Bestway Cement Company Ltd. (BWCL) is a subsidiary of Bestway Group of United Kingdom. It was listed on Karachi Stock Exchange in February 2001. The company is a major manufacturer and seller of cement. It has a market share of 8% in domestic market. Bestway has been a major cement exporter to Afghanistan and recently began exports to India, Africa and Middle East.
Bestway Group decided to setup its first cement plant in Pakistan in 1992. The company commenced work on its first cement plant at Hattar, Haripur in NWFP with an initial investment of US $120 million. The plant's initial capacity was 0.99 million tons per annum. Hattar's capacity was enhanced to 1.17 million tons per annum in 2002 owing to increased domestic demand. In 2005, the plant's capacity was further increased to 1.20 million tons per annum of clinker. During FY07, the clinker production at Hattar reached at 1.14 million tons and cement production was 1.17 million tons.
Initially, the Hattar plant was using furnace oil as fuel. Around 2001, the plant was converted into natural gas. This was a prudent step towards cost efficiency as a hike in petroleum prices was anticipated. In 2003, the plant was converted from gas to coal with an investment of $10 million. Now, the Bestway Cement Hattar can operate all the three major fuels. These measures have reduced the energy costs, which at times constituted about 65% of the total production cost of the company.
In 2004, BWCL set up a new cement plant near Village Tatral of District Chakwal in Punjab at a cost US $140 million to meet the growing cement demand in the domestic market. The plant had a cement capacity of 1.8 million tons per annum. The plant is fully functional and started production in June 2006. In FY07, cement production and clinker production at Chakwal was 1.119 million tons and 1.061 million tons, respectively.
In an attempt to increase its share in the cement industry, BWCL bought 85.3% stake in Mustehkam Cement Limited in 2005. The plant had a capacity of 0.63 million tons per annum and is close to BWCL's plant at Hattar. BWCL planned a project of upgrading and modernising Mustekham plant to a capacity of 0.9 million tons per annum.
In May 2006, the company announced for setting up a second 1.8 million tons per annum capacity plant adjacent to the plant in Chakwal at a cost of US $180.0 million. With such major capacity expansion plans, the company's cement manufacturing capacity is set to exceed 6.0 million tons per annum by FY08, making Bestway the second largest cement producer in the country.
Bestway's capacity expansion has been in line with the trend of the entire cement sector. The overall production capacity of the cement sector increased to 38.95 million tons at the end of 3QFY08, as compared to 30.1 million tons in the same period of FY07.
INDUSTRY OVERVIEW (FY08)
The cement industry of Pakistan showed an impressive growth of 24.3% in cement dispatches during FY08. Total cement dispatches grew from 24.22 million tons in FY07 to 30.11 million tons in FY08. There was a 6.5% growth in local cement dispatches as demand in the domestic market increased due to construction activities and government spending on infrastructure development.
However, the substantial growth in the cement dispatches in FY08 was boosted mainly by a 14% increase in the exports. Pakistan's cement sector has benefited more due to shortage of cement in the regional countries. Pakistani companies are actively exporting to Afghanistan and India. Cement demand in Afghanistan is expected to be 1.5m-2.0m tons per annum for the next four years at least and local companies can be expected to export 3.0m-4.0m tons per annum over the next few years. Also, rising construction activities in the Middle East and Africa have made them lucrative markets for our cement sector to tap.
COMPANY PERFORMANCE
In line with the industry trend, Bestway Cement also experienced an increase in its cement dispatches during the first nine months of FY08. It posted a growth of 14% in the cement dispatches (increase of 233,604 tons) during the first three quarters of FY08 as compared to the same period last year.
The overall capacity utilisation of the cement sector improved to 79% from 78% during the first nine months of FY08. BWCL's capacity utilisation improved to 81% and was better than the industry average. This shows that the management of the company has been able to increase the efficiency of its operations. Improvement in the efficiency is of utmost importance for the entire cement sector especially during the current situation of rising costs of production.
PROFITABILITY
Currently, the cement sector is experiencing strong growth in cement dispatches but at the same time it is facing declining profitability. The profitability of the cement sector fell by 73.6% to Rs 562 million during the 9 months of FY08 from Rs 2,133 million in the corresponding period of FY07. Although the sales volume increased, the net sale revenue did not increase commensurately due to decrease in net retention prices in the sector. Over the years, all the cement manufacturers undertook huge capacity expansion plans. This has created a situation of supply glut in the market. Companies resorted to price wars and this led to a fall in prices. The average cement price during Jul-Mar FY08 was Rs 128.3 per bag as compared to Rs 133.6 per bag in the same period in FY07.
Bestway Cement's net sales increased by 18% during the first nine months of FY08 (net sales amounted to Rs 4,772 million) as compared to (Rs 4,039 million) in the same period of FY07. Despite a rise in company's net sales, its gross profit declined by 43% from Rs 673 million during the first 3 quarters of FY07 to Rs 386 million during the same period in FY08. This was mainly due to 30% increase in the cost of production.
The cement manufacturers in the industry were faced with rising fuel and power costs during FY08. The cost of production for the entire cement sector of Pakistan went up due to rise in the prices of imported coal. Crude oil prices shot up during FY08 and had its impact on prices of coal and natural gas. Fuel and power constitute around 67% of the cost of production and therefore it was greatly affected by the doubling of international coal prices and a huge increase in the country's power tariffs.
The operating expenses of the company increased as there was a 29% increase in administration and general expenses and the distribution costs increased from Rs 27 million during the first 9 months of FY07 to Rs 51 million during the same period in FY08, increasing by 88%. Thus the operating profit fell by 58.8% during the first nine months of FY08 as compared to the corresponding period in FY07.
Thus, despite a 7% fall in the financial costs, the company posted a loss before tax of Rs 399 million and loss after taxation of Rs 298 million.
Profitability ratios of BWCL showed a rapid upward movement throughout the years under review owing to realization of better cement prices and higher capacity utilisation, which consequently boosted the net income of the company. However, the company's profitability ratios worsened after FY06. The first half of FY07 was characterised by a declining trend in profitability, despite a healthy growth in cement dispatches. Overall, cement dispatches during FY07 registered an increase of 32%, reaching 24.29 million tons at the end of the year, compared to 18.4 million tons during the preceding year. This growth could be traced back to a 24% growth in the domestic market and a 112% growth in exports demand.
The production of cement and clinker also increased during FY07. The clinker and cement production for the year remained largely stagnant for the Hattar plant, but production of the Chakwal plant increased as it was operational for the whole year in FY07. This considerably boosted sales for the company. The latter plant had been able to run for only a few days in FY06. However, the production of clinker and cement during the year under review was restricted due to lower volumes of exports and planned plant shutdowns.
FY07 witnessed a decline in profitability of the cement sector for a number of reasons. The most significant of these was a sharp decline in cement prices due to a supply overhang for most of the year. The prices in the South Zone exceeded the prices in the North Zone by a considerable margin, whereas prices in international market exceeded the prices in the domestic market. There was rise in fuel costs. Also, the interest charges on money borrowed for the acquisition of Mustehkam Cement, increased borrowing for running Chakwal Line-I and the higher cost of borrowing resulted in a 158% rise in financial charges of the company.
This further aggravated the profitability position of the company, resulting in a net profit margin of 0.91% in FY07 compared to 27% in FY06. Profit after taxation declined 96% in FY07 to reach Rs 52 million, compared to Rs 1,226 million in FY06. These factors took a toll on the profits of Bestway, as depicted by a sharp decline in profit margins in FY07. At the same time, the low retentions and high energy costs drove the gross profit of the company down by 56%.
LIQUIDITY
The liquidity position of BWCL improved only marginally over the years from FY03 to FY05. The current ratio remained well below the industry averages signifying the liquidity crunch that the company faced. However, constant expansion in the form of new plants as discussed above is a reasonable justification of this liquidity downturn. Owing to the new plant set-up, Bestway has done reasonably well in managing its liquidity position. The recent decline in the current ratio can be attributed to the subsequent pay-off of the long-term loans acquired for Mustehkam Cement and Chakwal Plant-II. Consequently, the current liabilities soared up in the same year resulting into a decline in current ratio.
The current ratio had shown an improvement during FY07 but its liquidity position remained unsatisfactory, lingering below the minimum requirement of 1. Much of the current assets of the company were held up in the form of inventory. On the liabilities side, a large part of the amount came from the current portion of long term debt. During the first nine months of FY08, the company's liquidity position went down owing to 84% increase in the current liabilities of the company and a less than proportionate increase (13.6%) in the current assets of the company.
The major reason for such rise in the current liabilities is the increased short term borrowing by the company. In FY07, short-term borrowing amounted to Rs 756 million but by March-08 this figure reached Rs 3,132 million. The interest payables and trade payables also increased significantly for the company.
BWCL's liquidity position seems less favourable because the less liquid assets such as stock in trade and stores and spares constitute major portion of the company's current assets. The share of bank balances shrunk during the nine-month period in FY08 while portion of trade debts increased.
ASSET QUALITYThe company has managed to improve its capacity utilisation over the years and due to the company's ambitious capacity enhancement projects the production capacity has increased greatly. This has resulted in accumulation of inventory (raw material and work-in-progress) for BWCL.
Since inventory forms such a major part of the company's current assets, it is important to analyse the management of this asset. The inventory turnover ratio of the company declined considerably during the first nine months of FY08 showing that the inventory of the company was sold less number of times during the period as compared to previous years. Thus, the days to sell average inventory increased from around 23 days in FY07 to 64 days during 3QFY08.
Accounts receivable, are the other major current assets of the company. The rising days sales outstanding ratio shows that the number of days within which the management is able to recover accounts receivables are increasing. Thus the operating cycle of the company also increased indicating that it took the company longer to convert its inventory into cash.
The longer operating cycle supports our assertions about the unfavorable liquidity position of the company. The lengthening of the operating cycle during the 3QFY08 means that quality of the BWCL's working capital has deteriorated. Strategic planning to control excess supply can cushion the turnover ratio.
Sales/equity has been erratic and worse than the industry averages. Lately, the ratio has been declining and can be attributed to lower sale price, depressed sales and high reserves.
DEBT MANAGEMENT RATIOSFY07 ended with a further deterioration of the company's debt situation, as the debt to assets and equity ratios continued to rise due to an increase in long term loans taken by the company. The increase in loans, compounded with an increase in the cost of borrowing has had an adverse affect on the financial position of the company, as the TIE ratio dropped to a dangerous level. The 158% rise in financial charges and a decline in profitability of the company resulted in a TIE of below 1.
BWCL is a highly leveraged company in the industry as evident from its enormously high long-term debt to equity and debt to asset figures. Considerable part of financing comes through long-term debt mainly from banks, modarabas and syndicate financing. Long-term debt to equity jumped up in FY06 with the acquisition of 85.3% stakes in Mustehkam Cement, which was totally financed through long-term debt.
Thus, the financial expenses for BWCL are at a higher side, in consequent of constant expansions on loan and set-up of two Greenfield projects at Chakwal. Financing comes mainly through debt as shown by greater than 1 debt-equity ratio trend. As a result, interest-paying ability of BWCL has dampened considerably in FY06. On the whole, debt management of the company is not better than the industry and thus BWCL constantly faces the interest rate risk.
Dividend policy of the company reflects investor confidence. The company declared 10% cash dividend (Re 1.0 per share) in FY05 same as in FY04. It also announced 10% bonus shares in FY05. DPS has been constant since 3 years irrespective of the profit margins. BV and EPS have also posted a commendable trend, rising till FY06.
The rising net worth and EPS is a very positive sign for the investors who generally look for sustained growth in EPS and DPS figures. When compared with other industry players, BWCL fared well in terms of its Dividend policy but lagged reasonable behind in EPS. It retained all its profits in FY07 and paid no dividends. This might be due the fact that company plans to invest in future growth.
FUTURE OUTLOOKCement dispatches may continue to grow in the future as the demand may increase in response to construction activities in the private sector. Also in the budget FY09, the government has announced that Rs 550 billion will be allocated to PSDP in the country. However the growth in local cement dispatches may be depressed due to slow down in economy-led construction activities and rising inflation.
This year, the GDP growth was 5.8% despite the target of 7.2%. This slowdown in GDP growth decreased the growth of per capita cement consumption from 22.2% in FY07 to 2.9% in FY08. Cement consumption is correlated to GDP growth. In the past years, Pakistan's cement sector witnessed a robust growth due to the country's strong economic growth. However, in FY08, lower GDP growth has affected the construction activities in the country and thus affected the demand for cement in the local market.
Exports are expected to maintain strong growth and support the total cement dispatches and will play a critical role in supporting the cement dispatches. In the budget FY09 the central excise duty on cement was increased to Rs 900 per ton from current Rs 750 per ton.
On each bag the CED increased by Rs 7.50 per bag (from Rs 37.5 per bag to Rs 45 per bag). But this increase is not expected to impact the profits of the cement sector because this increment in CED will be passed on to the consumers. However, the rise in the GST by 1% will increase the local cement prices and may dampen the demand for cement.
Expenses are expected to increase for cement manufacturers due to the hike in coal prices and higher interest rates in our economy. This will negatively impact the gross margins of the cement sector. During the past, our cement manufacturers shifted production from oil to coal or gas.
Pakistan has huge reserves of coal but manufacturers need to import coal due to high sulphur content. Coal prices more than doubled during FY08 with average coal prices being around US $176/ton during the fiscal year. Rising coal prices coupled with a depreciating rupee will increase the cost of production for the cement companies and hit their gross margins hard.
From a wider perspective, the cement consumption in the domestic market is expected to fall because of the deplorable economic situation in the country. The declining GDP and volatile economic situation may restrict the construction activities in the country and may hit the demand for cement.
However, there is hope for cement sector on the international front. Presently, Pakistan is exporting to Afghanistan and India. Regional shortage of cement has presented a favourable opportunity for our cement manufacturers. Cement demand in Afghanistan is expected to be 1.5m-2.0m tons per annum for the next five years.
This is an opportunity for Bestway Cement that has already strengthened its position in the Afghanistan market. Bestway Cement is expected to have increased demand in the north of the country and Afghanistan during the second and third quarter of FY'09.
Cement manufacturers have growing opportunities in Middle East and African countries. New export markets like Russia and European countries have been identified. Growth in export sales may boost the margins of the industry and reduce the negative impact of rising costs on its profitability.
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BESTWAY CEMENT LIMITED-FINANCIALS
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BALANCE SHEET Jun'05 Jun'06 Jun'07 Mar'08
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Share capital & Reserves
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Authorised share Capital 2,500,000,000 2,500,000,000 3,000,000,000 3,000,000,000
Issued, subscribed and 2,128,165,100 2,340,981,610 2,575,079,770 2,832,587,750
paid up share capital
Share Premium Account 901,277,930
Reserve for issue of bonus shares
Advance for issue of rights issue 1,116,466,140 -
Surplus on Remeasurement 240,343,820 437,623,819 437,623,820
unappropiated Profit 1,468,417,191 2,268,637,348 1,851,979,758 1,553,594,782
3,596,582,291 4,849,962,778 5,981,149,487 5,725,084,282
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Non-Current liabilities
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Long term Financing 3,148,463,686 9,458,832,353 12,380,000,005 11,683,333,334
Liabilities against assets 227,054,048 227,054,048
subject to finance lease
Deferred Liabilities 594,653,794 1,075,913,123 1,055,573,197 936,569,796
Long term Advance 44,458,500 23,607,975 14,874,660
3,743,117,480 10,579,203,976 13,686,235,225 12,861,831,838
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Current Liabilities
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Trade and Other Payables 641,964,241 693,718,916 1,010,350,485
markup Payable 460,711,429 169,907,278 260,111,697 681,175,902
Short term Borrowings 753,639,569 1,110,327,690 756,384,619 3,132,325,542
Proposed dividends
Current portion of long term financing 469,996,667 666,633,334 1,703,832,354 1,453,333,334
1,684,347,665 2,588,832,543 3,414,047,586 6,277,185,263
TOTAL LIABILITIES & SHAREHOLDER EQUITY 9,024,047,436 18,017,999,297 23,081,432,298 24,864,101,383
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Non-current Assets
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PPE 3,147,107,940 9,752,139,389 9,792,103,067 9,518,181,876
Work in Progress 1,962,291,302 936,567,384 4,383,271,686 6,031,458,883
Investment Property 563,803,179 277,155,456 277,155,456 277,155,456
Long term investement 1,862,819,950 4,984,929,078 5,514,775,613 5,735,517,554
Long term advances and deposits 24,766,048 102,200,847 307,325,047 112,390,847
7,560,788,419 16,052,992,154 20,274,630,869 21,674,704,616
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Current Assets
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Stores and Spares 578,150,212 795,246,779 1,062,334,034 1,205,539,510
Stock in trade 93,439,984 150,269,307 290,830,696 775,589,200
Trade debts 47,691,775 33,190,955 84,633,511 113,440,272
AFS investments 330,600,000 - -
Advances deposits and prepayments 138,310,607 236,138,276 482,675,425 821,068,482
Bank balances 605,636,439 419,561,826 886,327,763 273,759,303
1,463,229,017 1,965,007,143 2,806,801,429 3,189,396,767
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TOTAL ASSETS 9,024,017,436 18,017,999,297 23,081,432,298 24,864,101,383
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INCOME STATEMENT Jun'05 Jun'06 Jun'07 Mar'08
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Sales-net 3,535,841,713 4,543,808,323 5,649,378,012 4,772,294,254
Cost of sales 1,986,891,718 2,250,304,518 4,636,508,040 4,385,976,319
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Gross Profit 1,548,949,995 2,293,503,805 1,012,869,972 386,317,935
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Operating expenses
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Admin and General 97,064,331 124,952,073 103,121,152 102,097,137
Selling & Distribution 20,876,316 24,563,397 38,278,894 51,316,773
Operating Proft 1,431,009,348 2,143,988,335 871,469,926 232,904,025
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Financial charges 139,637,148 468,727,103 1,211,745,924 841,842,323
Other income 71,733,025 139,240,672 396,632,200 209,348,537
WPF 65,183,235 84,034,307 - -
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Profit before taxation 1,297,921,990 1,730,467,597 56,356,202 -399,589,761
Provision for taxation 367,090,178 504,614,420 4,817,471
Profit after taxation 930,831,812 1,225,853,177 51,538,731 -298,384,976
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EPS 4.37 5.24 0.2 -1.08
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RATIOS Jun'05 Jun'06 Jun'07 Mar'08
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LIQUIDITY RATIO
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Current Ratio 0.87 0.76 0.82 0.51
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ASSET MANAGEMENT
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Inventory Turnover Ratio 21.26 14.98 15.94 5.66
Days to sell average inventory 16.93 24.04 22.58 63.66
Day Sales Outstanding (Days) 4.86 2.63 5.39 8.56
Operating cycle (Days) 21.79 26.67 27.97 72.22
Total Asset turnover 0.39 0.25 0.24 0.19
Sales/Equity 0.98 0.94 0.94 0.83
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DEBT MANAGEMENT
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Debt to Asset 0.60 0.73 0.74 0.77
Debt/Equity 1.51 2.72 2.86 3.34
Times Interest Earned (Times) 10.25 4.57 0.72 0.28
Long Term Debt to Equity 1.04 2.18 2.29 2.25
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PROFITABILITY (%)
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Gross Profit Margin 43.81 50.48 17.93 8.10
Net Profit Margin 26.33 26.98 0.91 -6.25
Return on Asset 10.32 6.80 0.22 -1.20
Return on Common Equity 25.88 25.28 0.86 -5.21
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PER SHARE DATA
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Earning per share 4.37 5.24 0.2 -1.08
Dividend per share 10.0 10 -
Book value 16.90 20.72 23.23 20.21
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