Kohat Cement Limited

Kohat Cement Company Limited is a Pakistani cement manufacturer located in the North Zone of the country, with a factory plant near Peshawar. Incorporated in 1980, the company manufactures two types of cement, grey and white. It has a total production capacity of 2,805,000 tons/annum and 148,000 tons/annum respectively and a market share of approximately 10 percent.
INDUSTRY ANALYSIS Between 1HFY11 and 1HFY12, local dispatches in the cement industry increased while exports contracted. The growth of sales for the industry was four percent, below expectations. One reason for the sub-par results may have been the significant increase in cement prices over the period. A decrease in Sales Tax and Federal Excise Duty (FED) of one percent along with a complete removal of the 2.5 percent Special Excise Duty (SED) within the government's budget 2011-2012 had reduced the burden on the manufacturers. Though initially expected by analysts to pass this tax exemption to consumers, the cement producers chose not to in an effort to augment their bottom lines.
OPERATIONS Increment in volumetric sales for Kohat Cement was 19 percent for the half year ended 31st December 2011, which was a significant increase not over just the corresponding year but also above the industry average. Demand, or lack thereof, had an adverse effect on the cement lines of Kohat. The old grey line had to remain closed on account of insufficient demand and white cement was not sold in much quantity for the same reason. Clinker production grew by a paltry 1.58 percent over the corresponding period.
Coal is a significant input in the production of cement, accounting for nearly around 60 percent of the cost of cement. The volatility of coal prices in recent years has led many cement players to look towards alternative sources of fuel. Kohat is no different; as of 1HFY12, the management was working on a project for alternative energy scheduled to be completed over the next year.
PROFITABILITY The 1HFY12 result for Kohat Cement shows increased profitability over the corresponding period last year. Net sales increased by 62 percent year on year, while cost of goods sold increased by 37 percent. As a result, gross profit was augmented by 241 percent and gross margins more than doubled from 12.2 percent in 1HFY11 to 25.7 percent in 1HFY12.
Selling and distribution expenses ballooned, but that is expected to accompany surge in sales such as the one the company experienced. Operating profit increased by over 250 percent percent, and operating margins more than doubled from 11.1 percent in 1HFY11 to 24 percent this period.
Despite a significant increase in the taxation over the previous year, profit after tax witnessed an increase of 842 percent and the company saw a change from red to black over the corresponding period last year. Net margins for 1HFY12 increased from a negative three percent to a positive 13.6 percent.
LEVERAGE The company capitalised upon the good fortunes of increased prices and, in addition to other repayments, pre-paid a long term debt during the six months to the tune of Rs 250 million. This is good news in an industry which has seen non-performing loans exceed 22 percent, according to a spokesman of the All Pakistan Cement Manufacturers Association.
LIQUIDITY On the liquidity front, there has been relative improvement in Kohat Cement's accounts. From a current ratio of 0.43 in the FY10, the ratio improved to 0.7 in the most recent annual report of FY11. Such a ratio underscores a prevalent trend in the cement industry as many players have current ratios below one. The cash flows in 1HFY12 suffered on account of Rs 711 million worth of long-term finance being repaid in the period.
LOOKING FORWARD The government has been increasing public expenditure funds in recent months, and the export market might bode better as well. Having seen a reduction in exports over the past couple of months, the reconstruction activity in Afghanistan bodes well for the North Zone while Gulf nations showing signs of increasing trade with Pakistan regarding cement is good news for players in the South Zone.

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Kohat Cement Ltd

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(Rs mn)                  1HFY11   1HFY12    chg     FY10     FY11    chg

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Net sales                2,516    4,074     62%   3,692    6,085     65%

Cost of sales            2,209    3,025     37%   3,335    5,158     55%

Gross profit               307    1,049    241%     357      927    160%

Operating profit           279      979    251%     283      841    197%

Finance cost               329      341      3%     665      715      7%

profit before taxation     (50)     639            (382)     126

profit after taxation      (75)     555            (328)      64

EPS (Rs)                 (0.58)    4.31           (2.55)    0.49

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