Gharibwal Cement (PSX: GWCL) was incorporated in 1961 and has since been operating in the district of Chakwal in the province of Punjab. It is a fairly small cement manufacturer with the current capacity of 2 million tons mainly supplying to northern domestic markets in Pakistan. The company started with an annual capacity of 360,000 tons. A decade later, it was nationalized and in 1993 denationalized along with many other cement players. In 2003, the company merged with GCL Electric with a power generation capacity of 10MW in 2003, later adding on two gas power generators of 12 MW. In 2009, it also added a new plant with more than 2 million tons annual capacity that came with three dual-fuel power generators of 16MW. Only a few years later, it discarded its old plant of 540,000 tons which left the company with the new plant. In 2013, Gharibwal upgraded its electric grid stations and recently, the company invested in a 20 MW of a Waste Heat Recovery (WHR) unit and a downhill conveyor belt to improve the operational performance of its plant.
Majority stake in the company's holdings are with directors and family members at nearly 89 percent. Of this, the CEO held more than 56 percent of the shares as on June 2019. The rest of the shares spread across joint stock companies, banks and modarabas and foreign companies with the public holding 8 percent shares.
In the past two years, the company has invested in BMR activities as well as installing waste heat recovery plants as well as a downhill conveyor belt and a new vertical cement mill which optimize the grinding capacity. Moreover, a clinker storage silo was also installed to enhance clinker storage and reduce the handling and transportation cost of clinker stock.
Gharibwal also provides loan facilities to its associate company Balochistan Glass Limited (PSX: BGL). Gharibwal earns a mark-up of 1 percent above the rate charged by banks and financial institutions for this loan.
Operational and financial performance
Being a small capacity manufacturer, Gharibwal has tried to improve its production by optimizing the capacity as it was quite low toward the beginning. The company's plant was old which led to compromised capacity utilization. Once the new plant was running however, the company discarded its old plant. By FY14, capacity utilization grew to 66 percent, and 85 percent by FY17. The company grew its revenues during this time as domestic demand and retention prices improved. Revenues have grown by 5 times since FY10.
On the demand side, when the economy is in expansion mode, the company's dispatches grew in accordance to the infrastructure and development projects taking place. While demand was strong during FY16, it started to move south after FY18, where domestic demand started to take a hit. Meanwhile, exports to Afghanistan also started to decelerate as market access grew toward Iranian cement.
The company incurred a gross loss of 20 percent during FY10 growing it to a gross profit of 40 percent by FY16 which is a huge improvement on the back of new plant, better retention prices and low costs. Later, margins receded as coal prices (coal makes up a huge share of total fuel and power costs) and depreciation of rupee started to hit them. Though due to BMR, the company did reduce its fuel and power costs.
During FY18 and FY19, higher international coal prices as well as rising gas, furnace oil and grid electricity prices brought margins further down only exacerbated by rupee depreciation. During FY19, other expenses also grew due to which profits declined substantially. However, the company still earned a profit.
Latest financials and outlook
As the economy entered austerity, and IMF bailout took over, the government adopted contractionary policies characterized by PSDP cuts, restriction on non-filers to purchase property of over Rs4 million and overall economic downturn which led to reduced demand from commercial and housing development. These dynamics were coming into play during FY19. Now the first quarter of FY20 has passed by and dynamics have not changed too much.
Perhaps, only worsened. Price competition is higher, domestic demand is low while exporting markets such as India have closed doors on Pakistani cement. These factors led to the company incurring a loss in the first quarter of FY20. In September 2019, the tide seems to be turning as dispatches in the north have improved while prices have also come up. If Gharibwal retains its market share, it will be able to grasp enough revenue streams as before. But inflationary pressures for fuels and financial expenditures due to tighter monetary policy will both determine the bottom line which until the outgoing quarter was in red and maybe continue in at least the upcoming quarter as well.
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