Lucky Cement Limited is the largest manufacturer of cement in Pakistan. During FY09, Lucky Cement started operation of 1.25 mtpa production capacity of Line 'G' at Karachi plant, increasing its total production capacity to 7.75 mtpa. The company increased the capacity of its Karachi plant keeping in view the lucrative potential of export to Gulf region and African countries.
During FY09, the company's production of clinker and cement increased by 8.7% and 8.9% respectively. Lucky Cement produced 5.61 million tons of clinker and 5.72 million tons of cement during FY09. As a result of massive capacity expansion over the past years, Lucky Cement has been able to consolidate its position as the largest cement exporter. The company has the highest export market share of 30% and a major portion of local sales with the market share of 13%.
CEMENT SECTOR DURING FY09
The performance of the cement sector remained lackluster during FY09. The sector posted a marginal growth of 2% as the total sales volume increased by only 0.484 million tons to reach 30.77 million tons by June 2009. Local cement demand declined by 13% to 19.4 million tons in FY09 against 22.4 million tons in FY08. Northern cement market recorded a decline of 17% at 15.9 million tons while the southern market posted a growth of 4% at 3.5 million tons during FY09.
Adverse economic conditions resulted in the slow down in construction activities while cut in infrastructure spending both in public and private sectors caused the cement demand to drop. Pakistan's per capita cement consumption at the end of FY09 was recorded at 120kg as compared to 139kg in last fiscal year (representing a decline of 14%). The local cement sales volume dropped by 14% to 19.4 million tons in FY09 as compared to 22.6 million tons in FY08. The 2% overall growth in sales was achieved due to high exports during FY09. The sector's exports surged by 47% to 11.4 million tons in FY09 as against 7.7 million tons in FY08.
Despite the economic turmoil in the international markets, export demand for cement remained high due to previously initiated projects in the Middle East and reconstruction activities in Iraq and Afghanistan. Thus, the local cement manufacturers capitalized on the regional shortfall in cement posted positive growth during the year. Exports contributed 37% to the overall sales volume of the sector. The overall capacity utilization of cement plants declined to 74% in FY09 from 81% in FY08 due to lower domestic demand and capacity expansions in the sector. According to recent statistics released by APCMA, 5 million tons of capacity expansion took place in FY09 (as compared to 7 million tons in FY08).
The total cement production capacity of the industry stands at 42 million tons by end of FY09 as against 37 million tons in last fiscal year. Company-wise, DG Khan Cement (DGKC) and Maple Leaf Cement (MLCF) posted impressive export sales growth of 113% and 114% respectively. Lucky Cement's exports grew by 29%. Both DGKC and MLCF managed to increase their market share in export sales to 14% and 12%, however, Lucky Cement's export market share declined to 30% during FY09 from 35% in FY08. However, its overall market share improved from 18.35% last year to 19.18% in FY09.
PROFITABILITY FY09
Lucky Cement Limited posted a profit after taxation of Rs 4.597 million in FY09. The profit for FY09 was 72% higher as compared to the profit earned in FY08 (PAT FY08: Rs 2.678 million). The gross sales of the company increased by 48% to Rs 30.915 million in FY09 as against Rs 20.820 million in FY08. The increase in gross sales was largely due to increase in cement prices as there was only a 6.25% increase in overall volumetric sales. The local sales volume of the company decreased by 14.5%, inline with the sector trend. It was the 29% increase in export sales volume that boosted the overall sales volume of the company.
The net sales of the company increased by 55%, from Rs 16.958 million in FY08 to Rs 26.330 million in FY09. The net retention prices of the company increased by around 46%. Net retention price is the price retained by the company sales tax and excise duty. Lucky Cement's retention price improved to Rs 4460 in FY09 from Rs 3052 in FY08. The increase in sales revenue was thus mainly due to increase in prices. Lucky Cement increased exports, which have higher retention margins. Also, prices increased in the local cement market owing to rising cost of sales in the previous years.
Cost of sales of the company increased by 31% during FY09. The cost per ton of cement increased by 23%. Energy costs are the major cost component for the company. In the previous years, the profitability of the cement sector was greatly affected by the rising international coal prices, which caused exorbitant increase in cost of sales. However, the coal prices began to fall during the second half of FY09 and remained during the range of US $65 to US $85 per ton. Thus, a higher increase in sales revenue as compared to costs resulted in 125% increase in gross profit for FY09.
The operating expenses increased by 102.5%, however, it was the drastic increase in the finance costs (from Rs 126.7 million in FY08 to Rs 1,237 million in FY'09) that squeezed the profitability of the company. The finance cost was mainly increased due to winding up of cross currency swap transactions during 1QFY09, which were providing interest rates hedging. Also the tight monetary policy of SBP during the early part of FY09 increased finance costs of the company.
PROFITABILITY DURING FY03-FY09
The profits of Lucky Cement have been increasing since FY03, however, at varying rates. The growth in profits had been declining from FY06 to FY08 due to rising costs but surged during FY09. During FY08, the growth of the company's profits slowed down to 5%. FY08 was marked by the cement sector as not only the year which saw growth in cement prices, both locally and internationally, helping the companies to secure more profits; but also the year in which they faced massive growth in operation costs, primarily fuel and electricity costs. This led the cement companies of the country to face massive problems in continuing productions and even to obtain profits from sales after the deduction of operation costs.
Many cement companies were faced losses due to these costs. Lucky Cement managed to obtain profits during FY08 when other companies posted losses. Lucky Cement anticipated these events and quickly employed counter strategies, like shifting to exports and reducing finance costs, resulting in high profits for the company. Also the energy and fuel crisis has also been spotted by the company in due time and preventive measures are employed with the hope that they will reduce operations and fuel costs in the future. Lucky Cement had showed a growth of 35.4% in sales, from Rs 12.25bn in FY07 to Rs 16.95bn in FY08. This growth was achieved through increase in exports, along with the rise in cement retention prices over the year.
Local retention prices showed an increase of Rs 133.7 per bag in FY08 from Rs 129.7 per bag last year, having a growth of 3.1%. Export retention prices, on the other hand, showed an increase of US $55.7 per ton (Rs 152.6 per bag) in FY08 as against US $47.2 per ton (Rs 133.2 per bag) in FY07. Although sales volume of the company grew by 19.7% to 5.56m tons as compared to 4.64m tons last year, yet domestic sales for the same period declined by 9.2% to 2.89m tons as against 3.18m tons last year. This occurred due to more focus toward high yield exports, which showed a growth of 83.0% to 2.67m tons in FY08 from 1.46m tons last year. During FY08, ratio of local sales to export was 52:48 against 69:31 in FY07.
The gross profit margin of the company revived to 37.26% during FY09 from 25.73% in FY08. Likewise, the profitability margin of the company also improved from 15.79% in FY08 to 17.46% in FY09. This shows that the profitability of the company has improved during FY09 after declining in FY08. The gross margin showed a declining trend in FY08, primarily due to the rising costs of production, especially in terms of rising fuel prices like coal, which rose from US $80 per ton to US $210 per ton from FY07 to FY08. Also the price of furnace oil was increased.
Net margin showed a similar decline although finance charges were reduced since last year from Rs 836m to Rs 127m, representing a decline of 85.3%, as the company entered into cross country swap agreements with the banks. But the effect was nullified, as the fair value loss on these agreements was included in the other charges under exchange differences. Return on assets (ROA) and Return on Equity (ROE) also increased during FY09 due to a higher proportionate increase in profits as compared to the increase in asset and equity base of the company. The assets and equity of the company increased by 12% and 24% while the profit after taxation surged by 72%.
ASSET QUALITY
The company's performance in terms of asset management fairly improved during FY09 as compared to in FY09. The operating cycle of Lucky Cement reduced to 80 days during FY09 as against 119 days in FY08. This was due to shortening of the time period taken to convert inventory into sales and the sales into cash. During FY09, it took Lucky Cement 63 days to sell its inventory as compared to 103 days during FY08. This is because the sales of the company increased while the stock of the company reduced. Also, the Day sales outstanding reduced from 15 days to 17 days during FY09, depicting that it took the company lesser period of time to recover credit payments.
The Total Asset Turnover ratio of the company had a declining trend till FY05, after which it started improving. The ratio continued to improve during FY09. The total asset turnover ratio has been increasing due to higher growth in sales revenue as compared to the growth in assets over the years. The rising trend of Sales/Equity was disrupted during FY08 when the ratio declined from 1.34 times in FY07 to 0.91. This was primarily due to the fact that the increase in reserves due to the issuance of GDR led to a far greater increase in equity as compared to sales. However, the Sales/Equity ratio improved to 1.13 times due to higher sales revenue.
LIQUIDITY
The liquidity position of the company became less favorable during FY'09 as the current ratio fell from 1.09 in FY'08 to 0.86 in FY'09. This was due to 6% decreased in current assets and 18% increase in current liabilities. The stores, spares and inventory of the company declined by 5%. However, the major reason behind decline in current assets was a 289% decrease in cash and bank balance of Lucky Cement. Cash is the most liquid asset and such a substantial decline could make it difficult for the company to meet its obligations.
Lucky Cement had shown a positive trend in FY08. The current assets were raised by sales tax refundable by the company and by the increase in stock in trade, mainly stock in transit. On the other hand, current liabilities were less, but still there were quite a few short-term borrowings done by the company as financing facilities, along with many bills payable. Liquidity position may remain weak until the company reduces its bills payable and short-term borrowings.
DEBT MANAGEMENT
Lucky Cement has a strong position when it comes to debt management. Since the end of FY06, the company has employed strict measures to keep its debts under control. This futuristic preventive measure has helped the company a lot in these times when interest rates are continuously on the rise. The action to reduce loans and to depend on equity for expansionary purpose finances has been critical in saving the company valuable profits that would have been otherwise lost in the name of finance costs. The swap agreements are another preventive measure the company is employing to save itself further from interest rates.
The results of the preventive measures are visible in the debt to asset ratio and the long-term debt to equity ratio, which show a downward trend since FY06. Total debt to equity has also been on a declining rate. In FY08 although total debt increased significantly, critically due to the rise in current liabilities, yet the overall effect has been declining owing to the rise in equity by the issuance of GDRs. Yet the debt to asset ratio signifies that the company succeeded in lowering its overall debts and strengthening its financial position.
The TIE ratio had been declining from FY04 to FY07 but in FY08 the TIE raised significantly, ie from 4.28 to 24.48 times. Although the EBIT for the year was less than that of FY07 (3,077,660 as compared to 3,695,402), but in FY08 the finance costs were reduced drastically through swap agreements, causing the rise in TIE. Still, for future times, the company would have to reduce its operating costs along with its finance costs to maintain the positive stream of TIE.
The Earning per Share of the company continued its positive trend that has been established since FY05. The Earning per share of Lucky Cement increased to Rs 14.21 in FY09 from Rs 9.84 in FY08. However, despite rising earnings per share, the price to earning ratio declined during FY09, depicting low investor confidence in the company. The average market price of the company's shares in FY08 was Rs 124, which fell to Rs 54 during FY09. The company announced a dividend of Rs 4 per share for FY09.
FUTURE OUTLOOK
The budget 2009-10 is expected to have a positive impact on the cement sector in the future. Excise duty per ton on sales of local cement has been reduced to Rs 700 per metric ton from previously Rs 900 per metric ton. This Rs 200 per ton reduction in federal excise duty will help the cement manufacturers to gain around Rs 10/ 50 kg. Reduction in excise duty in the budget has provided relief to the cement sector. The retention prices are expected to increase in FY10 and this will improve the profitability of the cement companies.
The recent break of the cartel leading to a massive decline in prices locally is expected to hit the profitability of the cement companies, though on the other hand it might spur local demand. Nevertheless we see cement shares subdued due to the recent development. Local cement sales can be expected to show positive growth during FY10 as PSDP budget allocation has been increased by 17.6% to Rs 646bn, as compared to the previous allocation of Rs 549bn, which was not achieved and then cut to Rs 271bn. The construction of 8 dams in each province and improvement of canals will boost local cement sales directly.
Export sales growth may slow down as the new capacities in the Gulf region are expected to come online in the future. Gulf countries constitute 39% of the total cement exports with Qatar, Oman and UAE leading the pack with 12%, 10% and 10% share. With new capacities online, our local cement manufacturers will experience a decline in the demand for cement. Also, political tension with India has already closed a window of opportunity that had appeared in FY'09. India constitutes 8.5 percent of total Pakistan's cement exports. The Indian government imposed 12 percent duty on cement imports a few months ago, which further discouraged Pakistan's cement exports to India.
However, local cement manufacturers are exploring markets like Central Asia and other new markets to enhance cement exports. The distribution costs of cement manufacturers may get controlled as Cement exporters are expected to get inland freight subsidy from Rs 40 billion export investment fund announced in 2009-10 budget.
COURTESY: Economics and Finance Department, Institute of Business Administration, Karachi, prepared this analytical report for Business Recorder.
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