Pioneer Cement Limited (PIOC) has started its project in November 1994 when its first unit commenced production. The second unit was commissioned in January 2006. PIOC is a medium sized company in the cement sector, which began its operations with an installed capacity of 2000 tons per day clinker.
The company underwent many expansion plans due to which its capacity was increased to 2350 tons per day in 2005 and in 2006 a new production line of 4300 tons per day clinker capacity started production. Pioneer Cement Limited was incorporated on 9th February 1986 as a public limited company. Presently, its shares are quoted on all the three stock exchanges of the country.
It is part of the Noon Group, which holds the majority stake of 60% in the company, followed by a leading brokerage house, First National Equity Limited with 9% shareholding. The rest of the shares held by financial institutions, insurance companies and the general public.
PIOC is involved in the manufacturing and marketing of cement. Its products include ordinary portland cement, suitable for concrete construction and sulphate resistant cement, ideal for construction in or near sea. The company's sulphate resistant cement has less than 2.0 C3A content whereas the maximum limit of C3A content, set by British and Pakistani standards, is 3.5.
Thus, the company's sulphate resistant cement is highly preferred in important projects such as the Thal Greater Canal project. PIOC's products are sold under the brand name of 'Pioneer Cement' and it was the winner of "Brand of the Year Awards 2006" in cement sector in the national category.
The company's state-of-the-art European (FLS) plant is equipped with stringent quality control measures. PIOC is ISO 9001:2000 QMS and ISO: 14001:2004 certified. It meets local as well as international quality standards. PIOC produces and sells clinker and cement domestically and internationally.

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KEY FACTS
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COMPANY NAME             PIONEER CEMENT LIMITED
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TICKER                                     PIOC
PROFT AFTER TAX                        36 M PKR
SHARE PRICE (JUNE 30, 2009)           13.58 PKR
SALES (FY 09)                         5.1 b PKR
TOTAL EQUITY                          2.2 b PKR
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RECENT RESULTS 2001 Q 2010
The quantity sold was 11% more than last year, however following a decrease in net retention price by 27% sales declined to Rs 1432 million from Rs 2179 million in the corresponding period 2009. The net average retention price in 1Q10 was Rs 3212 per ton as compared to Rs 4405 per ton in 1Q09. Cement exports also declined by 75% mainly on account of declining international prices and rising international transport charges.
Clinker production declined by 29% to 283,439 tons while the cement production increased by 1% to 317,775 tons. Gross profit declined by 73% to Rs 115 million from Rs 454 million in 1Q09. Exchange loss of Rs 93 million (1Q09: Rs 144 million) pushed the PAT in the red. Distribution charges dropped down drastically to Rs 33 million from Rs 218 million due to a massive decline in exports that led to a major decline in the freight handling charges. LAT was recorded at Rs 67 million in 1Q10 as compared to Rs 16 million PAT in 1Q09. LPS was Rs 0.34
Going forward the debt to equity swap with NBP will be reflected in the balance sheet of Pioneer cement. The H1'10 results will reflect the above as improvement in the TIE and gearing ratios.
INDUSTRY OVERVIEW
This year was really turbulent for the cement sector due to the overall deteriorating law and order situation and the economic recession in the country. The local demand for the cement and clinker plunged to almost 15% and was highly affected by the large budget deficit and the reduction in the development expenditure by the government in line with the new demands of IMF. The government reduced the expenditure on Public Sector Development Program (PSDP) in FY09, which caused a reduction in the demands of cement by government by 11.3m tons. However this situation was shadowed by a huge 47% increase in the demand abroad. Also the increased inflation and the prices of cement and clinker helped the companies to improve their profitability position. The country now is 5th in the world regarding the overall cement exporters, a feat which has never been achieved before. Moreover most of the companies, this year, tapped the attractive markets of Middle East and Central Africa to overcome the shortfall in local demand, a decision which led to highly appreciable results despite the overall crisis in financial sector of the economy.
PRODUCTION AND SALES
At the year-end FY08 the local sales contributed 75% while the share of exports rose to 25% of total cement dispatches of the company. PIOC clearly benefited from the growth in demand for cement in India and the Middle East. As PIOC's plants are in close proximity of the Indian border, the shortage of cement in India made it a lucrative and accessible market for the company and exports are made through roads. The retention prices in India are better than other export market. As the cement prices in India are expected to rise further, PIOC can be expected to have increased value of sales and higher gross margins.
PIOC exported 293,431 tons of clinker, mostly to the Middle East due to depleted limestone reserves and idle installed grinding capacities. PIOC is also exporting to Europe and Africa. The production of cement decreased this year by 30% due to shortage of power and crisis-stricken political state of the country. The volume of local sales decreased by 30% in line with the industry trends and the exports decreased by 45% this year but due to the high prices both on local and international front, the company was able to make profit after taxes of about Rs 36m.
PROFITABILITY
The cement sector is experiencing strong growth in cement dispatches but at the same time it is facing declining profitability. The cost of production for the sector went up due to rise in the prices of imported coal. Crude oil prices shot up during FY09 and had its impact on prices of coal and natural gas. Fuel costs were the largest portion of production costs of the PIOC. For POIC the prices of packaging material went up and formed 14% to total production costs. For POIC fuel and electricity costs form 60% of the cost of sales and higher electricity tariffs and fuel costs affected the earnings of the company. Company had an impact of Rs 149 million on earnings due to devaluation of rupee against the dollar and Japanese yen in the form of exchange losses. Financial cost also increased due to higher interest rates in the economy.
Profitability ratios indicate that PIOC like many other companies in the cement sector, has been plagued by lower earnings. PIOC's rising operating expenses and finance costs have led to negative net profit margin. Similarly return on assets and return on equity have also fallen. The company improved a lot in the FY09 as far as the profitability is concerned. The gross profit margin increased from 10% to 26.66% As compared to last year the gross profit earned in FY09 (Rs 1333 million) is 160% more than that of FY08 (Rs 820 million).
Escalation in cost of goods sold was controlled and COGS was reduced by 16% in FY09 due to a sharp reduction in the international coal prices. The sales also increased by 3% in this year. But even then the Pioneer Cement's gross profit margin was less than the industry average of 30.36%. Same is the case with the net profit margin, the company which incurred an overall loss last year last year was able to bring their profit margin from -3.71% to 0.72% in FY09. The company has greatly reduced its distribution costs by 23% than last year. However, Pioneer Cement is below the industry's average net profit margin of 5%, although the asset management and debt management this year was the best in the whole sector. Pioneer's ROA and ROE are less at 0.35% and 1.4% respectively as compared to the industry average, which is 6% and 8.4% respectively. PAT was Rs 36 million as compared to Rs 180 million in losses in FY08.
LIQUIDITY ANALYSIS
The liquidity position of the company has been deteriorating over the years due to substantial rise in the current liabilities. PIOC felt a liquidity crunch, like many other companies in the cement sector due to the price war and losses caused by that in FY08. The current liabilities of PIOC have also increased to Rs 2.987 billion during FY08, backed mainly by increased short-term borrowings by the company. To solve the liquidity problem PIOC initiated a process of restructuring its debt by issuing Sukuk of Rs 2.5 billion in FY08. This will help the company to liquidate its excessive current liabilities. It will also help the company to control its finance costs. Also in lieu of its payments to NBP, Pioneer due to its inability to pay its loans will issue shares to NBP. This restructuring would give a breather to the company whose current ratio was steadily moving downhill.
During FY08 the composition of current assets changed such that the most liquid assets: cash and bank balances constituted 18%, trade debts 5% and inventory 9% of total current assets. Stores, spares and tools are highly illiquid assets and they form a major portion of the company's current assets. The liquidity position of the company improved a bit in FY09 despite the overall crumbling economy. The improvement was very minimal though 0.26 was the liquidity ratio in FY08 while the company ended up at 0.29 in the FY09. This slight improvement was due to 30% increase in the current assets of the company. Against the assets, the liabilities increased by 17%. The industry average for the liquidity ratio was 0.92 for the FY09 with Attock Cement as the market leader as far as liquidity was concerned. This shows that the overall industry's position, though not ideal, is at least much better than the Pioneer Cement. In fact it is the only company in the cement sector, which has the liquidity ratio of below 0.5.
ASSET MANAGEMENT ANALYSIS
The asset management of the company seems to be quite effective during FY08 as the operating cycle of PIOC decreased to 9 days from 23 days in FY07. The operating cycle, however, has reduced due to faster sales turnover while days to collect trade debt remained the same in FY08. The days to sell the average inventory were 19 days in FY07 whereas in FY08 it took the company only 6 days to sell its inventory. The company's policy in FY09 to increase its inventory has affected the inventory turnover rate, which was reduced from 63 times to 25 times. This year, the cost of sales of the company, were also reduced by 16%, which also played its part in reduction of the inventory turn over.
As long as, this policy is increasing the profitability and sales of the company, the ratio inventory turnover of 25 is satisfactory, considering the fact that the cost of goods sold were also reduced considerably by 16% although the main part in achieving that astonishing feat was played by the revaluation of the total assets of the company in FY08 due to which the depreciation expense was reduced by 13%. The cross country analyses tells us that despite the reduction in the ITO the company was well above the industry average in FY09 which was only 9.2 times in fact the ITO of Pioneer Cement was the highest amongst the sector. So the average days to sell the inventory in FY09 were increased from 6 to 14. All this happened due to the huge volume of cement export to the rebuilding countries like Iraq, Afghanistan, India and the Middle East by all of the companies in Pakistan. The increasing export volume also increases the amount of inventory recorded in the company's books. This explains why the Inventory Turnover of the cement sector is 38.8 days on average and the Pioneer Cement is very well below the average indicating the good performance as far as supply chain is concerned.
The company seems to be leading the market as far as the asset management is concerned as its operating cycle of 17.33 days is very less than the industry average of almost 48 days. This incredible performance is really plausible. Another noticeable achievement of the company is that 3% growth in the overall sales of the company was achieved even though the trade debts were reduced by 7% in the FY09. This step was taken by the company owing to the liquidity and credit crunch in the global market place and with in the country as well. The company's total assets turn over was also stable at 0.48 and it was almost the same as previous financial year. Even though the sales increased by 3% and the total assets decreased by 1%. Yet the company's turn over is less than the industry average of 0.61 which is a healthy sign for the company. Same is the situation with the equity turnover ratio which hadn't changed from the previous figure of 1.07 and is well below the industry average of 1.3.
DEBT MANAGEMENT ANALYSIS
In FY08 the debt to equity ratio has declined owing largely to a fall in the debt. The company is trying to restructure its financing composition in favor of equity by issuing Sukuk financing and convertible loan into equity. This will reduce the current liabilities in the future. In the wake of rising interest rates in the economy, this strategy will prove to be beneficial for PIOC in the future. The company's debt to asset ratio has not changed much from the previous figure of 0.57 and is 0.58 this financial year. The total liabilities of the company were decreased by 3% while assets were decreased by 1%. However, a closer look at the liability structure of the company, tells that the current liabilities were increased by 17% due to huge rise of 104% in the accrued interest and 68% increase in the short-term financing of the company to hedge itself from the dangerous after-effects of the long-term debt financing.
While on the contrary, the long-term liabilities were decreased by 23% and all the long-term loans were either redeemed or significant portion of their principals was paid to the banks to reduce the increasing finance cost from the profit and loss account. Almost Rs 300m were disbursed from the company for that purpose, which affected the liquidity, but the whole industry was doing this and that trend was followed by other manufacturing concerns as well. The industry average in this ratio is 0.51, which is closer to that of the company. The company increased its equity by 1% in FY09. But due to the redemption policy of the long-term loans, the company's overall liabilities were also decreased by 3% yet the capital structure is dominated by the debt financing and trend will be continuing for a very long time in future.
A cross-country analysis tells that the capital structure of Pioneer Cement has too much debt in it. This year's industry average is 1.41 and it is much lesser than that of the Pioneer Cement. This is probably because the company is not owned by the single family which doesn't allow ownership to transfer into the foreign hands unlike other companies of the sector. The company's long-term debt to equity ratio reduction from 1.28 to 0.95 in FY09 confirms its policy of getting rid of long-term debts. In fact, the average ratio indicates that the whole industry has blindly followed this course of action to save them from the inflation.
The industry average of 0.35 suggests that Pioneer Cement has still got a lot of debt on its balance sheet but this is there because the share of equity in the capital structure is very less. The company's Times Interest Earned ratio is 2 and has increased from the last financial year when it was negative last year due to loss it incurred from the operations. Even though the interest rates have increased the finance cost by 104%. The other companies who got rid of the long-term debt fully have managed to save a lot of profit from being going to the interest account. The TIE industry average is 5.8 which is very much larger than that of Pioneer Cement but we have to keep in mind that the Pioneer Cement has got such a large amount of debt in its capital structure that it was not possible to get rid of it in one financial year.
SHARE PRICE ANALYSIS Share prices of the Pioneer Cement reduced from Rs 31 in June, 2008 to Rs 13.58 in June 2009. The Earnings per share were increased from negative to Rs 0.18, however they are pushed in the red in 1Q10.
COURTESY: Economics and Finance Department, Institute of Business Administration, Karachi, prepared this analytical report for Business Recorder.
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