LUCKY CEMENT LIMITED - Analysis of Financial Statements Financial Year 2003-1H'11

Lucky Cement Limited is currently one of the largest manufacturers of cement in Pakistan. During FY10, in order to decrease cost of production, Lucky Cement signed an MoU with Oracle Coal Fields for coal supply and also implemented the waste heat recovery project in its Karachi plant that uses wasted heat from the production system to run turbine engines. It also led to signing of MoU to sell 50 MW to Karachi Electric Supply Company. In FY09, the plant's production capacity was increased to 7.75mtpa.
During FY10, the company's production of clinker and cement increased by 7.92% and 13.05% respectively. Lucky Cement produced 6.054 million tons of clinker and 6.461 million tons of cement during FY10. As a result of massive capacity expansion over the last years, Lucky Cement has been able to consolidate its position as the largest cement exporter.
During 1H11, the company's production of clinker and cement decreased by 3.7% and 9.1% respectively. Lucky Cement produced 2.908 million tons of clinker and 2.785 million tons of cement during 1H11. As a result, Lucky Cement has been able to consolidate its position as the largest cement exporter.
Cement sector in (1H11)
The cement industry faced a negative growth of 11.2% in the half-year ended December 31, 2010 in both, local and exports sales volume as compared to the same period last year. The first quarter experienced a negative growth of 17.8%, while the 2nd quarter fetched a growth of 4.5%, bringing the overall negative growth for the half-year to 11.15%. The sales volume of the industry also witnessed a negative growth of 8.3%.
On the export front, similar trend was witnessed that resulted in 17.03% negative growth during the first half year of this financial year. The sales declined to 5019 million tons. The exports to India registered a decline of 33.97 percent to 1.779 million tons during the period as compared to 2.771 million tons last year. Exports to Afghanistan, however, increased by 18.35 percent during the first five months of this fiscal year to 1.830 million tons.
The major reasons for decline in growth were heavy monsoon rains with massive floods, lack of government spending on public sector development projects, hyperinflation and bad law and order situation across the country. Another reason for the decline was the exorbitant transportation charges that made it difficult for the plants located in the northern areas to export cement via sea.
The All Pakistan Cement Manufacturers Association (APCMA) said the capacity utilization has constantly declined since 2004-05 when it reached the peak of 91.32 percent. In 2009-10, it dropped to 76.53 percent, whereas in the seven months of the current fiscal year, it was 71.55 percent.
The industry has a total production capacity of 41.23 million tons of which 34.26 million tons are produced in the northern part of the country while the southern part produces 6.97 million tons. The capacity will be increased by 2.68 million tons in this fiscal year by commencement of operation at the new Fauji Cement plant.
Comparison with the industry
Lucky Cement's market share increased in the domestic market by 3% from 12.14% last year to 14.98% during the first half year of this financial year. The local sales volume recorded a robust growth of 13.16% from 1.339 million tons cement sold last year to 1.515 million tons sold during the first half of this financial year. The export sales volume sank sharply by 30% from 1.845 million tons last year to 1.291 million tons this financial year mainly due to a sharp decline in clinker and loose cement sales in GCC countries due to slack construction activities coupled with oversupply of cement. However, the bagged cement exports sales volume of the company increased by 8.2%.
The earnings per share the period was Rs 4.52 per share as compared to Rs 5.90 per share during the same period last year.
Profitability
Lucky Cement recorded a profit after tax of Rs 1.46 million in 1H11. The profit was 24.75% lower as compared to the profit earned in the same period of previous year. The gross sales of the company increased by almost 2% to Rs 14.4 million in 1H11 from Rs 14.126 million in 1H10. During the period, the local sales revenue increased by 32.8% because of 13.2% increase in volume and 17.3% increase in prices on the back of increase in production cost.
Also, the cost of sales increased by 6.2% whereas the cost per ton of cement went up by 20.5% as compared to the same period last year. Fuel cost which includes heat and power constituted a part of the cost of production. It accounted for 67.2% of the total cost and increased by 14.2% as compared to the corresponding period of last year. The international coal prices also reached a new height and increased to dollar 140 CNF.
The company therefore achieved a gross profit rate of 33% because if the greater increase in cost of sales as compared to the sales. The company achieved a gross profit rate of 37.3% during the same period last year.
The finance cost for the period under review remained almost the same at Rs 294 million as compared to Rs 298 million during the same period last year. The distribution costs, however, increased by 5.15% because of the increased sea freights.
The earnings per share during the period were Rs 4.52 per share, which was Rs 5.90 per share during the same period last year. The decline was due to the decrease in the profit of the company.
The profits of the Lucky Cement have been increasing since FY03 at varying rates. The growth in profits had been declining from FY06 to FY08 due to rising costs but surged during FY09. During FY08, the growth of the company's profits slowed down to 5%.
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. Many cement companies were faced losses due to these costs.
Lucky Cement managed to obtain profits during FY08 when other companies posted losses. Lucky Cement anticipated these events and quickly employed counter strategies, like shifting to exports and reducing finance 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.
Lucky Cement had showed a growth of 35.4% in sales, from Rs 12.25bn in FY07 to Rs 16.95bn in FY08. This growth was achieved through increase in exports, along with the rise in cement retention prices over the year. Local retention prices showed an increase of Rs 133.7 per bag in FY08 from Rs 129.7 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 ton (Rs 152.6 per bag) in FY08 as against US$47.2 per ton (Rs 133.2 per bag) in FY07.
Profitability ratios.
The gross profit margin of the company fell to 33% during 1H11 from 37.34% during the corresponding period of last year. Likewise, the profitability margin of the company also fell from 15.74% in 1H10 to 12.14% in 1H11. This shows that the profitability of the company has deteriorated during the current period.
The gross margin showed a rising trend in 1H10, primarily due to the increasing export demands but it fell in the current period of the decrease in exports and increased cost of sales. Net margin also showed a decline mainly due to increase in distribution costs.
Return on assets (ROA) and Return on Equity (ROE) decreased to 3.65% and 5.78% respectively during the period as compared to 5% and 7.6% during the corresponding period of last year due to a less proportionate increase in profits as compared to the increase in assets and equity base of the company. The assets of the company increased by 4.54% and equity increased by 0.67% but the profit after taxation fell by 23.4%.
Asset quality ratio
The operating cycle of Lucky Cement became 215 days in 1H11 as opposed to 160 days during 1H10. This shows that the company was not able to manage its stock and sales properly. However during 1H11, it took Lucky Cement 188 days to sell its inventory as compared to 131 days during 1H10. This is because the stock of the company increased while the sales reduced. Also, the day sales outstanding went down from 29 days to 27 days during 1H11, depicting that it took the company a little less period of time to recover credit payments.
The Total Asset Turnover ratio of the company stood at 0.3 in 1H11 as compared to 0.31 during 1H10, which is not a major change. The change that occurred was due to decrease in overall sales and increase in total assets of the company.
The Sales/Equity ratio declined to 0.476 times in 1H11 as compared 0.51 1H10. The decrease was because of the decline in overall net sales and increase in the equity.
Liquidity
The liquidity position of the company became a little favorable during 1H11 as the current ratio increased from 0.65 in 1H10 to 0.73 in 1H11. This was due to increase in current assets by 31.4% and 16.7% increase in current liabilities. As the increase in assets was more than increase in liabilities, the current ratio showed a positive result. The stores and spares showed an increase of 47.5% whereas the stock in trade went up by 29.5%. The other receivables also showed a dramatic increase of 218%. However, the trade and other payables also showed an increase of 55.9% and the portion of long-term finance due in the current period also increased by 45.9%.
The acid test ratio also increased to 0.614 in 1H11 as compared to 0.543 in 1H10 indicating that the stock in trade formed a comparatively large part of the current assets. The increased value of stock and the increased inventory turnover rate show that the company faced some problems in converting its inventory into cash.
Debt management ratio:
Lucky Cement has a strong position when it comes to debt management. Since the end of FY06, the company has employed 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 total debt increased 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 Recently cost reduction measures like the Waste Heat Energy Project and using local coal has also helped in reducing debt. Hence the debt to asset ratio signifies that the company succeeded in lowering its overall debts and strengthening its financial position.
The TIE ratio in 1H11 declined to 6.37 as compared to 8.31 in 1H10. This was mainly because of decrease in the EBIT by 27.45%, as the finance charges didn't show much change in the current period.
The debt to equity ratio also showed no change as such as in 1H11 as compared to 1H10 because the decrease in non-current liabilities was offset by increase in current liabilities.
Marketability:
The earnings per share of the company decreased to Rs 4.52 in 1H11 from Rs 5.9 in 1H10, due to a decline in the profit after tax of the company. The price-earning ratio of the company was 15.7 in 1H11 as compared to 11.8 in 1H10 showing high investor confidence in the company. The average market price of the company's shares also rose to Rs 70.78 from Rs 69.62 in 1H10.
Cement sector in (FY10)
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. Local cement demand increased by 14.6% to 23.53 million tons in FY10 against 19.4 million tons in FY09 mainly due to increased spending in the private sector and higher agricultural support prices provided by the government to the rural sector.
Northern region cement market recorded a growth of 18% in export volume while the southern region market posted a decline of 2% during FY10. However, the export sales were at 10.7 million tons compared to 11.4 million tons, ie a drop of 6.1% from the previous year mainly due to a drop in exports to India by 52%. However in the Middle East, Iraq and Afghanistan export demand was relatively similar.
The overall capacity utilisation of cement plants increased to 76% in FY10 from 74% in FY09 due to increased domestic demand with capacity expansions in the sector. According to recent statistics released by APCMA, 3 million tons of capacity expansion took place in FY10 (as compared to 5 million tons in FY09). The total cement production capacity of the industry stands at 45 million tons by end of FY10 as against 42 million tons in last fiscal year.
Lucky Cement has a gross margin of 32.56% as compared to the industry average of 15.15% due to cost deductions due to local coal supplies and new electricity generation plants. Being one of the largest cement manufacturers, Lucky Cement has a profit margin of 12.84% compared to the industry average of 1.4%, depicting its profitability owing to a large proportion of export sales.
The company is also not highly leveraged with a Debt to Asset ratio of 34.5% compared to the industry average of 50%. This can be owed to its reduced financing costs and its financial stability. The Return on Assets is also much above the industry ie 8.19% as compared to 1% indicating a well above proportionate increase in the net profit as compared to the assets acquired.
Owing to such factors, its Earning per Share is also Rs 9.7 as compared to an average of Rs 2 showing high investor confidence and growth potential.
Profitability (FY10)
Lucky Cement Limited posted a profit after taxation of Rs 3.137 million in FY10. The profit for FY10 was 32% lower as compared to the profit earned in FY09 (PAT FY08: Rs 4.597 million). The gross sales of the company decreased by 6% to Rs 29.052 million in FY10 from Rs 30.915 million in FY09. The decrease in gross sales was largely due to lower cement prices, locally and internationally. The local sales volume of the company increased by 26.32% and the exports increased by 2.21%, hence doing better than the sector trend.
The net sales of the company decreased by 6.92%; from Rs 26.330 million in FY09 to Rs 24.509 million in FY10. The increase in sales revenue was thus mainly due to lesser prices as although sales volume had increased, sales price remained constant. Lucky Cement decreased exports, which had increasing distribution cost.
Cost of sales of the company increased by 0.07% during FY10. The cost per ton of cement decreased by 11% due to the implementation of Waste Heat Recovery Project and using lesser expensive coal from a local supplier. The fuel and coal costs are 62% of the total costs, which went down by 16.2%. In the previous years, the profitability of the cement sector was greatly affected as cost of sales had increased by 31% in FY09.
Thus, a decrease in sales revenue as compared to costs resulted in a decrease of 18.68% in the gross profit for FY10. The operating expenses increased by 44.05% mainly due to distribution costs of exports, however, it was the drastic decrease in the finance costs (from Rs 1237 million in FY09 to Rs 569 million in FY10) that increased the profitability of the company. The finance cost was mainly reduced due to early repayment of high markup carrying long-term loans and resorting to export refinance and Foreign Currency Import Finance (FCIF), hence the company recovered via the hedge of exports.
Profitability (FY03-10)
The profits of Lucky Cement have been increasing since FY03 at varying rates. The growth in profits had been declining from FY06 to FY08 due to rising costs but surged during FY09. During FY08, the growth of the company's profits slowed down to 5%.
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. Many cement companies were faced losses due to these costs.
Lucky Cement managed to obtain profits during FY08 when other companies posted losses. Lucky Cement anticipated these events and quickly employed counter strategies, like shifting to exports and reducing finance 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.
Lucky Cement had showed a growth of 35.4% in sales, from 12.25bn in FY07 to 16.95bn in FY08. This growth was achieved through increase in exports, along with the rise in cement retention prices over the year. Local retention prices showed an increase of Rs 133.7 per bag in FY08 from Rs 129.7 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 ton (Rs 152.6 per bag) in FY08 as against US$47.2 per ton (Rs 133.2 per bag) in FY07.
Although sales volume of the company grew by 19.7% to 5.56m tons as compared to 4.64m tons last year, yet domestic sales for the same period declined by 9.2% to 2.89m tons as against 3.18m tons last year. This occurred due to more focus toward high yield exports, which showed a growth of 83.0% to 2.67m tons in FY08 from 1.46m tons last year. During FY08, ratio of local sales to export was 52:48 against 69:31 in FY07.
Profitability ratios
The gross profit margin of the company fell to 32.56% during FY09 from 37.26% in FY08. Likewise, the profitability margin of the company also fell from 17.46% in FY09 to 12.8% in FY10. This shows that the profitability of the company has deteriorated during FY10 after improving in FY09.
The gross margin showed a rising trend in FY09, primarily due to the increasing export demands. Net margin showed a slight increase as finance charges drastically increased to Rs 1237m from Rs 127 million representing a rise of 881%, as the company was wound up in cross currency swap transactions which were providing interest rates hedging and SBP had also increased its markup rate - hence a higher financing cost.
Return on assets (ROA) and Return on Equity (ROE) also decreased during FY10 due to a lesser proportionate increase in profits as compared to the increase in asset and equity base of the company. The assets of the company decreased by 0.2% and equity increased by 7.93% but the profit after tax fell by 51.75%.
Asset quality
The company's performance in terms of asset management remained more or less the same during FY10 as compared to in FY09. The operating cycle of Lucky Cement became 79 days in FY10 as opposed to 80 days during FY09. However during FY10, it took Lucky Cement 68 days to sell its inventory as compared to 63 days during FY09. This is because the stock of the company increased while the sales reduced. Also, the day sales outstanding went from 15 days to 11 days during FY10, depicting that it took the company greater period of time to recover credit payments.
The Total Asset Turnover ratio of the company had a declining trend till FY05, after which it started improving. The ratio continued to improve during FY09 but again declined marginally in FY10. The total asset turnover ratio had been increasing due to higher growth in sales revenue as compared to the growth in assets over the years till FY09 but then it slightly decreased due to lesser selling price despite high sale volume.
The rising trend of Sales/Equity was disrupted during FY08 when the ratio declined from 1.34 times in FY07 to 0.91. However, the Sales/Equity ratio improved to 1.13 times in FY09 due to higher sales revenue and again declined to 0.98 due to lower sales revenue.
Liquidity
The liquidity position of the company became lesser favorable during FY10 as the current ratio fell from 0.86 in FY09 to 0.71 in FY10. This was due to 12.55% decrease in current assets and 6% increase in current liabilities. The stores, spares and inventory of the company declined by 2% and the net taxation income fell by 17%. However, the major reason behind decline in current assets was a 68.2% decrease in cash and bank balance of Lucky Cement. Cash is the most liquid asset and such a substantial decline could make it difficult for the company to meet its obligations.
Lucky Cement had shown a positive trend in FY09. The current assets were raised by cash in hand due to a smaller Days Sale Outstanding time period and also sales tax refundable by the company. On the other hand, current liabilities had increased, there were quite a few short-term borrowings done by the company as financing facilities, along with many bills payables. Liquidity position may remain weak until the company reduces its bills payables and short-term borrowings.
Debt management
Lucky Cement has a strong position when it comes to debt management. Since the end of FY06, the company has employed 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 total debt increased 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 Recently cost reduction measures like the Waste Heat Energy Project and using local coal has also helped in reducing debt. Hence the debt to asset ratio signifies that the company succeeded in lowering its overall debts and strengthening its financial position.
The TIE ratio had been declining from FY04 to FY07 but in FY08 the TIE raised significantly, ie from 4.28 to 24.48 times. It again declined in FY09 to 5.85 and then marginal increase in FY10 to 7.46. Although the EBIT for the year was less than that of FY07 (3,077,660 as compared to 3,695,402), but in FY08 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 had a general positive trend that has been established since FY05. The Earning per share of Lucky Cement decreased to Rs 9.7 in FY10 from Rs 14.21 in FY09, due to a lesser PAT. However, the price to earning ratio rose during FY10, depicting high investor confidence in the company. The average market price of the company's shares in FY09 was Rs 54 which rose to Rs 71 during FY10. The company announced a dividend of Rs 4 per share for FY10.
Future outlook
Although currently the price of cement has fallen worldwide, major construction projects due to the rising per capita income in various countries leading more residential and commercial construction projects will boost cement sales and within the next 3-4 years, the price of cement is expected to increase.
Local cement sales can be expected to show a positive growth during FY11 due to the construction of eight dams in the country, rehabilitation of flood victims in Pakistan and increased spending by the private sector will give a boost to local cement sales.
It is anticipated that the demand of cement in domestic market may likely be increased during the current financial year because of likely spending by government on infrastructure and low cost housing projects together with contribution from Friends of Democratic Pakistan on construction and rehabilitation of flood-affected areas.
Export sales growth may slow down as it has slightly reduced already due to unrest in North Africa and the Gulf regions. Also, political tension with India has already closed a window of opportunity that had appeared in FY09. India constitutes 8.5 percent of total Pakistan's cement exports. However, local cement manufacturers are exploring markets like Central Asia and other new markets to enhance cement exports.
The company has plans of capturing the Afghanistan market as the exports to Afghanistan have increased in recent years. The company has also decided that the cement plants located in the northern parts of the country will gradually be phased out from export markets through sea route if the Inland Freight Subsidy is not continued by the government in the current financial year.
As for Lucky Cement, the working capital ratio can easily improve if they manage and reduce their Days Sales Outstanding. Also a likelihood of increasing in world cement prices plus increase in local demand may lead to higher selling prices which can in turn increase its sales revenue leading to higher gross margin. As investor confidence is already there, company's share prices are expected to increase too.
Lucky Cement has plans to expand its operations abroad. It has to start its first overseas factory in Africa by 2011 to take advantage of a construction boom.
Lucky Cement, currently exports to South Africa, plans to use the African factory to export to Europe.
Lucky Cement accounts for a third of Pakistan's overseas cement sales. It exported 57 percent of its production to the Middle East, Africa, Sri Lanka, India and Afghanistan in the nine months ended March 31.
Lucky Cement also raised $109.3 million selling shares overseas last year and said it would use the funds to increase production capacity to 9 million tons in three years from 6.55 million tons.
COURTESY: Economics and Finance Department, Institute of Business Administration, Karachi, prepared this analytical report for Business Recorder.
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