Cement: FAUJI CEMENT COMPANY LIMITED - Analysis of Financial Statements - Financial Year 2004 - 1Q 2011

Sponsored by Fauji Foundation, the Fauji Cement Company (FCCL) was incorporated in Rawalpindi in 1992. With its headquarters in Islamabad, the company operates cement plants at Jhang Bahtar, Tehsil Fateh Jang, District Attock Punjab.
The cement plant has an annual cement production capacity of 1.165 million tons. The quality portland cement produced at this plant is the one of the best in the country and is preferred in the construction of highways, bridges, commercial and industrial complexes, residential homes, and a myriad of other structures, fundamental to Pakistan's economic vitality and quality of life.
In line with the cement industry, Fauji Cement has signed a contract with Polysius, a German cement plant manufacturing firm for installation of state of the art, the largest single line (7200 tons per day of clinker) ever commissioned in Pakistan. Meaningful expansion will help the company expand its market share. The project is expected to be commissioned in the 3rd/4th quarter of 2010.

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Company Snapshot

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Symbol                                   FCCL

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Nature of the Business      Cement Production

Market Price                          Rs.4.94

Outstanding Shares                    741,988

Market Capitalization               3,665,421

EPS                                   Rs.0.31

Price/Earnings                          20.87

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Recent results (1Q11)
During the quarter under review, the Company's capacity utilization remained at 82% as compared to 83% in the corresponding quarter of the last year. Exports stood at 112,777 tons as compared to 56,320 tons of cement in the same quarter last year depicting an increase of 100%. Local dispatches stood at 126,696 tons as compared to 185,955 tons during the corresponding quarter of last year depicting a decrease of 32%. As a result of slightly low dispatches and increased cost of production profitability of Company stood at Rs 106 million compared to the last year's same quarter's profit of Rs 148 million.
Sales dipped a bit to Rs 1.18 billion as compared to Rs 1.25 billion in the same period last year. Higher cost of sales resulted in lower gross profit at Rs 204 million as compared to Rs 261 million in the same period last year. Administrative expenses also increased significantly to trim down PAT further. Financial charges were however lower at Rs. 1.9 million as compared to Rs. 12.2 million in the same period last year. EPS for 1Q'11 was Rs. 0.14 as compared to Rs. 0.20 in the same period last year.
Industry overview
FY10 has been one of the worst in the history for the local cement industry in terms of prices and profitability. The ongoing recession along with capacity expansions in the cement sector have created a situation of excess supply and a drop in prices due to a severe price war. The total cement production capacity of the industry stands at 45 million tons as of the end of FY10, with capacity utilization of the industry estimated at 68%. The fierce price war has drastically eroded retention prices on one hand, while on the other hand input prices have also increased due to heavy inflationary pressures. On per-ton-basis, retention prices were lower by 21% YoY, while gross profit was lower by 53% YoY due to cost pressures.
On the backdrop of declining prices, overall cement volumetric growth registered an increase of 9.3% YoY to stand at 34.2 million tons. The increase in the domestic dispatches of the industry is 14.63 % and the decrease in exports is 0.89%. While exports increased considerably during FY09, due to expanding capacity of neighbouring countries the local cement industry was unable to capitalize the market and only a marginal rise was seen during FY'10.
Sales and production
Cement production of FCCL for FY10 stood at 1,119,577 tons, a decline of 4% over production during FY09. Local sales fell by nearly 12%, standing at 786,646 tons (FY09: 891,283 tons) while exports rose by 21% standing at 332,931 tons. In terms of revenue, sales fell by almost 30%, dropping down to Rs. 4.9 billion at the end of FY10 (FY09: Rs. 6.95 billion). The decline in sales revenue is attributed to both, a decline in turnover, as well as a decline in cement prices. Over the year, there has been a decline of 27.53% in the local prices and a 12.90% drop in international prices. As a result, revenue from local dispatches dropped by almost 36%, against a 12% drop in volume. Similarly, export revenue rose by only 1.2% against a 21% increase in volume.
Comparing the performance of Fauji Cement to the industry, it is seen that while all companies experienced a decline in sales revenue due to the ongoing slash in prices, most also experienced a growth in sales volume. This trend however was not followed by FCCL. Capacity utilization of the company stood at 96% during FY10 (FY09: 100%). This proportion is expected to decrease further if demand of cement does not pick up, as the company is currently in the process of capacity expansion.
Profitability
For FY10, Fauji Cement posted a profit after tax of Rs 250 million, a decline of 75% YoY (FY09: Rs 2 billion). This decline was due to both, declining prices and lower sales. Production costs for the year fell by 9.2% YoY, which is more than proportionate to the decline in sales volume. This shows that the company was able to employ efficiencies and cut costs such that production costs fell despite inflationary pressures. Fuel consumption, which comprises of 40% of costs, fell by almost 25% over the year. Raw materials and packaging materials consumed fell in proportion to the decline in sales. Gross Profit thus stood at Rs.515 million, as compared to Rs. 1.69 billion at the end of FY09.
Operating expenses remained relatively stable over the year, while operating income fell sharply, dropping from Rs. 190 million during FY10, to Rs. 27 million during FY10. This decline is primarily due to the lack of profit on bank balances over the year. Finance costs saw a decline, falling to Rs. 41 million (FY09: Rs. 224 million), resulting in a Profit before Tax of Rs. 325 million.
With the decline in sales revenue and the ongoing price war, profitability of the company was seen to decline over FY10. The Gross profit margin for FY10 stood at 13.5% (FY09: 32%), while the net profit margin stood at 6.6% (FY09: 19%). While the company's gross profit margin is similar to that of the industry, the net profit margin stands well above the industry average, which is only 1.4%.
ROA for FY10 stood at 0.93%, due to the combined effect of a decline in sales and an increase in assets (FY09: 4.7%). Similarly, ROE stood at 2.6%, the decline caused only by the drop in sales (FY'09: 10.4%). Both figures are in line with the industry.
Liquidity
The liquidity position of FCCL has been seen to be on a decline since FY'09, when the current ratio fell sharply from 2.16 at the end of FY08 to 0.63 at the end of FY09. During FY10, a much smaller drop was seen, with the current ratio now standing at 0.52. The liquidity position of the company is similar to that of the industry, which has an average current ratio of 0.67.
Current liabilities rose by 52% YoY, standing at Rs 3.98 billion; while current assets rose by 25% YoY to stand at Rs 2.1 billion. A large portion of the increase in current liabilities is attributed to an increase in the current portion of long term financing. Current assets on the other hand increased due to increases in sales tax refundable.
Asset management
Asset management, similar to the other ratios analyzed, has been on a decline during FY10. Inventory turnover rose from 80 days at the end of FY09 to 109 days by the end of FY10, mainly due to the decline in sales over the period. Days sales outstanding halved, from 4 days at the end of FY09 to 2 days by the end of FY10. This is a great achievement for FCCL, as it has made a considerable improvement in its debt collection. The industry average for DSO is 6 days, meaning the company is doing much better than the industry. The operating cycle for the year FY10 thus stood at 111 days (FY09: 84 days).
Total Asset Turnover and Sales/Equity saw moderate declines, largely a result of the decline in sales. Total Asset Turnover stood at 0.14 (FY09: 0.25), while Sales/Equity stood at 0.40 (FY09: 0.55). Total Asset Turnover of FCCL lies well below the industry average which stands at 0.44, while Sales/Equity of the company is in line with the sector.
Debt management
Debt management of FCCL has been on a decline, with short and long term debt on the rise. The debt to assets ratio has seen a moderate rise, from 0.55 at the end of FY09 to 0.66 by the end of FY10. Debt to equity however rose by 44%, standing at 1.74 (FY09: 1.21). While debt to assets rose only moderately due to the balance of increasing assets and liabilities, the debt to equity ratio felt the full impact of the increasing debt. A large proportion of the increase in liabilities is a result of long term debt, which is why the long-term debt to equity ratio of the company rose from 0.94 at the end of FY09 to 1.33 at the end of FY10. Long-term debt of the company stands at Rs. 12.8 billion, while current liabilities stand at Rs. 3.9 billion. The company's debt management is considerably worse than the industry average, which has a debt to equity ratio of 1.3 and a long-term debt to equity ratio of 0.65.
While the company is highly leveraged as compared to the industry, it has been successful in keeping finance costs relatively low. The TIE ratio stands at 9.50, a rise over the previous year (FY09: 7.67). This figure is well above the industry average which stands at 4.35. The company's finance costs have reduced considerably over the period, dropping to Rs. 41 million by the end of FY10 (FY09: Rs. 225 million).
Market value
The market price of FCCL has been on a decline, with the price dropping from Rs. 6.72 per share at the end of FY'09 to Rs. 4.56 by the end of FY'10. The beta for the stock is 0.79, which means that it provides less return than the average stock, but is also less risky.
Earnings per share for the year stood at Rs. 0.31, a 32% decline YoY (FY'09: Rs. 0.46). The company's EPS stands well below the industry average of Rs. 2 per share, and is a reflection of the poor sales during the year. The price earnings ratio stands at 20.87, which shows that investors are still confident about the company's prospects, despite the company's performance (FY09: 14.1). Book value remained stable over the year, as there was no change in the number of shares outstanding or in equity. Like other cement manufacturers, FCCL has not announced a dividend for its shareholders, and has chosen to reinvest profits so as to boost performance during the coming year.
Future outlook
The prospects of the local cement industry are dependent upon improvements in the economy, especially macro-economic indicators and the law and order situation. While a budget of over Rs. 600 billion had been allocated to public sector development program (PSDP) this year, this amount may be slashed in half in the aftermath of the floods. Resources are limited and public and private spending will both be reduced in the future, a threat to local cement manufacturers. However, there is a large amount of reconstruction that is required in the flood affected areas which will ultimately enhance demand for cement in the country. Additionally, a number of dams as well as roads and buildings need to be built, which will help provide the cement sector with the required boost.
Pakistan has the ability to export large quantities of cement, but is unable to capitalize upon this opportunity due to heavy taxation and excise duty, political tension, and poor law and order situation. Export sales are likely to reduce further in the near future due to enhanced capacity of neighbouring countries.
FCCL is currently in the process of expansion, which once complete will make it the largest cement manufacturer of Pakistan. The company is expected to revive in terms of sales and profitability, as well as debt management, once this project is complete. With the expected boost in cement demand, prices are likely to rise, which will help the company to further improve profitability.
COURTESY: Economics and Finance Department, Institute of Business Administration, Karachi, prepared this analytical report for Business Recorder.
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Copyright Business Recorder, 2011