Gharibwal Cement

Brief history: Gharibwal Cement (PSX: GWCL) kicked off its operations in 1965 with a capacity of 1,200 tons per day (approx. 360,000 tons annually) after being incorporated in 1961 and getting listed on the stock exchange a year later. It was later nationalized as part of the then-government nationalization policy. In 1993, it was privatized and the current management took over its operations. The company went through several expansions over the years. In 2003, the company merged with GCL Electric with power generators of 10MW, later also adding on two gas power generators of 12 MW. GWCL also added a new plant of 6,700 tons per day (approx. 2 million tons annually) with three dual-fuel power generators of 16MW. In 2011, the old plant was discarded.
Most recently, Gharibwal added a 20 MW of a Waste Heat Recovery (WHR) unit as well as a downhill conveyor belt to improve the operational performance of the plant. Gharibwal currently holds about 4.6 percent of the industry's total production capacity but it announced it would be expanding its capacity by adding 8,000 tons per day (2.4 million tons annually) to existing production. The plant is a brownfield project in Jhelum which will take up the capacity to 6 percent of the total industry's capacity-a promising feat given nearly all the players are going through expansion over the next couple of years.
Shareholdings, investment, and debt: The company is almost entirely held by one family-nearly 90.57 percent of the shares are held by the company's directors, CEO and family and about 4 percent held by the general public.
The company invested a short term long facility to its associate company Balochistan Glass Limited (BGL) for Rs 250 million-the loans expires in December 2017 but is extendable. BGL is a listed company that manufacturers glass containers, tableware glass products and plastic shells for beverage companies and requires the loan for its working capital requirements. GWCL has been receiving a mark-up of one percent above of its average borrowing cost.
The company is managing its debt efficiently. It paid off its Bank of Punjab loan and the company's loan from National Bank of Pakistan was restructuring to be repaid in 40 unequal quarterly installments from October 2015 to June 2025 with a reduced mark-up rate.
Operational and financial performance: Even though revenues have been encouraging for Gharibwal over the years-having increased from Rs 2 billion to Rs 10.5 billion between FY10 and FY16, it has been producing significantly below its capacity. Production increased from 0.5 million tons to 1.3 million tons between FY10 and FY16 and even though capacity utilization has gone up from 26 percent to 65 percent between the two time periods-there is still plenty of idle capacity.
However, Gharibwal seems conscientious of that fact-it added capacity over the years and also discarded an old plant in 2011 for higher productivity and efficiency. It also conducted a Balancing, Modernization and Replacement (BMR) to reduce its power and fuel costs while investing in energy efficient technology. The annual report of the company announced that the existing generators of the company are being upgraded also and will enhance power consumption efficiency.
In 2006, the company added two gas power generators of 12 MW and then later in 2009 when production capacity was enhanced, the company added three dual fuel power generators of 16 MW. In fact, fuel and power as a percentage of cost of sales declined from 64 percent in FY11 and 67 percent in FY12, down to 50 percent in FY16.
The 20 MW WHR which is on a trial run will also help bring energy costs down in the future. Meanwhile, the downhill conveyor belt that recently started operating is also expected to add efficiency. The belt would enable the company to bring down the crushed raw material from quarry directly to the material yard resulting in substantial reduction in the transportation cost of raw material.
The company will be installing a new vertical cement grinding mill of 250 tons per hour at the plant which will increase the cement grinding capacity substantially and reduce energy consumption on cement grinding. Moreover, the company signed an agreement with a Chinese company, China International Trust and Investment Corporation (CITC) in June 2016 for the setting up of factories in the industrial park in Chunia that spreads over 2,000 acres of land located near Lahore.
Snapshot of 9MFY17 and outlook It will be days until the company announces its annual result for FY17 and we will have to wait and see what happens but the overall the outlook is optimistic given some reservations. During the period, Gharibwal's WHR as well as the conveyor belt started operating, the former currently on a trial run. These will in the future contribute to a reduced cost of production in the coming months but may even reflect in the last quarter of the company's financials.
The company's new cement mill will soon be operational while the civil work of new clinker storage silo of 150,000 ton capacity is already underway. The new capacity addition will add to the company's revenues if the demand goes up as much as it is expected.
The new add-ons may improve the company's capacity utilization-from its current 65 percent but if that does not happen, the added capacity by some stroke of bad luck could hurt Gharibwal in the long run. Its margins reduced in 9MFY17, instead of improving, due to costlier coal much like the rest of the sector that saw squeezed margins from their peaks of 40-45 percent in the outgoing fiscal.
However, the biggest problem right now for cement manufacturers are not global oil or coal prices but the declining cement exports that are not finding any reprieve from any of the sector's existing markets. From South Africa to Afghanistan; neither of the markets are giving in and Pakistan is losing its share. Local cement manufacturers are banking on local demand but will demand keep up with the ambitious addition in capacity of the industry? That is the big question. And what happens when utilization goes down-it will certainly lead to a head on competition amongst cement manufacturers, on price as well as sales.

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Major shareholding pattern (as at June 2016)           Shares         %

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Directors, Chief Executive Officers,

and their spouse and minor childern               362,531,042    90.57%

Muhammad Tousif Peracha- Chief Executive Officer  230,872,079    57.68%

Abdur Rafique Khan - Chairman Executive Director   92,500,285    23.11%

Amna Khan- Non-Executive Director                  22,728,035     5.68%

General Public                                     15,706,778     3.92%

Foreign Companies                                   8,364,224     2.09%

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Source: Company accounts

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9MFY17                           Gharibwal Cement

Rs (mn)                        9MFY17     9MFY16    YoY

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Sales                        8,370.19   7,460.13    12%

Cost of Sales                5,484.28   4,712.97    16%

Gross Profit                 2,885.91   2,747.16     5%

Administrative                 243.03     237.80     2%

Distribution costs              20.52      14.61    40%

Other operating expenses       124.29     143.51   -13%

Finance cost                   201.27     246.42   -18%

Other income                    29.73     105.28   -72%

Profit before tax            2,326.53   2,209.58     5%

Taxation                       625.49     625.85     0%

Net profit for the period    1,701.04   1,583.72     7%

Capacity (mn tons)                   2.01 (4%)

Earnings per share (Rs)          4.25       3.96     7%

GP margin                         34%        37%    -6%

NP margin                         20%        21%    -4%

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