Fauji Cement is one of the leading manufacturers of cement in Pakistan carrying 8 percent of cement production in the sector. The company was incorporated in1992 and started production operations in 1997 with a capacity of 3,150 tons per day. The plant is located in Jhang Bahtar, Punjab. The company increased capacity in 2005, adding 735 tons per day to existing capacity to bring it up to 3,885 tons per day. FCCL introduced another production line in 2011 with a capacity of 7,560 tons per day. Annual production today stands at 3.43 million tons in cement and 3.27 million tons in cement making, it the fourth largest cement producer in Pakistan.
Delivering to the Northern region; its local markets are focused in Punjab, KP and adjoining areas. Major export markets have been in Afghanistan and South Africa with Sri Lanka and India from the region. Some of the projects FCCL have contributed to include Mangla Dam Raising Development Project, Neelum Jhelum Hydroelectric Power Project, Muzaffarabad, the Islamabad-Peshawar motorway, various Bahria Town projects, Pak Gulf Construction, Karakoram Highway Islamabad.
The company is listed on the stock exchange. Expansion-led growth: operational and financial performance FCCL has been expanding in tandem with the growing local demand. It enhanced capacity from 1.16 million tons to 3.42 million tons in 2011, which doubled net sales in 2012 and has had an upward surge in terms of revenues and profits. The company has further expansion plans keeping in view the projected growth in demand given the upcoming CPEC.
Production
Clinker Production increased by 120 percent in the past six years, going from 1.06 million tons of production in FY10 to 2.34 million tons in FY15. Cement production grew by 126 percent standing at 2.65 million tons in FY15. Production went up by 82 percent between FY11 and FY12 owing to the increased capacity.
Dispatches
Dispatches grew by 149 percent in the past six years. Local dispatches grew by 37 percent post-expansion between FY12 and FY15; standing at 2.2 million tons in the last fiscal, up from 1.6 million tons in FY12. Local dispatches in FY10 stood at 755 thousand tons and between FY11 and FY 12 grew by 157 percent.
Exports have been consistently falling since 2012; a total decrease of 25 percent between FY12 and FY15. Its share in total dispatches has gone from 24 percent in FY12 to 15 percent in FY15. The last fiscal saw a decrease of 8 percent with exports standing at 384 thousand tons in FY15, down from 416 thousand tons.
Financial standing
Sales revenues have surged since 2012. Between FY10 and FY15, net sales grew fivefold, going from Rs 3.81 billion to Rs 18.6 billion. After-tax profits went from Rs 0.3 billion in FY10 and Rs 4.1 billion in FY15, doubling in FY15 from profits in FY13. Capacity utilisation for the company has gone from 62 percent in FY12 to 75 percent in FY15.
Gross profit margins have soared; going from 14 percent in FY10 to 27 percent in FY12, and climbing to 38 percent in FY15. These margins have been at the back of high sales and lower input and fuel costs. Earnings per share were Rs 2.91 in FY15 as opposed to Rs 0.31 in FY10. In FY15, company gave final cash dividend of Rs 1.50 per share in addition to Re1.00 per share of interim dividend.
Operations in 9MFY16 and Q3FY16
In the nine-month performance of the company ending March 31, 2016, local dispatches stood at 651 thousand tons, an increase of 17 percent in a year-on-year growth since 9MFY15. Despite a fall in exports for several years, exports in 9MFY16 have seen an increase of 55 percent from 9MFY15.
Net sales grew by 13 percent in 9MFY16 at Rs 15.2 billion while before tax profits grew by a whopping 61 percent between 9MFY16 and 9MFY15. Margins have soared to 47 percent in the nine months of FY16 whereas they stood at 36 percent in the same period last year.
Quarterly results are astounding making sweet promises for the future-gross margin in Q3FY16 were unbelievably at 48 percent, and 37 percent in the third quarter of FY15. Profit before tax grew by 69 percent in the third quarter of FY16 compared to Q3FY15.
Energy and cost efficiency
To gain efficiency in energy consumption, the company installed its first ever Refuse Derived Fuel Processing Plant in 2009 at the cost of Rs 320 million. As well as being a cheaper source of fuel, the plant allowed for better disposing of municipal waste. About 200-300 tons of refuse per day is used in the plant which produces compost fertiliser as a by-product.
FCCL also recently set up a new Waste Heat Recovery (WHR) power plant with the engineering and equipment assistance of the Chinese SINOMA Energy Conservation Company, and the construction, erection and commissioning contract offered to ETEMAD Engineering. The plant has the capacity of generating up to 12 MW of electricity that would convert waste heat from the plant into energy. The plant started generating electricity in March 2015 reducing reliance on the national grid and operating with the captive power plant for smooth functioning of the second production line. Another WHR with a capacity of 9MW might be commissioned soon.
Recent update
According to a PSX notice released yesterday (May 30, 2016), an accident at the FCCL facility ended in the raw meal cement silo collapsing on coal mill at the second production line. The coal mill was destroyed and operations at the plant were halted. The plant according to the announcement will remain closed for 5-6 months until the damage is repaired. The first production line was under planned maintenance and it was hoped that it will be operational soon. This will have significant impact on outlook for the company in the coming fiscal.
Outlook: opportunities and threats
Plant expansion in 2011 and strong local demand; low cost of fuel driven by global coal prices that are falling because of China's slowing economy; high energy efficiency owing to the waste heat recovery plant; use of captive power generation from furnace oil as opposed to grid-brought power have all contributed to the strength of the top line and sky-high margins. With CPEC projects on the horizon, and growing economy that will boost construction and real estate sectors, FCCL is likely to maintain its bottom line. Since it's a major player in the cement sector, and with recent capacity utilisation of 86 percent in 9MFY16, the company may get a bigger piece of the CPEC pie than smaller players.
Major expansion plans within the sector-with notable cement producers including Cherat, DG Khan, Attock and Lucky cement announcing that they will have new plants operating by FY17 and FY18-could lead to a heavy price competition.
Exports could bounce back in the next fiscal if South Africa retracts the anti-dumping levy. On the regional side, India, Sri Lanka and Nepal have growing cement markets. While India is becoming more self sufficient, other regional countries are opening up for more imports. The cement sector on the whole should be wary of cement suppliers from Vietnam and Thailand that are more competitively priced.
The company's announcement yesterday that it halted production of its second line due to a collapse of the 25,000 tons capacity silo will have repercussions. The second line has a production capacity of 7,200 tons per day and will not be producing any cement for up to six months or more.
Analysis from Arif Habib says that for every 1 month closure of the second production line, the company would have an adverse after tax impact of Rs 0.19 per share on the bottom-line. If the plant remained closed for a year, the loss would reach Rs 2.29 per share.
However, the company reckons that the first line will be producing its 3700 tons per day soon and sufficient clinker stock will help the company to continue dispatches in the market at a likely lower price. The sooner the company repairs the damage, the better; but FY17 might bring sobering bottom line compared to the trends the company has enjoyed for years.
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