Javedan Cement Limited (JCL) was incorporated in Pakistan on 8th June 1961 as a public limited company. The company's old name was Valika Cement Limited and it was nationalized by the government in 1972 and then its name was changed to Javedan Cement Limited.
Its principal activity is to manufacture and sell ordinary Portland cement, blast furnace slag cement and sulphate resisting cement. Total installed annual capacity of the company is 600,000 tons. The pattern of shareholding of the company on June 30, 2006 was as follows:
The company was privatized in September 2006 whereby the 96.34% shares were transferred from State Cement Corporation of Pakistan to Al-Abbas Holdings Private Limited and Ghani Holdings Private Limited in equal proportions.
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Recent Performance, Quarter ended September 2007:
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3rd Quarter 3rd Quarter
2007 2006 % change
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Sales -net 367,311 385,687 -4.76
Cost of goods sold 326,944 270,021 21.08
Distribution cost 6,619 643 929.39
Administrative expenses 5,684 5,913 -3.87
Financial cost 25,552 246 10286.99
Profit after taxation 1,062 76,061 -98.60
Basic Earnings per share-Rupees 0.02 1.36 -98.53
Property,plant & equipment 829,816 833,762 -0.47
Stores and spares 149,686 152,806 -2.04
Stock-in-trade 147,071 189,277 -22.30
Total Assets 1,301,364 1,286,700 1.14
Total Liabilities 984,191 970,589 1.40
Total Equity 317173 316111 0.34
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The clinker production in the quarter declined but the production of cement increased to 115,000 million tons. The local sales of the cement witnessed a fall whereas exports of cement registered a growth.
The sales of the company slowed down. Although the sold quantity of cement increased, the retention price was less. Hence, the effect was observed in lower sales as well as lower profit.
The lower retention price phenomenon started in FY07 when a huge influx of new production capacities forced the manufacturers to reduce the cement prices in order to achieve certain capacity utilization levels. However, the prices have started recovering now and have grown by 20 percent to Rs 220/bag as against Rs 185/bag in the first quarter. This price recovery is attributed to the outcome of quota arrangements between the cement manufacturers, which was also necessary to compensate the rising fuel cost. Thus, better profitability may be expected in the near future.
Of the operating expenses, the distribution expense emerged as a major component. This may be attributed to higher exports this quarter. The inventories recorded are less than in the previous year's quarter due to higher production and sale of cement. This also points out the fact that the company has increased its capacity utilization. We may expect a higher inventory turnover especially for this period may be for the year ending 2007.
As the company is currently pursuing a capacity enhancement and plant maintenance programme, the production and sales of the company may increase in future. This is likely to further improve the liquidity and solvency picture of the company.
Analysis of Financial Performance (June'03-June'06)
The profitability of the company has substantially increased since 2003. The profitability profile of the company was in negative in 2003 owing to lower cement production and sales mainly and also due to higher administrative expenses and financial charges. As the production and sales of cement doubled in 2004, the profits of the company shot up. The company also eliminated its doubtful debts in years subsequent to 2003. The profits of the company have continued to increase on account of better capacity utilization (that increased from 36% to 75% and then to 80.50% in 2006) leading to enhanced production and better sales, as well as higher demand (due to the boom in construction sector) and higher cement prices especially in 2005 and 2006.
The liquidity profile of the company has become better over the years indicating that the company is better positioned to meet any short-term obligations easily and comfortably. The current assets of the company were less than its current liabilities until 2005. Subsequent to 2004, the current assets outperformed its current liabilities due to increases in raw materials and finished goods and short-term investments in bonds.
The company also retired its interest payable on mortgaged property to the holding company, State Cement Corporation of Pakistan, in 2006. The company was also able to recover its receivables. A large decline was also witnessed in the advances to the suppliers indicating that the company received its shipments of raw materials on time.
The company's ability to manage its assets has increased quite remarkably, particularly after 2003. Its assets, which is inventory, now takes less time to convert into finished goods that is cement and clinker. This is clear from its inventory turnover, days sales outstanding and operating cycle of the company that have decreased over the years. This reflects prudent asset management, better run factor and in time inventory handling. Moreover, the company has increased its capacity utilization and opened its previously closed kiln plant (that represents about 25% of the production capacity of clinker) for operation in 2004 and onwards. The sales of the company have also increased. The sales to equity ratio of the company peaked in 2004 due to a double increase in its net sales. However, subsequent to that the net sales of the company have increased at a rate less than its equity. In 2006, its equity increased by 31% whereas its net sales increased by 24%.
The profile demonstrates fine debt management. The total assets of JCL have been increasing at a faster rate than its total liabilities. The company has been able to recover its dues and pay back its payables. In addition, the inventories have also grown on the back of higher demand and the consequent production and sales. The debt to equity ratio has decreased which points to the fact that the company is now becoming less financially leveraged and has enhanced its equity financing and capital base through issue of bonus shares in recent years. The composition of JCL's liabilities has changed with the prominent emergence of long-term debt and a decline in current liabilities. The long-term debt of the JCL has increased owing to deposits from cement stockists/dealers. Times interest earned has risen due to greater bank charges and commissions and as the interest on worker's participation fund increased 6 times in 2006 from 2005.
The market value of the company shows marked increase. The market price of the company has increased as the cement prices have been rising since the previous years due to increase in demand. The price of JCL's share increased twice since 2005 and three times in 2005 from 2004.
The company has been pursuing a policy of retaining its earnings and distributing fewer dividends to finance its capacity enhancement programme. For this purpose, many plants have been under maintenance. The book value per share of the company has increased considerably due to increasing equity.
FUTURE OUTLOOK:
In recent years, the cement industry of Pakistan witnessed an unprecedented growth of 32% year-to-year basis. Industry has an installed cement production of about 37 million tons per annum, over stripping domestic demand. This capacity may touch 44 million tons by 2008-09. The surplus cement has an encouraging export market demand from neighbouring countries like India and Afghanistan and there is great potential to export the surplus cement to the Middle East.
The Pakistani cement is cheaper than India's and better in quality. Bilateral trade between India and Pakistan has taken a significant step forward with at least five Pakistani companies that have started exporting to India while five more have applied for approval. Greater exports may translate into greater demand for cement and hence lead to higher production and utilization of excess capacity of the cement industry.
Cement sector has attracted above 80 million dollars foreign investment, depicting an upsurge of 577 percent during the first half of 2007. Presently, cement industry is rapidly growing, driven by growing construction demand at home and abroad, as presently South East Asia region is facing huge shortage of cement. However, Pakistan's cement sector is fully enjoying this supply and demand gap, by getting tremendous export orders from Gulf countries and India.
Therefore, local cement sector has also attracted huge foreign investment, which is expected to further rise in the upcoming months. This foreign investment may put a positive impact on the performance of cement sector and listed cement companies' share may become most attractive and required in the stock markets due to huge profits. Javedan Cement is opportunistic from this perspective.
The profitability of the sector is predicted to increase by 22% in the next five years due to higher volumetric sales though the profitability may be slightly lower in 2008 but the magnitude of decline is expected to be lesser than previous years.
One factor that cannot be ignored is the rising price of gas and coal. This may harm the cost of production but the increase in the fuel cost is likely to be contained due to quota arrangements and higher domestic as well as foreign demand that is likely to keep the retention prices higher.
The economic activities in the country are on the rise and the government has made greater allocations for development expenditures. This is already evident from the higher PSDP set by the government. This is likely to translate into a higher demand for cement in the future. Keeping the bright prospects in mind, JCL seems a prospective investment.
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JAVEDAN CEMENT FINANCIALS
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Rupees in Million 2003 2004 2005 2006
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Balance sheet 2003 2004 2005 2006
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Property, plant and equipment 172,263 160,937 165,951 152,709
Other non-current assets 67259 65822 48145 35858
Inventories 166867 169344 195013 198768
Trade debts 794 0 0 0
Cash and cash equivalents
at the end of the year 80,041 231612 397272 394931
Current assets 312,256 437,257 771,067 776,056
Quick Assets 145,389 267,913 576,054 577,288
Total assets 551,778 700,017 985,162 964,623
Ordinary share capital 560000 560000 560000 560000
Preference share capital 0 0 0 0
Reserves 646,966 646,966 75,466 75,466
Total equity 125,574 168,271 379,419 499,746
Surplus on revaluation
of fixed assets 0 0 2681 0
Non-current liabilities 291 291 36291 34307
Current liabilities 425,913 531,454 566,771 430,570
Total liabilities 426,204 531,745 603,062 464,877
Total equity and liabilities 551,779 700,017 985,162 964,623
Net current
(liabilities) / assets -113,657 -94,197 204,296 345,486
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Profit and loss 2003 2004 2005 2006
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Net sales 533,619 1,111,306 1,390,369 1,726,610
COGS 567,502 969,746 1,083,516 1,295,821
Gross profit -33,882 141,562 306,854 430,789
Operating profit/EBIT -51,015 124,547 287,150 412,560
Finance Cost 536 398 927 1,088
Profit before tax -37,815 121,698 294,958 422,784
Taxation 2,739 37,000 83,811 78,457
Profit after tax -40,554 84,698 211,147 344,327
Ordinary cash dividends 0 42,000 0 318,000
Capital expenditure 435000 350000 181000 60000
No of Shares Outstanding 56,000 56,000 56,000 55,986
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FINANCIAL RATIOS 2003 2004 2005 2006
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PROFITABILITY RATIOS
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Profit Margin -7.60% 7.62% 15.19% 19.94%
Gross profit margin -6.35% 12.74% 22.07% 24.95%
Return on Assets -6.85% 17.39% 29.94% 43.83%
Return on Equity -32.29% 50.33% 55.65% 68.90%
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LIQUIDITY RATIOS
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Quick Ratio 0.34 0.50 1.02 1.34
Current Ratio 0.73 0.82 1.36 1.80
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ASSET MANAGEMENT RATIOS
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Inventory Turnover(Days) 112.57 54.86 50.49 41.44
Day Sales Outstanding (Days) 0.54 0.00 0.00 0.00
Operating cycle (Days) 113.11 54.86 50.49 41.44
Total Asset Turnover 0.97 1.59 1.41 1.79
Sales/Equity 4.25 6.60 3.66 3.45
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DEBT MANAGEMENT RATIOS
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Debt to Asset 0.77 0.76 0.61 0.48
Debt to Equity Ratio 3.39 3.16 1.59 0.93
Long Term Debt to Equity 0.00 0.00 0.10 0.07
Times Interest Earned -95.18 312.93 309.76 379.19
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MARKET RATIOS
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Earning per share -0.85 1.51 3.77 6.15
Price/Earnings Ratio -10.88 10.79 13.93 17.44
Dividend per share 0.00 0.75 0.00 5.68
Book value per share 2.24 3.00 6.78 8.93
No of Shares issued 56000000 56000000 56000000 55985915
Market prices(Year end) 9.25 16.30 52.50 107.25
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