Part of the Ghulam Faruque Group (GFG), Cherat Cement Company Limited (KSE: CHCC) was established in 1981 with its plant located near the district of Nowshera, KP. Starting with a production capacity of 1,100 tons per day and after subsequent expansions, the company now has a total annual capacity of around 2.3 million tons with the latest-and most substantial-capacity enhancement of 4,200 tons per day or 1.3 million tons annually coming online January of 2017. The new capacity expansion has put Cherat in the new league as with an installed capacity of 1.3 million tons, the company now has a 5 percent share in the industry's cement production capacity.
Cherat commissioned its first Waste Heat Recovery (WHR) for power generation in 2010, a Tyre Derived Fuel Processing Plant in 2012 and a Refuse Derived Fuel Processing Plant in 2013 in order to be more energy efficient and cut down on production costs by using alternative fuel. The second cement line that went online early this year also has a WHR installed.
The company's domestic markets are mainly in the north and it also exports to Afghanistan and India, with the added advantage of being near the Pak-Afghan border. Cherat announced a third cement production line at its existing site in KP with an annual production capacity of 2.1 million tons which would take up the company's total output to 4.4 million tons annually. This would likely increase its contribution to industry capacity by a small margin by the time the third line comes online in the second half of FY20 since much of the sector is overhauling capacity.
The company's majority shares are held by its Holding company Faruque (Private) Limited with 20 percent of the shares whereas other associate companies within the group also hold shares in Cherat. Nearly 30 percent of the shares of the company are held by the general public.
Financial and operational performance Production may have fluctuated over the years but the capacity utilization for Cherat has remained over 80 percent over the past 6-7 years vouching for its strong place in the market. In FY11, the plant was running at 98 percent of its capacity.
The company has adopted an efficient mix of local and imported coal, optimum mix of WHR, National Grid and self-power generation to cut down on costs. Cost as a share of sales has dropped over the years with gross margins arriving at 37 percent in FY16. However, per unit cost of clinker for Cherat has increased over the years.
While total dispatches sustained, exports have been squeezed for Cherat much like the rest of the sector which is now marred by continually falling share of exports in their sales mix. For Cherat, exports stood at 21 percent of all sales in FY16 whereas they used to be 43 percent in FY10. This is similar to the industry averages where for the combined sector; exports were 15 percent of all dispatches. Cherat may be above the fray but just about. Cherat moved from making losses in FY10 to before-tax profit of Rs 2 billion in FY16, maintaining a profit margin of around 20 percent for a few years.
Latest financials and outlook In 9MFY17, the second production line started to show results as dispatches grew by 35 percent year on year, resulting in a top line growth of 29 percent; and a bottom line growth of 50 percent. Finance cost increased and will continue to remain high over the next few years as the company goes through its second expansion and fulfils its debt obligations.
Its indirect costs-administrative and distribution expenses-remain the same share of the total sales. However, the dropping exports from the sales mix will likely hurt Cherat in the future as it would the rest of the industry. Afghanistan's market is becoming tougher with cheaper Iranian cement reaching that market and pinching Pakistan's share by a large margin. There isn't any strong indicator that exports could see a turnaround over the next fiscal year since Iran is only expanding its capacity, and will continue to export to Afghanistan. Sri Lanka and India were proving to be growing markets for Pakistani cement but growth has dwindled over the outgoing fiscal.
In fact, in FY17, exports have fallen down to 10 percent for the industry-where they were 15 percent in FY16. Right now, the industry is running at high capacity but once expansions come through, and if exports continue to fall, the sector will have a lot of idle capacity it would not know what to do with.
That is a potential threat for all cement players who are expanding, Cherat being one of them. While expansions are being done in the hope of projected domestic demand, it is best to diversify your sales mix to reduce risks and exports are a great way to do that. Perhaps, active players like Cherat should start thinking along the lines of marketing to other destinations.
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9MFY17 Cherat Cement
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Rs (mn) 9MFY17 9MFY16 YoY
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Sales 6,714.18 5,221.86 29%
Cost of Sales 4,199.04 3,347.53 25%
Gross Profit 2,515.14 1,874.34 34%
Administrative 166.03 140.44 18%
Distribution costs 209.28 173.93 20%
Other operating expenses 114.74 109.79 5%
Finance cost 98.42 29.81 230%
Other income 78.90 39.65 99%
Profit before tax 2,005.58 1,460.02 37%
Taxation 438.88 416.76 5%
Net profit for the period 1,566.70 1,043.27 50%
Capacity (mn tons) 2.3 (5%)
Earnings per share (Rs) 8.87 5.91 50%
GP margin 37% 36% 4%
NP margin 23% 20% 17%
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Source: PSX notice/ APCMA
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Shareholding Pattern June 2016 Shares %
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Associated Companies
Faruque (Private) Limited 36,623,485 20.73
Cherat Packaging Limited 4,243,362 2.4
Mirpurkhas Sugar Mills Limited 5,770,252 3.27
Greaves Pakistan (Private) Limited 2,199,093 1.25
Banks, DFIs, NBFIs etc 9,803,640 5.55
Mutual Funds
National Investment (Unit) Trust 8,491,358 4.81
PICIC Growth Fund 5,455,000 3.09
Meezan Islamic Fund 6,645,612 3.76
General Public 52,171,276 29.74
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Source: Company accounts
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