D.G. Khan Cement

Established in 1978, D. G. Khan Cement Company Limited (PSX: DGKC) is a publicly listed company on the Pakistan stock exchange. The company is involved in the production and sales of clinker, ordinary Portland cement and sulfate-resistant cement. The company has a current capacity of 7.056 million tons of cement with plants located both in the north zone at Dera Ghazi Khan and in Hub Balochistan. It supplies to markets across the country through a dealership network of over 2200 dealers. DGKC also exports to neighboring markets such as Bangladesh, Afghanistan and overseas to Central Africa. The country signed a deal with a buyer in the United States in August 2021 to supply 100,000 tons of cement to the country. The first shipment carrying 50,000 tons left in June of this year after the company met all of the certification requirements of the US market.

Shareholding pattern

Nearly 32 percent shares of the company belong with associated companies within which the major shareholder is Nishat Mills Limited that holds 31.4 percent shares. The local general public holds 19.5 percent shares, while a little over 6 percent shares are owned by insurance companies, modarabas and mutual funds each. Another 12 percent are owned by Mr. Mian Umer Mansha and Mr. Mian Hassan Mansha together. The directors, CEO, their spouses and minor children together own 4.3 percent shares whereas the remaining 19 percent are with the rest of the shareholder categories.

Operational performance

Until 2018, DGKC was operating and competing in the north zone with its plants located in Dera Ghazi Khan but when the expansion spree began—the company decided to set up a plant in the south side near the ports. Not only was this supposed to help the company grab a higher market share in the south zone but also be able to export clinker overseas to countries where demand was rising. The capacity at the new plant was 2.7 million tons, taking the total capacity from 4.2 million tons to nearly 7.1 million tons. Clinker exports kept utilization for the company high, avail government’s export refinancing scheme and cover fixed costs. Before the expansion came through, the company was at its maximum utilization and the natural progression was to invest and raise capacity.

Between FY18 and FY22, annual growth in the company’s top-line has been strong for the most part—safe for FY20 when all bets were off. Revenue declined, gross profit plummeted, and before-tax earnings turned red. That year nearly all cement companies experienced a dramatic downturn with retention prices dropping and demand remaining weak. Covid put significant pressures on the economy’s stability and with inflationary pressures, also came rupee depreciation. The industry’s costs rose. At the time, DGKC had a leveraged balance sheet because of the new expansion. With ever growing discount rates, the company’s finance costs to balloon. Overheads and other expenses also remained high at 8 percent—together taking both expenses to 20% of revenues. Even “other income” could not help shore about earnings that plunged.

Since then, finance costs were brought down. In FY22, they stood at 6 percent of revenue together with 6 percent overheads. Meanwhile, other income has been growing as a share of pre-tax earnings. In FY21 and FY22, other income (consisting of dividend on cash and investments) was 53 percent and 45 percent of pre-tax earnings.

Coal and fuel prices play a dominant role in how the industry performs as most fuel and coal is imported from abroad and the rupee-dollar parity comes into play significantly. When coal prices rise, and/or the rupee depreciates, cement manufacturers have to raise prices. This was visible in the past year when international prices for coal surged when the Russia-Ukraine war hit the world. Cement manufacturers made the prudent decision to shift suppliers from South Africa and other countries to procuring locally and from next door. In FY22, therefore, prudent procurement and higher retention prices secured the company’s margins at 18 percent—same as the previous year—and much higher than margins of 4 percent during the covid year of FY20.

DGKC’s south expansion has helped the company reach out to more cement markets abroad. New shipments under a contract are already heading to the United States. This is critical since many regional markets are drying up in demand including Afghanistan and Sri Lanka—both countries in economic and political turmoil.

Latest performance and outlook:

In 1QFY23, DG Khan Cement (PSX: DGKC), may be reverting back to days in FY20, though the company did not turn over a loss like it did that year. The situation is similar across most, if not all, cement companies. Earnings during the quarters lidal most 60 percent as demand plunged and costs rose much faster than retention prices did.

The company’s revenue per ton sold grew 58 percent due to improved prices but rising energy costs, higher coal prices, and overall inflation on all inputs pushed costs per ton sold to 65 percent increase. This resulted in the company’s gross margins dropping to 15 percent from 19 percent in 1QFY22.

The company incurred lower other expenses due to a decline in exchange loss (4% vs. 7% last year), finance costs more than made up for it expanding to nearly 12 percent of revenue from 6.6 percent in 1QFY22 on account of the increase in policy rate. The company could have slid into losses had it not been for other income which stood at 114 percent of before-tax earnings.

Despite cheaper Afghan coal available, international coal prices dropping and cement prices in the domestic markets remaining high and intact, the declining demand in cement should be a major concern, especially when traditional export markets are also not keeping up. Development spending is down and rising construction costs have stalled new construction projects. Domestic markets must turn around for the company’s current financial position to improve.