Lucky Cement Limited

Lucky Cement Limited (PSX:LUCK) is a leading player in Pakistan's cement space, an industry which have a good run in wake of the rise in construction activity. The cement company started operations in 1993; in little over two decades, it sits comfortably at the top of the cement industry with a near 20 percent market share. Starting off with a capacity of 1.2 million tons per annum (with installations of Line A and B at the Pezu plant, Lakki Marwat) the constraint eased to 1.5 million tons in 1999.
The year 2005 brought major expansionary plans with the commencement of Line C at the Pezu plant and inauguration of production facility at Karachi. Currently, the company has seven production lines in place, bringing its total production capacity to around eight million tons a year.
With plants in Karachi to serve the Southern area, and in Pezu and Khyber Pakhtunkhwa to cater to northern region, Lucky supplies throughout Pakistan. In 2002, the cement manufacturer started its export operations. As part of its global expansion, Lucky set up a grinding facility in Basra, Iraq, and a manufacturing plant in Congo.
Lately, local sales have been strong for Lucky and other cement producers on back of booming private housing sector. Exports, however, haven't impressed investors on account of strained demand from Afghanistan - the primary export market for Pakistani cement manufacturers.
Recent Performance In the past five years, Lucky Cement has seen its revenue growth at a compound annual growth rate of 13 percent. In the latest fiscal year (FY15) though, declining exports only allowed Lucky a 2.7 growth year-on-year to 6.8 million tons. In the same period, industry-wide sales were up 3.3 percent. One area where Lucky has an evident edge though is capacity utilisation - 92 percent as of FY15-end compared to 78 percent industry-wide.
Cement exports have continued on a downward journey in FY16. In the six months ended December, the industry-wide exports have eased 26 percent year-on-year to three million tons. Exports for Lucky followed suit, declining 27 percent year-on-year to 0.9 million tons.
Soaring cement sales locally and a fall in demand from abroad means that the revenue mix is changing fast for the likes of Lucky. While sales might only have jumped two percent year-on-year in 1HFY16 to 3.3 million tons (Rs 21.8 billion), the share of local sales jumped nearly 11 percentage points to 73 percent.
Profitability has been the biggest positive for Lucky Cement in recent years. In the last half decade, after-tax profits have soared at a CAGR of nearly 32 percent. From Rs 3.1 billion in FY10, profits climbed to Rs 12.4 billion in FY15. More recently though with subdued top line growth, the increase in Lucky's bottom line has been less impressive.
Over the years, margins have depicted a healthy and consistent rise - from FY10 to FY15, GP margin climbed from 32.6 to 45.1 percent while NP margin rallied from 12.8 to 27.8 percent respectively. As of 1HFY16, the two metrics stood at 46.7 percent and 28.6 percent respectively. Also, Lucky's liquidity condition has bettered a lot in this period. Solid cash inflows from operations have allowed the company to put more money into investing activities each year and pay off loans. Consequently, there has been a significant decline in Lucky's short-term as well as long term liabilities over the years.
The company's balance has nearly doubled in the past five years - from total assets of Rs 38 billion in FY10 to Rs 73 billion in FY15. Lucky's total investments summed up to around Rs 11 billion as of FY15. With a progressive financial situation, Lucky has increased the amount of cash dividends it disburses. From Rs 1.29 billion in FY12 (and preceding two years), the manufacturing giant upped the payout to Rs 2.91 billion in FY15.
Stock price and outlook LUCK's stock rally has been phenomenal in the last few years. The stock has outperformed the market in each of the past five years. Trading at below Rs 100-mark in early 2012, Lucky Cement shares have rallied steeply to trade above Rs 500 today; from CY12-14, the average appreciation in LUCK was 91 percent. Also, the stock has a high correlation with the overall market - a beta coefficient of 0.93 according to Financial Times.
Domestic cement dispatches have been marching on for some time and are expected to do so in future. Even if export-deceleration doesn't slow down, local sales are backed to offset the deficit. Going forward, CPEC is the major growth driver for the cement industry with multi-billion dollar investments in infrastructure and power generation. This coupled with a booming private housing sector makes the approaching years bright for the likes of Lucky. Nearly all sell-side reports (on stock market outlook for CY16) have included LUCK as a top pick, with each one of them highlighting cement sector to be strong this year.

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Lucky Cement Limited

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Rs (mn)                 2QFY16     chg   1HFY16     chg

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Net sales                11500      5%    21842      2%

Cost of sales             6044      0%    11633     -4%

Gross profit              5456     12%    10209     10%

Gross margin               47%              47%

Distribution cost          472    -46%     1064    -39%

Administrative expenses    316     43%      579     35%

Finance costs               15    293%       17     35%

Other charges              368     10%      707      9%

Other income               303      7%      661      7%

PAT                       3287     12%     6255     12%

Net margin                 29%              29%

EPS                      10.16            19.34

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