DGKC: Getting in line

Nishat group’s DG Khan Cement (PSX: DGKC) which has fast become a major contender for the top spot in the cement industry has incurred a loss in the first half of the fiscal year. The interplay of demand, prices and costs of production has worked mostly against the company’s profitability — though most of it was expected. Loss per share of Rs1.93 (after-tax profit: Rs847 million) comes despite a 6 percent growth in the company’s topline.

Due to greater capacity, the company has been able to sell-off more cement than last year. In the first quarter, volumetric dispatches grew 11.9 percent (local: up 15 percent, cement exports: down 15.6 percent, clinker exports: up 329.6 percent). Indian countervailing duties have slashed exports to nil which affected overall cement exports. But DGKC managed to sell-off substantial volumes of clinker which has helped with capacity utilization and cover its fixed costs. According to the first quarter report, sales utilization improved to 98 percent (Q1 2019: 71 percent) against the industry’s 75 percent (Q1 2019: 80 percent).

Price war in the domestic markets due to supply glut and slowing demand, together with clinker fetching much lower prices in the foreign markets compared to cement, revenues growth was not on the same level as volumetric growth. Costs of production on the other hand rose from 83 percent to 95 percent of revenue. Clearly lower coal prices in the international markets did not do much for DGKC as rupee depreciated. Higher electricity prices and other fuels have also experienced inflationary pressures.

The company managed to keep all other expenses in check — which remained 7 percent of revenues. The 54 percent increase in selling expenditure came around due to higher clinker exports but the company managed to cut down on other indirect expenses. One major expense coming into play is finance cost due to considerably higher cost of borrowing — that includes short-term working capital needs as well as expansion related loans. In 1HFY20, finance cost as a share of revenue grew to 12 percent against 7 percent the corresponding period last year.

Thanks to its new production line in Hub, Baluchistan, DGKC can keep selling off clinker to markets overseas though it is more of a consolation prize than a gift horse. Domestic demand must recover considerably for the substantial capacity the industry has recently added, without which price pressures will continue and excess cement will be ever more difficult to off-load. The result would be idle capacity and more losses.

Monetary policy loosening may loosen the noose a little on the cost perspective, while the groundbreaking of the Naya Pakistan Housing Program projects may also provide the impetus the industry requires.