Kohat Cement

Initially established as State Cement of Pakistan in 1984, Kohat Cement emerged as a result of the government's privatization policy when it was acquired by private investors in 1992 through open bidding. At that time, the company operated a Romanian cement line with daily production capacity of 1,000 tons.
Upon privatization, the new management stepped in under the leadership of the Chief Executive Officer, Aizaz Sheikh and immediately began efforts to improve production capacity and enhance quality. In 1994, the company garnered funding through commercial debt and by public offering of its shares through listing at domestic stock exchanges. The funds raised were invested in an extensive BMR program. Resultantly, the plant capacity was increased to 1,800 tons per day.
Thereafter a new grey cement line with a daily production capacity of 6,700 tons was established in 2007. Similarly, a new white cement plant with capacity to produce 450 tons per day was set up in 2005, and the facilities were converted to use coal as an energy input in 2003. Standby power generation capacity of 22.6 megawatts was also added in 2009.
In 2014, the company's sponsors transferred 55 percent of the company's total paid-up capital to ANS Capital (Private) Limited, thus forming a group comprising of ANS Capital as the holding company and Kohat Cement as its subsidiary.
Products and businesses
The company manufactures and sells Ordinary Portland Grey cement under the brand name Kohat Cement. It sells White Portland cement under the brand name Kohat Super White Cement. Both brands are marketed in 40 kilogram and 50 kilogram bags which are available in both paper and polypropylene bags.
The company's head office is located in Lahore while it maintains sales offices in Kohat, Peshawar, and Rawalpindi as well as Lahore. The manufacturing facility is located, as the name suggests, in Kohat adjacent to the Indus Highway. While the company had historically sold most of its products within Punjab and the northern region of the country, it began exports in 2002.
A number of other businesses are also associated with Kohat Cement by virtue of ownership and management. These include: Liberty Car Park, Palace Enterprises, Aizaz Brothers, Asian Hotels and Resorts, Ace Developers and Tariq Motors.
Financial performance
In the recently concluded half-yearly period, most of the country's large cement manufacturers have reported beefed up sales. However, as relayed by BR Research in its result coverage for Kohat Cement, the company's top line has not managed to register comparable gains, as its top line growth stood at a stunted one percent in July-December 2014, compared to similar period of the previous year.
A recap of the company's capacity and production trends reveals that this trend extends over at least the past two fiscals. After successive gains in capacity utilization over previous years, that ratio has tapered at about 67 percent. On the bright side, the company has ample capacity available to capitalize on higher expected demand for building materials in coming months. It is also important to keep in context, the fact that this company has seen its revenue and bottom line expand manifold in recent years;
Evidently the relatively slow increase in the company's top line is at least partly due to exogenous factors. The result announcement for 1HFY15 informed that "unauthorized obstruction in mining operations of the Company by some local miscreants during December 2014" caused hiccups for the company's supply chain. However it also informed that the company has arranged "an alternate quarry" to be able to circumvent this challenge, thus garnering hopes that similar obstructions will not afflict its operations in coming months.
Rising cost of energy has also peeved the company's financial performance in recent times. Specifically, the gross margin was sliced by 700 basis points due to the latest round of power hikes that took their toll in the 1HFY15 period. On this front too, the company appears to be responding well as it has expedited work on setting up a waste heat recovery power plant. The soon-to-be-completed plant is expected to generate 15MW within the next 2-3 months.
The annual report issued by the company at the conclusion of the previous fiscal highlighted its mushrooming short investments which more than doubled in FY14 compared to the previous fiscal. These investments appear to have yielded a stellar improvement in the company's other income in 1HFY15 which was up by 194 percent, when compared to 1HFY14.
The company has been able to exercise restraint in terms of cost management. The drop in distribution expenses is partially attributable to the rising proportion of domestic sales instead of exports as well as relatively low transportation expenses thanks to low international and domestic fuel prices. Other expenses have also been similarly contained in 1HFY15.
Most promising is the emergent trend in finance costs that have been scaled down significantly despite spending on the new power plant. The previous fiscal's annual report offered details into the deleveraging that the company had undertaken then, and the same exercise has continued into the current fiscal. Resultantly the company appears to be well poised in terms of combating energy costs and financing expenses in coming months.
Future outlook
There is widespread consensus among the analyst community that domestic dispatches should receive a further boost thanks to higher disbursements from the Public Sector Development Program, in this fiscal and beyond. Of particular interest for KOHC, shall be those new and continuing projects that are within its immediate vicinity; both in Punjab and Khyber Pakhtunkhwa. If the company is able to generate higher sales as a result of heightened economic and developmental activity, the consequent gains may be aplenty and more comparable to other players in the sector whose sales and profits have jetted in recent months.

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Kohat Cement

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Rs(mn)                   1HFY14       1HFY15        chg

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Net sales                  5853         5906         1%

Cost of goods sold         3469         3874        12%

Gross profit               2384         2032       -15%

Gross margin                 41%          34%

Distribution expense         38           34        -9%

Administrative expense       54           56         4%

Other expenses              150          138        -8%

Other income                 40          119       194%

Finance cost                 80           42       -47%

PAT                        1474         1366        -7%

Net margin                   25%          23%

EPS (Rs)                   9.54         8.84      -0.07

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