Thatta Cement Company Limited (TCCL)

Thatta Cement Company Limited, a subsidiary of the State Cement Corporation of Pakistan (Pvt) Limited was incorporated in 1980, setting up its manufacturing facility in 1982. The plant was supplied by a Japanese company and had an installed capacity of 1,000 tons per day. The facility was privatised under the second privatization wave of 2000s, acquired by a consortium of Arif Habib group and Al-Abbas group.

Subsequent to privatisation, the capacity was enhanced from 1000 tons per day to 1,500 tons per day, and later converted its plant from furnace oil to multi fuel firing system (coal, gas and furnace oil). The company obtained listing on the Karachi Stock Exchange Limited as a public limited company in 2008.

The plant as the name of the company suggests is located through North East of Karachi in the district of Thatta with close proximity to raw material reserves such as limestone and clay. The company has the mining rights for extracting limestone from 2,364 acres, shale/clay from 1,121 acres and silica sand from 1,239 acres of land, respectively. In 2010, the company acquired additional rights to mine limestone from 1,240 acres of land.

TCCL has a larger product line than most other cement players and aside from producing ordinary portland and sulphate resistant cement; it produces portland blast furnace slag, ground granulated blast furnace slag (GGBF) which is used in blending and often as filler in foundations, and Oil Well Cement, for which the company also received a prestigious certification by the American Petroleum Institute (API). The Class G cement is used by oil and gas exploration companies and TCCL is the only Pakistani company that can market its product to countries that use this variety of cement for the construction and drilling of oil wells.

The company's current production capacity is 450,000 tons annually which accounts for one percent of the market share. The company is currently running at 62 percent of its production capacity.

TCCL's exports markets primarily include Sri Lanka, India, Middle East and some African countries including Sudan.

Company's ownership and investments

In 2013, Arif Habib group sold 62 percent holding to four private companies at a total transaction value of approximately Rs 1.5 billion. Of the four, two Sky Pak Holding and Al-Miftah Holdings each bought 22.7 percent of the company's shares, while the other two private companies - Golden Globe Holding and Rising Star Holding - bought 8.5 percent and 7 percent of Thatta Cement's shares respectively.

As at June 30, 2015; the highest stakes in the company's holdings belong to associated companies, Sky Pak Holding (Private) Limited that held 20.444 million shares (20.5 percent). Arif Habib Corporation Limited held 10.28 percent of the shares. Other companies such as Rising Star Holding (Private) Limited and Golden Globe Holding (Private) Limited also held 6.3 percent and 8.5 percent of company's shares.

The company incorporated a subsidiary called Thatta Power (Private) Limited (TPPL) in 2010 to primarily supply TCCL with generated power supply. Thatta cement owned 62.43 percent shareholding of TPPL as at June 30, 2015. The number of shares held in TPPL however increased from 2,991,581 in 2014 at fiscal close to 29,915,810 in 2015 at fiscal close; with share of holding remaining the same.

The captive power plant produces 23 MW of electricity, of which 10MW is used by TCCL, while the rest is provided to the grid. In October 2015, TCCL approved a loan of Rs 300 million to TPPL so it could meet its financial obligations including working capital requirements to ensure uninterrupted power supply to TCCL. The loan / advance facility carries mark-up at the rate of 3 month KIBOR plus 2.62 percent annually payable on quarterly basis.

TPPL was granted a generation license from NEPRA for its natural gas based thermal generation facility for the total installed capacity of 45.984 MW to be set up in two phases. In the first phase, the company successfully installed capacity of 23 MW in 2012. TPPL has now entered into a Power Purchase Agreement (PPA) with the Hyderabad Electric Supply Company Limited (HESCO) to sell power that is surplus to the requirements of TCCL. The two are currently in a litigation battle over some financial obligations.

Cost and energy efficiency

The company is strategically located to keep costs down. The plant is located near key raw materials that can be mined and Thatta is close to the Karachi port which allows for faster delivery of coal to its plant.

Over the years the company took several steps to upgrade its manufacturing facilities, in order to improve the efficiency of its plant and use alternative fuels to diversify. The company modified its clinker transport system and added a new rotary packing system to speed up the bagging process at the end of the manufacturing cycle.

The company also kicked off a Balancing, Modernisation and Rehabilitation (BMR) project in 2014 that was hoped would bring about productivity, efficiency in the production network to produce high grade products keeping environment in mind to eventually bring down cost of production and improve the company's margins and future sustainability. The BMR resulted in conversion of the existing cement making process into pyro-process system which was efficient and more environments friendly. Recently it was announced that the company's subsidiary TPPL would set up a 5MW Waste Heat Recovery (WHR) which would use waste heat of TCCL and TPPL power generation.

Six year operational and financial performance

Though Thatta holds a small share in the market, the company's financial standing and overall profitability has improved. Its diversified product range also makes it a unique cement producer with great potential to export its oil well cement to fuel exploration companies across the world.

Production came down quite a bit since FY10-clinker production went down by 18 percent between FY10 and FY14 and then further down by 31 percent between FY14 and FY15. Cement production came down by 7 percent between FY10 and FY14 a further 7 percent between FY14 and FY15 reaching 278,199 tons. GBFS on the other hand rose from 4,306 tons to 33,722 tons, inclining 8 times over between FY10 and FY15. Its oil well cement has also gone up albeit not exponentially.

According to the company's annual reports, clinker production was suspended for four months as the BMR was carried out from February 2015 which may have resulted in the decline of production.
Meanwhile, all dispatches stood at 419,633 tons in FY12, coming up from 324,244 tons in FY10; but later fell to 316,073 tons in FY15 but these swift declines can partially be associated to a dramatic fall in exports-from 107,079 tons in FY10 down to 78,196 tons in FY12, further down to 9,001 tons in FY13, reaching 2,133 tons in FY15. In fact, share of exports in total dispatches was 33 percent in FY10, which reached one percent in FY15.

The company's turnover rose by 49 percent between FY10 and FY15 reaching Rs 2.3billion and earned a profit of Rs 0.3 billion with a 14 percent net profit margin in FY15 against 6 percent the previous year and negative four percent in FY11.

Cost of sales as a proportion of revenues were brought down from 89 percent in FY12 to 69 percent in FY14 which is a fruit of the company's cost efficiency and low fuel costs. Margins have increased from 18 percent in FY10 to 31 percent in FY14 and 28 percent in FY15. The fixed incurred due to halted production for four months may have contributed to the decline in gross margin. Compared to the industry average of 38 percent in FY15, Thatta is a little behind but recent cost and energy efficiency measures is a positive sign for the future.

9MFY16 and going forward

In the nine months ending March 2016, the company reported revenues of Rs 1.98billion against Rs 1.67 billion in 9MFY15, a growth of 19 percent whereas it earned a profit of Rs 0.43 billion in 9MFY16 against Rs 0.24 billion in 9MFY15. Margins have improved from 30 percent to 32 percent between these time periods.

Overall dispatches have also gone up in year on year growth-from 229,236 tons to 265,915 tons between 9MFY15 and 9MFY16, though exports have fallen. Over the years, the company's capacity utilisation has come down, from 72 percent to 62 percent between FY10 and FY15. This idle capacity may very likely be increasing due to the downfall in export demand. It would bode well for the company to market its variety of products locally across the country as export demand remains a question mark in light of the fast acceleration of cheap Iranian cement in the world market.

Expansion may not be such a far-fetched idea since the company is well placed in terms of margins and profitability. It has its own power generation as well as a WHR on the way which would help it in the long run as cost of energy goes up since coal prices may be rebounding. It will shield the company for any fluctuations in energy prices. It's worth noting that fuel and power cost as a percentage of total cost of production was 59 percent in 9MFY15 which was brought down to 56 percent in 9MFY16.

Demand is up for taking the next two to three years in the construction sector and cement players across the industry are poised to cater to it, expanding their facilities and setting up power generation units to reduce reliance on the national grid. Thatta cement is one of the smaller players in a fast expanding industry so it needs to consider expanding its current production facility keeping in mind that CPEC projects might be adding a substantial sum to cement demand not to mention the increased projected government spending on infrastructure. Housing sector is also poised for development as the economy improves.