Power Cement Limited

Power Cement Limited, formerly Al Abbas Cement Industries Limited (AACIL) was established in 1981 and went public in 1987, and was acquired by a consortium of Arif Habib Group and Al Abbas Group. It is now a subsidiary of Arif Habib Corporation Limited. The company is listed on the Pakistan Stock Exchange. The Power Cement plant is located in Nooribabad Industrial Area, Jamshoro with two production lines with a combined production capacity of 3000 tons per day ie 900,000 tons capturing about 2 percent of the total cement production capacity today. The company caters to the southern market domestically and exports to South and East Africa, India, UAE and Afghanistan.

The company is run by Kashif Habib as CEO, son of Arif Habib. While majority of the shares of the company are held by Arif Habib (29.5 percent) and 29 percent by International Complex Projects Ltd (the real estate developers that own Dolmen city), 17.8 percent of the shares of the company are held by general public as at June 2016.

The company announced that it would be undergoing an expansion from its existing 3,000 tons per day to 8,000 tons per day which would bring up its total capacity to 2.4 million tons annually when the project completes. Though currently the share is 2 percent, after this expansion comes through, keeping in mind other cement expansions of about 22 million tons coming online by FY20, Power's capacity contribution to the cement industry would go up to 4 percent (given it keeps its old production lines), joining Attock and Cherat Cement companies that will have similar capacities in the next five years.

<B>Financial and operational performance</B>

Slowly but steadily, the company has increased its production, going from 502 to 605 thousand tons between FY11 and FY16; growing by 20 percent. Total dispatches in the outgoing year grew by 11 percent driven by local cement dispatches and grinded slag. Exports, like many of the other cement players bumped down by 50 percent only in the outgoing fiscal. Export share between FY15 and FY16 went down from 8 percent to 3 percent. The slowdown in key markets of Afghanistan and South Africa will continue to curb Pakistani cement exports in the near future at least.

While exports to India have bumped up fast in the past few months, political tensions may thwart the recent increase.The company's net revenues almost doubled in the past five years going from Rs 2.2 billion in FY11 to Rs 4.1 billion in FY16. The company was incurring a loss in FY11 and FY14 but earned an after tax profit of Rs 486 million in FY16, a bump of 12 percent in year-on-year growth. Though in the outgoing fiscal, greater taxation thwarted the growth in profits.

One concern for the company should be its higher cost of production that has brought down gross margins in just the past year from 25 percent in FY15 to 23 percent in FY16, comparably lower than the average cement player margins lying between 38-40 percent. A WHR to suppress energy costs would help in energy efficiency in the long term which is likely to come around with the new expansions.

In the outgoing fiscal, cost of sales went up by 12 percent against the 8 percent increase in net revenues. Distribution and finance costs however were lowered. Earnings per share have gone up marginally from 0.42 in FY12 to 1.33 in FY16 while net margin has trudged along slowly to 12 percent. The company hasn't paid any dividend in the past several years. The management's focus had been for several years to handle the company's long term debt obligations. The almost $220 million financing for the planned expansion will come from debt and equity, majority of it likely from issuing right shares.

The company's capacity utilisation has been between 51 to 61 percent in the past three years (FY16: 57%; FY13: 64%) as per its capacity of 3,000 tons per day which is lower than industry's 70-80 percent. This leaves some idle capacity out.

Outlook

Being a smaller cement company, the strategy has always remained domestic market focused which is where expectations of future demand are coming from? The expansion plans tie in well with the demand that is expected to come from multitude of across the country infrastructure and housing projects, of about 12 percent on average annually. Already the industry is seeing a huge surge in cement dispatches despite a sharp fall in exports in the past year or so.

After expansion, if the company keeps its existing production lines, the company will have a greater capacity. But in all likely, it will capture a higher market share being part of the Arif Habib group that has stakes in real estate development-the company will no doubt benefit from the real estate and housing boom in urban areas and the mall business.

Despite lower margins, the greater demand prospects and expansion plans will bode well for the outlook of the company together with a tightening of the purse strings over direct and indirect costs, especially related to energy.