Did you hear the one about DG Khan Cement (PSX: DGKC)’s impressive entry into the United States market via cement exports? It is what other rival companies must aspire to, except DGKC is drowning under the pressure.
A scatterplot illustration mapping the top 10 companies (also those that have announced their financial results for FY19) across their revenue and gross margin performance suggests DGKC is in a league of its own, which doesn’t appear to be a blessing. Though the company has recovered from last year’s loss of a whopping Rs3.6 billion, its post-tax earnings of Rs542 million are below every company in the list, even much smaller companies like Thatta or Attock cement.
Despite earning the fourth highest revenues during FY24 in the list, the company’s gross margins are abysmally low. At roughly 16 percent, gross margins for DGKC are much below the average for the 10 companies of 29.8 percent and are only slightly higher compared to DGKC’s FY23 (15%) where the average for the cement industry was 25 percent.
Evidently, this is turning into a trend, and may not be an outlier. DGKC is by no means a small cement company. It has one of the largest capacities and is one of the only two cement companies with plants located in the north as well as the south zone, the other being Lucky Cement. The company also doesn’t shy away from risky moves, having spent a significant amount of time and effort qualifying to export cement to a tough US market. It matters how DGKC performs.
Like other cement companies during FY24, the company has been burnt by lethargic demand in the domestic market, and like other cement companies, DGKC has been expanding its exports. Except, unlike other cement companies, DGKC has been exporting a lot more clinker than cement. Meanwhile, the cement it is exporting to the US is not enough yet. Data for 9M suggests clinker exports for DGKC grew 52 percent in FY24 while cement exports grew 29 percent; the share of cement exports to total cement sales, however, was only 5 percent compared to last year’s 3 percent. Clinker fetches lower prices than cement in export markets which explains why the company’s margins are low.
The other two important reasons why DGKC is lagging behind are higher tax incidence and significant finance costs. In FY24, the latter was 12 percent of revenues, while overheads were 6 percent of revenue, only slightly higher than the average of 5 percent for the other companies. But as a result of both, finance costs and overheads ate up 18 percent of the revenues together in FY24. Since 84 percent of revenues were the cost of goods, DGKC didn’t have any profits to speak of, if not for “other income”. In fact, other income (coming from dividends from MCB among other sources of other income) is 1.4x of before-tax earnings.
The outlook for DGKC may appear fairly pessimistic at the moment, but one could argue that the company is much better prepared for the long run, having jumped through hoops in its efforts to diversify its markets. The company supplies to both zones of the country, and it is exporting to the US, a quality of cement that it believes will be acceptable in other North American markets. At the expense of current profits, DGKC has made strategic decisions and investments that will pay off over time. The company has been focusing on reducing its debt, halted some of its energy projects due to high interest, and will take the next year to stabilize.
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