D.G. Khan Cement Company Limited

D.G. Khan Cement Company Limited (PSX: DGKC) was set up in 1978 under the repealed Companies Act, 1913 (now, Companies Act, 2017). The company produces and sells clinker, Ordinary Portland and Sulphate Resistant Cement. It has four plants; two located at Dera Ghazi Khan, one at Khairpur Distt. Chakwal and one at Hub Lasbela District (Balochistan).

Shareholding pattern

As at June 30, 2020, the company is largely held by its associated companies, undertakings and related parties, with over 32 percent held under this category. Of this, a little over 31 percent is with Nishat Mills Limited. Some 19 percent is with the local general public, followed by about 8 percent in foreign companies. The directors, CEO, their spouses and minor children collectively own 4 percent shares in the company, of which Mr. Mian Raza Mansha, the CEO, holds almost 3 percent. The remaining is divided among the rest of the shareholder categories.

Historical operational performance

Sales revenue of DGKC for the last nearly a decade has largely seen positive growth, while profit margins are on a gradual decline after reaching a peak in FY16.

In FY17, D.G. Khan Cement saw its topline increasing marginally by 1.5 percent, while volumetrically, dispatches also saw a similar increase to a large extent. While local sales had increased, export sales saw an 18 percent reduction. Reduced exports were a trend seen industry wide as exports to Afghanistan reduced while the African market was “becoming stringent”. Cost of production went up to nearly 61 percent of revenue, from a little over 57 percent in FY16, that reduced gross margin 39 percent. Most of this incline was associated with “furnace oil and coal” expense. The effect of this trickled down to the bottomline, with net margin recorded at 26.5 percent.

There was a nearly 2 percent rise in net sales revenue while total dispatches saw a 7.4 percent rise in FY18; local sales grew by almost 12 percent, while export sales contracted by more than 21 percent. Exports to India, Afghanistan and Sri Lanka reduced year on year; the company saw tough competition in the African market due to the presence of Iranian cement. Most of the exports of the company, about 77 percent are done by road, and 23 percent by sea. However, with a new plant of the company near the port, it hopes to increase exports via sea, and also export clinker to countries that do not have limestone reserves. Cost of production, on the other hand, jumped to almost 72 percent of revenue due to increase in coal C&F prices, that sliced gross margin to almost 28.5 percent. But other income, coming from dividends in addition to a positive tax expense, helped net margin to actually increase; it was recorded at nearly 28 percent for the year.

Revenue grew incredibly by 32 percent, whereas total cement sales saw a 16.4 percent rise in FY19. Local sales saw a 22 percent growth whereas export sales declined by 41 percent. DGKC’s new plant had a full year of operations, although helped to increase production, but could not find export markets due to a slowdown in the global economy. In addition, exports to India suffered after the Pulwama incident, while Afghanistan market was captured by Iran. Cost of production continued to increase, making up nearly 87 percent of revenue. This was due to increase in utility prices, while coal prices although saw 5.8 percent decline, but the effect was offset by currency devaluation, that caused an overall increase. this led gross margin to drop to an all-time low of 13 percent, that further contracted to almost 4 percent as net margin, due to an escalation in finance cost. the latter was a result of “borrowing to finance the capitalization of Hub plant”.

After seeing a growing topline for four consecutive years, revenue fell by 6 percent during FY20. Volumetrically, cement sales reduced by almost 2 percent while clinker sales increased remarkably as the company sold almost 1.7 million metric tons of clinker in exports. Local cement sales declined due to decrease in local cement sales price. This was as a result of demand contraction, Covid-19 pandemic and competition in the industry. Cost of production went up to 96 percent of revenue that brought gross margin to its lowest of 4 percent. This was further worsened by a continued rise in finance expense, that eventually led the company to incur a loss of Rs2.1 billion.

Quarterly results and future outlook

D.G. Khan Cement saw an almost 16 percent growth in its topline year on year during 1QFY21, whereas overall dispatches registered a 4.4 percent reduction. Sales growth was attributed to stable local cement prices while exports for the industry, as well as for the company, saw an increase mainly due to clinker sales. The company had, for the past many years, received substantial support from other income, that was much lower in 1QFY21 due to State Bank of Pakistan’s (SBP) restriction on banks regarding dividend payment. So, while D.G. Khan Cement did incur a loss for the period of Rs 351 million, it was lower than that seen in 1QFY20 at Rs 1.4 billion.

Waste Heat Recovery and CFPP at Hub are expected to become operational by 3QFY21 and 1QFY22, respectively that will help to lower the power expense of the company. Activities such as CPEC, work on dams and housing are expected to boost demand, while the capacity expansion of the industry is ready to meet the higher demand. However, costs may increase as the company expects coal prices to increase, while other risks for the industry include shrinking cement export markets, currency fluctuations and tight price market and competition.