FY2009-10 was one of growth and prosperity for Attock Cement in terms of production and sales volume. Clinker and cement production increased by 2% and 4% respectively as compared to FY08-09 position taking the firm to its full operational capacity; the chart below depicts this trend.
The company considers it a great achievement as these mark the second consecutive year of production at 100% capacity utilisation despite the depressive conditions in the domestic and foreign cement markets. The firm stands with a cumulative market share of 38% representing a 4% growth over the past years, even though the overall size of the market had shrunk by 3% due to the onset of floods and as an aftermath of the recession.
RECENT RESULTS (1H11)
The half-year ended 31 December 2010 continues to exhibit the impact of weak demand and volatile cement prices on the company's performance that have been a source of continued concern for the firm ever since the incidence of the massive floods. The local market registered a decline of 8% whereas the cement export market contracted by a substantial 17% over the half year. However, despite such a depressive streak Attock Cement was able to register a 2% growth in its volume of sales over the period, which helped to counteract the otherwise expensive impact of price volatility on sales revenue. The details of the salient operational indicators of the firm during the period are as below:
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SIX MONTHS ENDED
DECEMBER 2010(TONNES)
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CLINKER PRODUCTION 863680
CEMENT PRODUCTION 878114
CEMENT DESPATCH- LOCAL 616113
EXPORT 253310
CLINKER CAPACITY UTILIZATION 101%
CLINKER EXPORT SALES -
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PROFITABILITY
The profitability position deteriorated substantially over the six months ended 31 December 2010; despite the 1.5% rise in sales revenue as compared to the HFY09 the gross profit margin fell by an astounding 46.6%. The primary reason for such a drastic depression of the company's profitability has been the erratic pattern of its costs. As per company sources the production cost per ton of cement sold increased by 19% over the previous year stemming from the high coal prices and inflating electricity tariffs.
The ability of the company to pass on the incidence of such high costs on to the customers was severely compromised due to the volatility in the prices and the competitive market conditions due to excess supply of cement in the world market. As the charts below depict, the firm's profitability position worsened on all accounts; the impact of the 20% rise in cost of goods sold as opposed to a meagre 1.5% rise in sales revenue led to a domino impact that could not be absorbed despite the 46% contraction in operating expenses and eventually led to a decline of 63% in operating profit. Moreover, finance costs and income from non-operating sources declined by 28% and 78% respectively, and their impacts are evident from the chart below.
As far as the relative performance of the company to the previous two half-yearly periods is concerned, Attock Cement seemed to have performed poorly there as well. It is easy to see how the decline in margins from December 2009 to June 30 2010 attributed to the impact of floods have paved the way for even more deteriorated a position recently. The return on assets has declined by an astounding 77.9% over the six months and on an average by 63% over the last twelve months. This speaks gravely of the condition the company is facing at present. The returns to shareholders reported a similar dip on a percentage basis.
ASSET MANAGEMENT AND LIQUIDITY
As far as the efficiency position of the firm is concerned, we can say that the company succeeded in maintaining its productivity perhaps as a result of the implementation of stringent control mechanisms. The current ratio of the firm stayed strong throughout the 12-month period, substantially increasing from 2.45December 2009 to 2.62 in June 2010. However, we cannot ignore the fact that a great dip in the short-term position of the firm was observed in the subsequent months taking the current ratio down to its present level of 1.86. Hence the brunt of the impact from rising inventory due to a shortage of market demand in the face of the continued over utilisation of the firm's resources is evident here.
Similarly, the total asset turnover that had sharply increased from 0.5 times to well over 100% utilisation in the last six months of the previous fiscal year fell back to its original range of 50% during this period; also that the utilisation of the shareholder's equity for the creation of sales showed only marginal improvement of 1.5% over the last twelve months. As the figure below shows the operating cycle of the firm shortened primarily because the inventory turnover improved. As peculiar as this move seems, it seems like an intuitive result of the firm's efforts to boost its volumetric sales as a result of which the inventory turnover days has improved and the overall operating cycle has shortened.
DEBT MANAGEMENT AND INVESTMENT
During the 12 months between December 2009 to December 2010 the company seemed to have pursued a dual debt policy; where on one hand the liabilities were rationalised during the first six months, the subsequent half of the fiscal year saw a 16% soar in the debt to asset ratio alone. This implies that in order to sustain the sharp rise in the cost of production all in the context of rising economic and industrial turmoil the firm had no other choice but to increase its debt structure. As a percentage of equity the debt trend was similar; it is noteworthy however, that the long-term debt's percentage in total debt steadily declined over the tenor. Hence the firm resorted to a retirement of long-term debt during the end of FY10 after which it relied on short-term loans as sources to finance its rising expenditures. The times interest earned thereby stayed strong and healthy, increasing from 20 times to an astonishing 37 times by the end of December 2010.
On the investment side, the period has been one of sad news for shareholders; where the EPS had grown over the last six months of the previous FY it fell sharply in the subsequent tenor averaging to be a meager Rs 2.72 this December. The Book value per share also fell marginally from 50 to 58.9 a change registered to be less than 1%. Hence the negative market sentiments and shaky investor confidence for the stocks of the firm can be considered in this perspective.
A snap shot of the performance is as follows:
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2009 2010 June '10
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LIQUIDITY
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Current Ratio 2.45872 1.856161 2.621657169
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ASSET MANAGEMENT
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Inventory Turnover (times) 2.044337 6.649361 5.129959846
Average No of days to sell inventory 176.0962 54.14054 70.17598788
Days Sales Outstanding 5.477222 3.898277 2.599297639
Operating Cycle 181.5735 58.03882 72.77528552
Total Asset Turnover 0.505755 0.51356 1.086305688
Sales/Equity 0.691582 0.701623 1.421230307
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DEBT MANAGEMENT
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Debt to Asset Ratio 30.14086 27.43261 23.56582299
Debt to Equity Ratio 43.1452 37.80295 30.83152578
Long Term Debt to Equity 12.25685 7.420084 11.08903683
Times Interest Earned 20.384 36.67555 18.88422992
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PROFITABILITY
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Gross Profit Margin 29.19062 15.58503 25.53381638
Profit Margin 16.71811 6.210486 13.25857285
Return on Assets 8.455263 3.189455 14.40286311
Return on Equity 12.1033 4.395163 18.84348556
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MARKET VALUE
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Book Value 59.02265 58.96958 62.30599742
EPS 7.2 2.72 11.74
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PROFITABILITY OVERVIEW
The chart below depicts the sales trend for the company over the past five years; it is surprising how despite the 4% volumetric growth mentioned earlier the sales revenue actually dipped by a pronounce 10% to Rs 7668 million in FY10. The major factor that explains such peculiar findings is the decrease in Cement prices both in the domestic and international markets. It was cited earlier that the company produced at maximum capacity during the tenor under consideration; however we cannot ignore the absorptive capacity of the markets during the same period as they seem to have been the major cause of the contraction in sales revenue. The overall average net retention for Attock Cement fell by Rs 656 per ton as compared to FY09.
As far as the profitability position is concerned, a dip was observed in profit figures across the board for the company. Where gross profit declined by an astounding 27.7% compared to last year the operating and post tax profit positions took harder hits with 30.5% and 31.9% decreases in each respectively. A due examination of the cost structure reveals that the contraction in cost of goods sold was a mere 1.56% as compared to the 10% dip in sales volume discussed earlier; this implies that the company absorbed the adverse impacts of the demand contractions itself rather than passing it onto the consumers by drastically cutting its margins on sales.
The firm seemed to have adopted an overhead control mechanism reflected in the reduction of other operating expenses by 30%; other areas such as distribution and administration however continued to experience a spike in their accumulated figures. The most prominent factor other than the reduction in selling price as reflected in the contraction in the average net retention for the company that led to the depressive profit position was the substantial enhancement of the electricity tariff in FY10. Given the excess capacity position the increase of almost Rs 149 per ton of cement brought about by this did not bode well with the company's profitability position. However, one factor that served to offset the decline in profitability position cited above was the declining fuel cost as the company embarked on its program to procure coal at lower prices.
ASSET MANAGEMENT AND LIQUIDITY
The asset position of the company over FY10 presents a very ambiguous position primarily explained by the price depression and excess capacity reasons cited above. The liquidity position strengthened, reflected in the improvement in the current ratio from 2.4 to 2.6 in this period. The firm's greater marketing efforts to increase sales volume in the regional markets by tapping into newer avenues like Sri Lanka and Sweden was aptly reflected in the improvement of inventory turnover and the consequent reduction in inventory days. Hence the greater expenses absorbed by the firm during times of price uncompetitiveness helped it to consolidate its position in the cement markets greatly.
A cause of concern here is the rise in DSO for the firm; over the FY10 this value has doubled indicating the liberal trade debt policy adopted by the firm. Although this could have been another initiative to encourage sales and increase sales volume the company needs to prudently evaluate if such a drastic change was wise. However, the overall impact of the changes discussed above was a contraction of the operating cycle, reinforcing the liquidity improvement experienced during this year. Moreover, the reduction in sales revenue combined with the rising investment in non-current assets served to bring down the Total Asset Turnover figure during the period.
INVESTMENT POSITION
The two factors in addition to those discusses earlier that contributed to the improvement in the firm's standing over FY10 and helped to offset the effects of deteriorating profitability were the trimming of the finance costs and the generation of interest income from other investments. Since both of these heads pertain to the current section under consideration their discussion was reserved for this end; the finance cost declined by an astonishing 35% over this tenor taking the Times Interest Earned ratio up to 18.9 from a previous value of 17.6 despite the depressive streak observed in the profitability position. Furthermore, the 57% increase in income from other sources is partially explained by the Rs 175 million worth of interest income earned by the firm on excess funds invested in short term securities. This represented an absolute increase of Rs 80 million on the Rs 95 million generated under this head in the previous year.
The debt position of the company experienced a positive trend during this year. Where the gearing significantly declined from 31% to 24% in this year, it came primarily from the halving of the long-term debt to equity position from 22% to 11%. Also that the shareholder's position strengthened on the reigns of the company, duly reflected in the 15% point reduction in the debt to equity ratio from 46% to 31%; however, the book value decreased from Rs 66 to Rs 62 whereas the EPS declined from Rs 20.69 to Rs 11.74 this year.
A snapshot of the company's position is as follows:
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2009 2010
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LIQUIDITY
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Current Ratio 2.432579 2.621657
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ASSET MANAGEMENT
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Inventory Turnover (times) 4.534032 5.12996
Average No of days to sell inventory 79.39953 70.17599
Days Sales Outstanding 1.966447 2.599298
Operating Cycle 81.36597 72.77529
Total Asset Turnover 1.220467 1.086306
Sales/Equity 1.781144 1.42123
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DEBT MANAGEMENT
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Debt to Asset Ratio 0.314785 0.235658
Debt to Equity Ratio 0.459396 0.308315
Long Term Debt to Equity 0.221724 0.11089
Times Interest Earned 17.60551 18.88423
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PROFITABILITY
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Gross Profit Margin 31.83254 25.53382
Profit Margin 17.54334 13.25857
Return on Assets 21.41107 14.40286
Return on Equity 31.24723 18.84349
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MARKET VALUE
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Book Value 66.20937 62.306
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Market/ Book Ratio
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EPS 20.69 11.74
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