Bestway Cement Limited

Bestway Cement Limited (PSX: BWCL) was set up in 1993 under the Companies Ordinance, 1984 (repealed with the enactment of the Companies Act, 2017).

The company produces and sells cement; is a subsidiary of Bestway (Holdings) Limited, U.K. The latter holds over 56 percent shares in the company.

Shareholding pattern Bestway Cement is primarily held by its associated companies, undertakings, and related parties, with over 60 percent shares held under this category as at June 30, 2020. Of this Bestway (Holdings) Limited U.K. holds the vast majority at 56.43 percent shares. The directors, CEO, their spouses, and minor children collectively hold 17 percent shares followed by 21 percent shares distributed among the local general public. The remaining about 2 percent is distributed with the rest of the shareholder categories.

Historical operational performance

Bestway Cement has seen a rising sales revenue for a large part of the decade with the exception of FY20, whereas profitability has been on a gradual decline after reaching a peak in FY15/FY16.

During FY17, topline witnessed a nearly 13 percent increase, whereas cement dispatches for the company grew by 8 percent. The rise in revenue was a result of growing demand in the domestic market and increase in clinker sales. The clinker sales of Bestway Cement made up more than 46 percent of industry clinker sales. Cost of production, on the other hand, increased to make up more than 56 percent of revenue. This can be attributed to increase in coal prices. Fuel expense also increased that is reflected in the 52 percent increase in fuel and power expenses year on year. So, while gross margins saw a negative effect, net margin for the year remained flat at close to 26 percent due to a fall in finance expense. The latter was due to decrease in mark up on syndicate term finance facility and musharaka facility.

The year FY18 started on a positive note for Bestway Cement as a cement plant was completed and made operational by June 2018 with a capacity of 6,000 tonnes of clinker per day. Sales revenue registered a 2.4 percent rise, while volumetrically, cement dispatches for the company were 15 percent higher at 8,590,403 tonnes; clinker sales, on the other hand, reduced by 52 percent. However, this could only translate into 2 percent higher revenue due to depressed selling prices in addition to higher excise duty and sales tax. Cost of production continued to incline, squeezing profitability; the former made up 64 percent of revenue due to increase in energy costs. This led gross margin to fall to almost 36 percent, however net margin, at almost 25 percent, was supported due to significantly lower tax expense.

In FY19, Bestway Cement saw one of the lowest growth rates in its topline. This was also in line with industry trends as local dispatches for the cement industry saw a 2 percent reduction. This was attributed to lower demand owing to the slowdown of the economy and slower disbursement of PSDP funds. Cement sales for the company reduced by 5 percent, whereas clinker sales disappeared entirely. Prices had improved during the year that allowed for some improvement in revenue despite the fall in volumes. However, cost of production continued to take away the benefit of improved prices, as the former claimed 70 percent of revenue. Most of this increase was seen in raw and packing material consumed. Thus, gross margin contracted to 30 percent, while operating margin was supported by reduction in administration expense; net margin reduced to nearly 19 percent, due to significant rise in finance expense.

Bestway Cement saw an almost 31 percent contraction in its revenue along with cement dispatches seeing a 10 percent reduction in FY20. This was attributed to excess capacity, and the situation was further worsened due to Covid-19 related lock down. The overall cement industry saw a 2.5 percent reduction in cement dispatches. Exports, however, for the industry saw a 20 percent rise; of this cement exports declined due to halt in trade with India, while clinker exports increased, encouraged by new production lines, especially in the South. Lower volumes and lower prices, along with higher input costs reduced gross margin to 3 percent; the company incurred an operating loss, while net margin was positive due to a positive tax figure.

Quarterly results and future outlook

Revenue was higher year on year by 30 percent during 1QFY21. Cement dispatches grew by 24 percent, while the overall cement industry’s dispatches also increased, by 18 percent. This was driven by a strong demand as economic activities resumed after the lock down. Cost of production was also better at 77.5 percent of revenue compared with 92 percent of revenue seen in 1QFY20. Thus, net margin was higher at almost 15 percent.

Demand drove up after the lock down and further encouragment by the government’s incentives is a positive factor for the industry. However, factors such as energy costs, inflation, currency depreciation are some of the risks that can bring uncertainty into the equation. Moreover, exports have benefitted from currency depreciation, but the halt in trade with India, and the border closures due to Covid-19 can keep export revenues in check, particularly for cement manufacturers in the North.