D G Khan Cement

D G Khan Cement Company Limited (DGKCC) is amongst largest cement manufacturers of Pakistan with a production capacity of 14,000 tons per day (4.2 million tons/annum). The company has three cement plants - two at Dera Ghazi Khan and one at Khairpur District Chakwal, and operates through a countrywide distribution network.
DGKCC is one of the noted companies in the country which is complying with environmental regulations, with production processes that comply with the World Bank's environmental standards. It has been certified conforming to "Environment Management System" ISO 14001 by Quality Assurance Services, Australia and for ISO-9002 Quality Management System in 1998.
The use of alternate fuels by the company is also noteworthy. The company has come up with several alternate, cheaper fuel options such as, rice husk, poultry waste, corn cob, corn stick, cotton dust, cotton sticks etc. Scrap rubber tyres are also used for alternate fuel by DGKC, for the import of which the recent FY13 budget offered a reduction in custom duty from 20 percent to 10 percent.
INDUSTRY REVIEW After a tough FY11 when the country was hit by the Great Floods of 2010, FY12 saw local cement retention prices going up, lending some price-based support to local cement manufacturers. In addition, post-flood reconstruction activity and greater housing construction in some parts of the country also brought about a volumetric growth in local sales - an eight percent year-on-year improvement in 9MFY12 at 17.4 million tons. Export sales, however, continued to be stifled during the year, clocking in at 6.2 million tons during 9MFY12, eight percent less than the same period last year.
PROFITABILITY The first nine months of FY12 saw a slight decrease in local cement dispatches of DGKC Cement of about six percent during 9MFY12 on a year-on-year basis. The company attributes this to the generally pessimistic overall economic situation in the country, and the lack of impetus from major public sector development projects during most of FY12. As for exports, sales volumes improved by about 6.5 percent on a year-on-year basis, with Djibouti and Afghanistan leading as the biggest buyers in terms of volumes.
Yet, helped by healthy retention prices of cement, net sales went up by a handsome 27 percent, helped by the considerable increase in domestic prices of cement during July-March FY12 relative to the same period last year. DGKC's gross profit during 9MFY12 was greater than that for the full year FY11 at Rs 5.5 billion.
As for selling and distribution expenses, a slight decrease was observed in those as a percentage of sales during 9MFY12 compared to 9MFY11. The overall effect of higher gross margins and relatively lower selling and distribution expenses resulted in DGKC's operating margins increasing by a whopping 10 percentage points in 9MFY12 vis-à-vis the same period last year, while the net profit margin jumped to 12.4 percent, even greater than that for FY11 as a whole.
LEVERAGE DGKC has reduced some of it's long-term liabilities improving its leverage position to some extent. A reduction of Rs 1.8 billion was seen in long-term loans at the end of March 2012 relative to the end of June 2011. This was reflected in an improvement in the ratio of finance costs to sales, which reduced to eight percent in 9MFY12 from 12 percent in 9MFY11. The interest coverage ratio also improved from 1.27 times in 9MFY11 to 3.1 times in 9MFY12.
At a conference call conducted with analysts in May, DGKC claimed to retire more debt, brining down its finance costs. "Due to cash generation, on account of better profitability, DGKC is expected to retire some of it debt and a 15-20 percent reduction in financial expenses can be expected in FY13," said a report by Global Securities Pakistan Limited after the company's conference call.
OUTLOOK The recent budget of FY13 had announced various positives for the cement industry of Pakistan. These include a reduction in customs duty on the import of scrap rubber tires from 20 percent to 10 percent. For DGKC, which uses TDF (tire-derived fuel) as an alternate fuel, this is a positive step.
Further, FED on cement was reduced by a further Rs 100 per ton, and the budgeted increase in PSDP is also more than 19 percent of last year's outlays - aspects that bode well for cement players like DGKC. The increase in PSDP expenditures, expected to materialise in the current fiscal year which will be an election year, will be particularly rewarding in terms of improved prospects for domestic demand of cement.
To add to the favourable circumstances, coal prices have also started receding globally, having gone down by more than 20 percent since the beginning of 2012. Consequently, the overall outlook for the industry in general and DGKC in particular appears bright.
On the exports side, the company expects a rise in demand from Africa and Asia. At the same time, the strengthening of the dollar, cheaper coal and receding global oil prices also mean that exports will become a lucrative option in terms of margins.
INVESTMENT AND VALUATION The industry's pricing power continues to support the profitability of many players, and DGKC is no exception. With the positives measures announced in the FY13 budget, analysts are further optimistic about the scrip. "At current levels, we have a 'Buy' call on DGKC offering an upside of 36 percent to our respective target price of Rs 53.6. Currently, DGKC trades at a FY13 FPE of 5.2x," said an analyst report by JS Research.

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DG Khan Cement - key performance indicators

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                                         FY09     FY10     FY11   9MFY12

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Profitability

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Gross profit to sales           %        31.5     16.6     23.6     33.0

Selling & distribution          %        10.4      6.1     13.3     10.9

expenses to sales

Operating profit to sales       %        18.8     13.9     14.3     24.4

Finance cost to sales           %        14.4     11.7     11.0      7.8

Net profit after tax to sales   %         0.9      1.4      0.9     12.4

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Leverage

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Current ratio                   times    0.84     1.19     1.45     1.37

Debt : Equity ratio             times   27:73    28:72    25:75        -

Interest Coverage ratio         times     1.3      1.2      1.3      3.1

Investment/ valuation

Break up value per Share        Rs      39.97    37.28    41.75        -

EPS                             Rs       1.63     0.70     0.45     4.73

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