DG Khan Cement Company Limited (DGKC) was formed in 1978 as a private limited company under the management control of State Cement Corporation of Pakistan Limited. In April 1986, the company initiated its commercial production with 2000 tons per day clinker based on dry process technology. Later in 1992, the company was acquired by Nishat group as a result of privatisation initiative of the government and it was listed on the country's stock exchanges.
Cement industry - a condensed view Demand on the side of local industry is going strong. This is the outcome of an upsurge in construction activities ahead of winter season. During 4MFY15, local sales shot up by nearly 9 percent year-on-year. According to analysts, local sales growth is attributable to the rising demand by private housing sector.
On the contrary, the export chronicle is not so promising. Thanks to waning export demand from Afghanistan. Going onwards, analysts anticipate export demand to remain lackluster considering that Afghanistan remains the primary export market for Pakistani export manufacturers.
On the brighter side, falling coal prices in the international market is faring well for Pakistani cement manufacturers since coal is the primary raw material for cement. Moreover, with strengthening currency, the impact is likely to magnify. This is a good omen for the profitability of cement players. Not to disregard, strengthening currency carries the threat of further deteriorating export sales.
Dreading exports since 2011 It should be noted in line with industry wide trend, exports of the company has been on a downward trend ever since 2011. This was the outcome of Global financial meltdown disturbing construction, housing and infrastructure projects in developed economies, thus taking a toll on cement prices in leading developed economies around the world. Further, with the economy picking up, demand for housing and constructing and thus cement sales has seen an uptick. But with more and more cement players jumping on the bandwagon, not only competition has become severe but this has also resulted in excess capacities, thus further putting a stress on export demand for cement.
FY14: review of financial performance The company sells the bulk of its product in domestic market. As of June 2014, the share of local sales stood at 74 percent while exports contributed 26 percent to the aggregate cement sales of the company. In FY14, top line grew by 6.53 percent year-on-year. Thanks to rising local sales which compensated for the drop in export sales. Rising local sales seems to have come from private housing schemes and infrastructure projects of the government.
In terms of capacity utilisation, the capacity utilisation of cement improved, while that of clinker deteriorated when compared to last year. During the year, clinker production wise capacity utilisation stood at 89% (FY13: 97%), while cement dispatch wise utilisation was marked at 94% (FY13: 95%).
However, rise in cost of sales by 10.87 percent gobbled up whatever gains the firm achieved from top line growth. According to company's director report, doubling of royalty rates, increase in packing cost, 14% increase in depreciation due to capitalisation of RDF projects in Lahore, Multan and both factory sites, low clinker production, rupee devaluation in first six months, increase in Wapda and gas tariffs and rising freight costs were the culprits behind sky-rocketing input costs. Although declining coal prices provided a breather, reversal of GIDC diluted the positive impact. As a consequence, gross margin deteriorated by 200bps and clocked in at 35 percent in FY14.
Higher cash flows and better cash management helped in reducing the financial charges which further provided a boost to the bottom line. This also resulted in its interest coverage ratio to improve to over 16 percent from 9.7 percent last year, while debt to equity ratio dropped to 7.58 percent (FY13: 20.33 percent). Lower debt on the balance sheet is a reflection of lower financial charges - a good omen for profitability.
Besides, company's well-grounded investments further sugar-coated the bottom line by generating income to the tune of Rs 1,647 million, up by 12 percent year-on-year. Out of this Rs 1.6 billion, dividend income contributed a healthy 88 percent share.
Also, as a result of introduction of Alternative Corporate Tax in recent budget, the firm had to book higher taxation charges. Owing to the aforementioned reasons, bottom line of the firm rose by 8.43 percent. This pales in comparison to the previous year's bottom line growth of 34 percent where declining coal prices helped pick up gross margins and thus the profitability of the company.
Going onwards...With dwindling coal prices in international markets and improving currency value, gross margins are expected to portray a brighter picture. However, the prevailing GIDC issue continues to thwart cement players. De-leveraging of balance sheet and bolstering cash flows is lending a good hand in reducing financial charges and thus reinforcing the bottom line.
In the longer run, falling exports demands tapping into new export markets and diversifying into countries besides depending on exports to Afghanistan. Moreover, government's infrastructure and housing projects can help the industry fully utilise its capacity. Further, one area of focus could be disbursement of housing loans by commercial banks and other financial institutions. If done properly, demand for cement in the country can get a real boost.
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DGKC - KEY FINANCIAL RATIOS
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2009 2010 2011 2012 2013 2014
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Gross margin 31% 17% 24% 33% 37% 35%
Net margin 3% 1% 1% 18% 22% 22%
Interest coverage ratio 1.82% 1.92% 1.98% 4.29% 9.72% 16.84%
Debt to equity ratio 87.02% 63.38% 51.52% 41.09% 20.33% 7.58%
Dividend payout ratio 0.00% 0.00% 0.00% 15.99% 23.89% 25.70%
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Source: Company accounts
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