Gharibwal Cement Limited is one of the pioneers of cement manufacturing in Pakistan, producing cement since around 50 years. The company primarily produces ordinary Portland cement.
It sells cement under the brand name of "PAIDAR". The company was formerly known as Ismail Cement Industries Limited and changed its name to Gharibwal Cement Limited in 1972. Gharibwal Cement Limited was incorporated in 1960 and is headquartered in Lahore, Pakistan.
As of June 2009, Gharibwal has two lines of production; new dry process plant with one kiln having rated capacity of 6,700 M tons per day and old wet process plant with three kilns having rated capacity of 1,800 M tons per day, making the overall capacity of the cement plant to 8,500 M tons per day. The old wet process plant is intended to be utilized in order to meet the excess market demand or to produce Sulphur Resistance Cement (SRC). The new dry process plant started trial runs from July 2008 and commercial production started from April 2009.
RECENT RESULTS 3Q10
Net sales for GWLC increased to Rs 335 million for 3Q10, a tremendous increase compared to last year's corresponding period due to increased production capacities. Loss from operation was Rs 284 million while hefty financial charges of Rs 239 million did nothing good for the company.
Re-structuring and re-scheduling of all the long-term loans is in process and expected to be finalized in the quarter ending 30th June, 2010. This would increase the current ratio from 0.19 to 0.41.
The company suffered a loss after tax of Rs 386 million compared to Rs 258 million in the corresponding quarter of last year. Reasons for this included under-utilization of production capacity due to acute shortage of working capital, delay in approval of re-profiling of loans, high financial charges and huge dip in cement prices.
The plant operated for only 101 days which was very low as compared to other cement companies. During the first half of this year, the export prices showed an improvement and the company planned on penetrating into foreign markets including Afghanistan, Africa and Middle East. But due to the lack of working capital, the export orders from Ethiopia worth USD 100 million for supply of 1.2 million tons cement in this quarter was cancelled resulting in a loss of much needed foreign exchange earnings by our country. The export earnings for this quarter amounted to Rs 16.66 million.
The company also owns 40-MW captive power plant which can sell part of the electricity to PEPCO. This could not be done due to the lack of working capital.
In 9M10, the company's cost of production increased significantly and the major share in this came from fuel and oil and raw materials, which make up 65% of the cost. Due to the expansion of the plant, depreciation also constituted a large part of the cost of sales. Depreciation for the 9MFY10 was Rs 202.5 million as compared to Rs 44.5 million in the corresponding period last year.
Going forward, the situation of the company is not at all rosy and we recommend investors to be cautious with respect to this particular scrip.
FINANCIAL PERFORMANCE (JUNE 2005-2009)
During the year FY09, GWLC registered a high sales growth resulting in net sales of Rs 1,250 million as compared to Rs 522 million in FY07. The low level of sales in FY07 and no sales in FY08 can be attributed to the closure of old, wet process cement plant in the second half of FY07 as the operation of the plant had become uneconomical. During the plant shutdown period, a new 6700 TPD clinker production capacity plant was being set up by a top ranked Chinese building material company namely Tianjin Cement Industry Design & Research Institute (TCDRI) Co Ltd. The plant started trial runs from July 2008 and commercial production started from April 2009 after which sales picked up to around its previous level. The clinker production levels showed a huge jump after the start of commercial operations of the new plant from 436,335 M tons in FY06 to 813,889 M tons in FY09, an increase of 87%. Similarly, the cement production levels increased from 428,300 M tons in FY06 to 732,106 M tons in FY09, an increase of 71%.
The company is undergoing a depressed phase depicted by the increasing net loss after taxation amounting to Rs 453.150 million in FY09 as compared to a net loss of Rs 315.198 million in FY08 and Rs 222.916 million in FY07. This resulted in a negative net profit margin for the respective years. Major reasons for the loss in FY09 despite the start of new plant operations included low capacity utilization, slow domestic demand and high financial and energy costs. There was an increase of Rs 98 million in long term loans from banking companies and other financial institutions in FY09. Losses in FY07 and FY08 were mainly attributed to the decline in production due to shut-down of the plant as operations became uneconomical and reduction in the retention price of cement. Gross profit margin was negative in FY07 as the sales were on a decline and zero in FY08 as there were in no sales in that year. With the commencement of the new plant, the company registered a gross profit of Rs 70.254 million in FY09 and is expected to increase over the coming years.
Return on assets also showed a sharp declined and has been negative for the past three years. It decreased from -2.71% in FY07 to -3.03% in FY08 and -3.93% in FY09. Reasons include the net losses incurred by the company in all three years and the increasing assets particularly the fixed assets used in the new plant set up. Similarly, return on equity has a declining trend and has been negative for the past three years due to the net losses incurred by the company. Return on equity was -13.28% in FY07, -15.79% in FY08 and -29.63% in FY09.
The liquidity of the company has shown a declining trend over the last six years. The current ratio reduced from 0.7 in FY08 to 0.22 in FY09 mainly because of a tremendous increase in current liabilities of Rs 3,891 million from FY08 to FY09. There was a major jump in the accrued liabilities of the company from Rs 56.113 million in FY08 to Rs 408.396 million in FY09. Also, the company obtained Ijarah financing amounting to Rs 120 million for import of cement packing (stationary machine), wagon loading machines, belt conveyors and associated equipments, out of which the current portion of Ijarah Payable in FY09 was Rs 26.860 million.
Short term borrowings increased from Rs 192.537 million to 744.578 million arising from the import finance facilities obtained from commercial banks and loan obtained from past associated company, Dandot Cement Company Limited. Current portion of the long-term liabilities from banking companies and other financial institutions in FY09 amounted to Rs 2386.8 million in FY09 as compared to Rs 473.674 million in FY08.
The stock-in-trade was also on a rise from Rs 77.573 million in FY08 to Rs 371.989 million in FY09 due to the increased work-in-progress and raw material inventory after the start of commercial operations of the new plant and the inventory transferred from the trial run.
In terms of asset management, the company has not been doing too well. There was a decrease in inventory turnover from 16.43 in FY06 to 5.01 in FY09. Consequently, the days inventory outstanding increased from 22.22 days in FY06 to 72.86 days in FY09. Operating cycle has been negative and increasing since the past five years due to the increasing days payable outstanding from 87.61 days in FY06 to 317.21 days in FY09. This increase in DPO is an outcome of increasing trade and other payables over the years.
The operations of the plant had become uneconomical and thus was closed in the second half of FY07 and remained closed during FY08 resulting in an abnormally high days inventory outstanding and nil fixed asset turnover and sales to equity ratio in FY08. Fixed asset turnover has been on a decline as the operating fixed assets have increased sharply whereas the sales have remained around the same level. During the plant shutdown period, a new plant was being set up. As a result, there was an increase of Rs 6,486.675 million in fixed assets in FY09. There were no sales in FY08 and very low level of sales in FY07 while the plant was closed. Sales picked up to its previous level after the start of commercial operations in 2QFY09 explaining the recovery of fixed asset turnover and sales to equity ratio.
GWLC has been facing increasing debt over the past few years. Total liabilities have increased from Rs 1,312.872 million in FY06 to Rs 9,058.745 in FY09. This has resulted in rising debt to asset ratio which increased from 30.52% in FY06 to 78.6% in FY09. The debt taken by the company was for the construction of a new dry process cement plant as operations of the wet process plant were becoming uneconomical.
Debt to equity ratio has also increased from 3.8 times in FY08 to 5.92 times in FY09. However, long-term debt to equity ratio has remained around the same level for the past three years implying that the increase in total debt is contributed mainly by the increase in current liabilities.
Gearing ratio has been negative for the past three years due to the incurred losses before interest and taxes showing that the company is financially distressed. Finance costs have been high due to the long-term loans from banking companies and other financial institutions taken by GWLC for setting up the new plant. However, it has improved very slightly from (2.31) times in FY08 to (1.53) times in FY09.
As the company reported a loss in FY09, no dividends were declared making this the third consecutive year of non-declaration of the dividends. The EPS in FY09 was Rs (1.60) compared to Rs (4.34) in FY08, showing a decrease of 63.13%, but still not positive as the company faced a loss this year as well.
The book value per share of the company has decreased to Rs 6.6 in FY09 compared to Rs 8.88 in FY08 due to significant losses faced by the company, adversely affecting the equity. The reasons for the loss were low retention price, high financial cost and ancillary inflation in the cost of production. The beta of GWLC is -0.08 which means that the returns on the stock are negatively correlated to that of the market. However, on basis of significance it can be said that GWLC prices are not directly related to the index movement.
FUTURE OUTLOOK
Due to intense competition, domestic prices of cement have crashed since June last year. The company expects that domestic prices may improve soon and better result will be forthcoming during the next period. At present, there are better margins in export markets as compared to domestic market. Management is trying its best to sell more cement in export markets including Afghanistan, Africa and Middle East, etc. This will help the company to somewhat alleviate adverse impact of domestic price crash and keep itself afloat during this difficult economic period.
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2005 2006 2007 2008 2009
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PROFITABILITY
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Gross Profit Margin (%) 10.18 17.30 -36.12 0.00 5.62
Net Profit Margin (%) 15.11 13.37 -17.83 0.00 -36.24
Return on Assets (%) 7.80 3.89 -2.71 -3.03 -3.93
Return on Equity (%) 16.94 8.89 -13.28 -15.79 -29.63
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LIQUIDITY RATIO
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Current Ratio 1.67 1.14 1.12 0.7 0.22
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ASSET MANAGEMENT
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Inventory Turnover 43.47 16.43 6.65 0.97 5.01
Days Inventory Outstanding 8.40 22.22 54.86 377.24 72.86
Operating Cycle (67.89) (65.39) (182.30) - (236.66)
Fixed Asset Turnover 1.29 0.63 0.22 - 0.12
Sales/Equity 1.32 0.84 0.31 - 0.82
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DEBT MANAGEMENT
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Debt/Asset (%) 34.60 30.52 66.54 72.78 78.60
Debt/Equity 0.75 0.70 3.26 3.80 5.92
Long-term Debt/Equity 0.35 0.24 2.59 2.94 2.35
Times Interest Earned 2.57 5.24 (1.97) (2.31) (1.53)
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MARKET VALUE
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Earnings per share 5.12 1.82 (1.18) (4.34) (1.60)
Price/Earnings ratio 2.33 7.25 N/A N/A N/A
Dividend per share 0.00 0.50 0.00 0.00 0.00
Book Value 30.23 20.50 8.88 8.88 6.60
Number of shares issued 36,876,417 91,758,242 188,983,051 224,798,316 231,876,417
Market Price (June 30) 11.95 13.2 17.5 19.0 15.8
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