Dewan Cement Limited

Dewan Cement Limited (PSX: DCL) was established as a public limited company in 1980. It is part of the Yusuf Dewan group of companies. The latter has companies in the automotive and textile sectors. Dewan Cement manufactures and sells cement. It has two manufacturing units, Pakland Cement Limited and Saadi Cement Limited. It has an annual production capacity of 2.94 million tons of clinker.

Shareholding pattern

As at June 30, 2021, over 27 percent shares are accounted under the category of associated companies, undertakings and related parties. Within this category, Dewan Farooque Motors Limited has a major shareholding. Around 70 percent shares are held under the category of “individuals” while the directors, CEO, their spouses and minor children own a negligible share. The remaining close to 3 percent shares is with the rest of the shareholder categories.

Historical operational performance

In the last five years, topline has grown only twice, while profit margins have also been declining, with some improvement seen in FY21.

In FY18, revenue posted a growth of4.4 percent to cross Rs 13 billion in value terms. Total dispatches for the company grew by 7 percent to reach 2,233,980 tons. The industry overall also witnessed a significant growth of 13.84 percent with total dispatches recorded at 45.89 million tons. Production cost for the company, however, consumed nearly 85 percent of revenue, up from last year’s over 80 percent. This was primarily attributed to a rise in input prices, particularly coal. As a result, gross margin declined to 15.4 percent that also reflected in the net margin. The latter was recorded at 6.7 percent.

Revenue in FY19 contracted by over 10 percent. This was largely due to a 70 percent rise in export dispatches, while local dispatches were lower due to slower construction activities. The industry overall also experienced slow growth of 2.13 percent with most of the increase concentrated with export dispatches. On the other hand, production cost continued to make a larger portion of revenue at nearly 90 percent causing gross margin to shrink to 10 percent. With other income nearly disappearing in comparison to Rs 200 million seen in the previous year, the company posted a net loss of Rs 275 million for the year.

The company witnessed the biggest contraction in revenue in FY20 by nearly 52 percent with topline falling to an all-time low of Rs 5.8 billion. This was attributed to low demand due to a slowdown in construction activities that was further dampened by the onset of Covid-19 pandemic in the later half of the year. Moreover, selling prices also saw a downward pressure due to excess capacity in the industry. The cement industry too saw a marginal growth of 2 percent that was largely supported by export dispatches while local dispatches continued to decline. With production cost exceeding net revenue, the company incurred a gross loss of Rs 516 million while net loss increased to an all-time high of Rs 1.3 billion.

Revenue in FY21 grew by 7.3 percent on the back of local dispatches while exports stood at zero for the year, although local dispatches have also been lower year on year. This can be attributed to intense competition in the international market. Additionally, Afghanistan and India have been some of the major export destinations for Pakistan’s cement industry, both of which have witnessed political tensions in the last two years. With production cost decreasing to over 94 percent of revenue, the company managed to earn a gross margin of 5.75 percent for the year. However, with further expenses incurred, the company earned a net loss of Rs 666 million for the year.

Quarterly results and future outlook

Revenue in the first quarter of FY22 was higher substantially higher year on year at Rs 3 billion compared to Rs 16.5 million in 1QFY21 as the latter was affected by the strict lockdown during Covid-19. The company had also shut down its plants. With gradual resumption of activities, topline has been significantly better. However, losses have escalated to Rs 287.5 million versus Rs 116 million in 1QFY21, as production cost and administrative expense witnessed a notable increase.

The second quarter also saw topline significantly better year on year at Rs 4 billion compared to nearly Rs 1 billion in the same period last year. This was again attributed to resumption of business activities, hence an improvement in demand. Production cost was slightly better allowing the company to post a gross margin of 9.5 percent compared to a gross loss of Rs 164 million in 2QFY21. This also trickled to the bottomline that was recorded at Rs 131 million for the quarter versus a net loss of Rs 267 million in 2QFY21.

In 3QFY22, revenue was higher by over 68 percent on the back of local cement dispatches that more than doubled year on year. Production, however, consumed a larger portion of revenue at 89 percent due to rising input costs compared to 86 percent in 3QFY21, causing gross margin to decrease to nearly 10.8 percent versus 13.9 percent in 3QFY21. This also reflected in net margin that was lower at nearly 2 percent compared to 5.6 percent in the same period last year. The company has its hopes on rising local demand on the back of government construction projects such as PSDP and CPEC. However, the rising input costs as well as interest rates will continue to impede growth. Exports, in addition, have been hampered by rising freight and lower demand.