably. In FY08 the current assets of the company declined slightly but a 63% rise in current liabilities caused a decrease in the liquidity of the company. Investments constitute nearly 79% of the company's total current assets and they declined by 11% in FY08. The investments decreased further from Rs 15 billion at year end FY08 to Rs 7 billion by end of FY09.
ASSET MANAGEMENT
The performance of DGKC in terms of asset management was weak during FY07. During the year, the inventory turnover (days) of the company more than doubled compared to FY06 when the management of inventory seemed most efficient (evident from the lowest inventory turnover in days). The increase in inventory turnover in days and Days sales outstanding (DSO) prolonged the operating cycle of the company in FY07. In FY08 the days to convert inventory into sales became 79. Although the days to convert sales into cash (DSO) increased slightly, the substantial decrease in ITO (days) led to the shortening of the operating cycle in FY08.
In FY09, the inventory turnover days remained same around 77 days but they increased in FY10 to 90 days indicating a lower inventory turn over ratio. This was due to a 118% of capacity utilization of their plant; hence higher production and extreme price competition within cement sellers. The DSO decreased as trade debt reduced by 41% during FY10 as against sales. Yet the operating cycle increased from 87 days to 97 days. Hence the asset management of DGKC worsened as the company earned sales revenue less in proportion to the increase in inventory.
Besides this the sales to equity and total asset turnover of the company which had a rising trend till FY09 decreased in FY10. From FY07 to FY09, the sales to equity ratio increased due to increase in sales revenue from exports sales but it declined in FY10 due to increase in the paid up capital but a decrease in sales revenue due to lesser selling price. Total asset turnover also deteriorated in FY10 because of the decrease in sales revenue but increasing asset base.
DEBT MANAGEMENT RATIOS
The debt management ratios of DGKC rose from FY07 to FY09. During FY08 the debt ratios of the company rose because the total debt increased in FY08 mainly due to a 63% increase in the current liabilities however long term debt decreased. The long term debt to equity increased because of a decline in the equity base due to fall in reserves.
However in FY10, the debt to equity ratio fell from 104% to 77% and debt to asset ratio fell from 51% to 44% as total debt reduced by 6% mainly due to payment of long term debt and the reduction of 55% in provision for taxation.
The TIE ratio fell in FY10 from 1.3 to 1.19 as although finance charges reduced in the period by 27%, operating income in FY10 decreased by 33%.
Due to reduced sales revenue and in turn the profitability, DGKC experienced a decrease in its Earning Per Share (EPS) and Price to Earning (P/E) Ratio. EPS fell from Rs 1.63 in FY09 to Rs 0.72 in FY10.The averaged share price fell from Rs 39.97 in FY09 to Rs 37. This shows that the lower profits of the company have started reflecting in the low investor confidence and falling share price. The management did not recommend any dividend for FY10 due to reduced profitability situation in the period.
FUTURE OUTLOOK
GDP is expected to grow to a target of 4.5% in the Federal Budget of FY11. This means that higher per capita cement consumption is expected in the coming years.
The infrastructure redevelopment of flood affected areas is also a potential area for demand of cement to grow. The government announced to finance every house that was either fully or partially affected by the flood; again a potential demand for the growth of cement industry. Also with increased private sector spending, building infrastructure across the country will also aid in increasing demand of cement. The road networks and dams construction projects are also a potential source to increase demand of cement. Hence demand of local sales is expected to increase
Exports have recently reduced due to gulf region capacity and loss of export sales to India due to political tension in FY09. Yet there is export potential in new export markets like Russia and some European countries.
DGKC is trying to cut down on costs that have significantly and adversely impacted its profits. To reduce electricity cost, DGKC has started a project of power generation from waste heat at DGK site. The project is expected to generate substantially cheap electricity of about 10.4MW without using any fuel. This would help to cut down the cost of production. DGKC has also decided to use municipal solid waste as fuel for heating purposes. This project will be beneficial as it would bring down the company's costs of production, help resolve the environmental issues related with disposal of solid waste and most important, it would save huge foreign exchange spent on importing fossil fuels. In future local coal can also be used over the cement industry as Lucky Cement is already being supplied by Oracle Coal Fields.
Recent increase in cement prices will however help the industry in regaining margins and braving the increasing costs of utilities, and freight charges.
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Liquidity FY'02 FY'03 FY'04 FY'05 FY'06 FY'07 FY'08 FY'09 FY'10
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Current Ratio: 1.07 1.34 1.21 1.37 1.65 2.60 1.59 0.84 1.19
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Profitability FY'02 FY'03 FY'04 FY'05 FY'06 FY'07 FY'08 FY'09 FY'10
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Gross Profit Margin 28.35% 22.65% 35.68% 36.91% 49.81% 31.65% 15.39% 31.49% 16.62%
Profit Margin on Sales 10.29% 16.16% 20.46% 31.86% 30.40% 25.27% -0.43% 2.91% 1.43%
Return on Assets 3.23% 5.08% 6.78% 9.34% 7.05% 3.14% -0.10% 1.23% 0.50%
Return on Equity 8.01% 9.51% 12.58% 18.05% 12.55% 4.78% -0.18% 2.51% 0.88%
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Asset Management FY'02 FY'03 FY'04 FY'05 FY'06 FY'07 FY'08 FY'09 FY'10
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ITO (Days) 90.51 102.85 105.33 77.47 48.07 100.46 79.40 76.55 89.69
Days Sales Outstanding 3.76 1.83 4.88 5.20 3.36 8.09 10.59 10.26 6.72
Operating Cycle 94.27 104.68 110.21 82.66 51.43 108.55 89.99 86.81 96.41
Sales/Equity 0.78 0.59 0.61 0.57 0.41 0.19 0.41 0.86 0.61
Total Asset Turnover 0.31 0.31 0.33 0.29 0.23 0.12 0.24 0.42 0.35
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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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