Kohat Cement Company Limited (PSX: KOHC) was established by State Cement Corporation of Pakistan in 1984. In 1992, the government privatized the company. The company was listed on the stock exchanges of Pakistan in 1984. The company has a white and grey cement line besides having a standby power plant of 22.4 MW capacity. In 2002, KOHC entered export markets besides serving the domestic market. ANS Capital (Private) Limited is the holding company of KOHC. The company has its production facility located in Kohat with its head office in Lahore.

Pattern of Shareholding

As of June 30, 2022, the company has 200.86 million shares outstanding which are held by 2542 shareholders. Associated companies, undertakings and related parties with a holding of 55.08 percent shares are the largest shareholder of the company. Directors, CEO, their spouse and minor children hold 17.09 percent shares of the company. Mutual funds have a stake of 14.15 percent in the company followed by general public with 11.3 percent shares. The remaining shares are held by other categories of shareholders including Insurance companies, Banks, DFIs and NBFIs, Joint stock companies, NIT and ICP etc.

Historical Performance (2018-2022)

KOHC’s topline has been improving since 2018 except for a dip in 2020 due to global pandemic. However, it is to be noted that its margins considerably shrank over the years. Talking about 2019, the company’s topline grew by 16 percent year-on-year, however, its bottomline, in contrary, lost its grounds by 17 percent year-on-year. During the year, KOHC’s sales registered a 4 percent year-on-year rise to clock in at 2.35 million metric tons which included 0.12 million metric tons of export sales. However, tremendous increase in the cost of production due to increase in the price of imported coal coupled with Pak Rupee Depreciation proved to be a double whammy for the company. Moreover, increase in the price of packaging material and electricity also didn’t bode well for KOHC’s bottomline. To top it off, cement prices also fell in the 4QFY19 which affected the profitability of the company. With a 4 percent year-on-year dip in the gross profit, GP margin clocked in at 27 percent in 2019 versus 32 percent in 2018. Other expense grew by 48 percent year-on-year during 2019 mainly due to massive exchange loss on account of Pak Rupee depreciation. OP margin fell from 30 percent in 2018 to 24 percent in 2019. The company was able to contain its finance cost despite high discount rate during the year. This is due to less geared capital structure of the company with a debt-to-equity ratio of 22:78. The NP margin stood at 16 percent in 2019 vis-à-vis 22 percent in 2018.

2020 jolted the company with a tremendous 28 percent year-on-year drop in topline depicting a 1.3 percent year-on-year drop in volumes and 24 percent year-on-year drop in cement prices. Cement prices dropped in the 4QFY20, however, couldn’t aid the margins much. The company registered a gross loss margin of 0.2 percent in 2020. The company left no stone unturned to keep its operating expenses in check; however, with a 44 percent year-on-year drop in other income, KOHC posted an operating loss of Rs147 million. Despite low discount rate during the year, the finance cost enlarged by over 700 percent owing to long-term financing obtained during the year for the completion of its new cement line. The company registered a net loss margin of 3.9 percent in 2020.

The losses made in 2020 proved to be ephemeral as 2021 recompensed KOHC for what it lost in the previous year. The topline boasted a 113 percent year-on-year growth backed by 69.3 percent year-on-year growth in off-take. The growth was propelled by government initiatives for the real-estate sector including low-cost housing projects and subsidized house financing along with CPEC related activities during the year. Improved selling prices during the year proved to be cherry on top boosting KOHC’s GP margin to 25 percent during 2021. KOHC took optimum benefit of the increased market demand as its new production line was fully operational in 2021. Other expense massively grew during the year mainly owing to WPPF and WWF expense due to high profitability. High interest rates paved the way for finance cost to grow by 26 percent year-on-year, yet thrilling sales revenue absorbed all the expenses and resulted into an NP margin of 14.5 percent. The margins of the company, although rebounded after a terrible dip in 2020, however, still couldn’t match the level seen by the company in 2018.

While 2022 followed the growth trajectory in terms of topline, however, the growth was price led rather than volume led. Local and domestic sales posted decline of 0.5 percent and 95.6 percent respectively in 2022; however, prices had to be kept high to absorb the exorbitant rise in prices of coal, electricity and petroleum products. The company used a mix of local and Afghan coal to mitigate the effect of elevated international coal prices. Such measures enabled KOHC to improve its GP margin to 30 percent in 2022 despite sluggish sales. The high discount rate backdrop proved to be beneficial for the company as it made massive income on financial assets which boosted its other income by over 300 percent during 2022. The major growth driver was the gain on investment in T-bills. OP margin for the year clocked in at 29 percent despite significant rise in operating expenses. Finance cost was quite in check which grew by mere 4 percent year-on-year despite multiple upward revisions in discount rate during the year. Bottomline of KOHC registered a 44 percent year-on-year growth with NP margin clocking in at 15 percent.

Recent Performance (1HFY23)

The topline of KOHC posted a 32 percent year-on-year growth, however, with high construction cost, subdued construction activity – both in public and private sector; we can safely assume that revenue growth was backed by price rather than volumes. High cost of production owing to Pak Rupee devaluation took its toll on the cost of production; consequently GP margin took a dip to clock in at 29 percent in 1HFY23 versus 32 percent in the similar period last year. Other income with a year-on-year growth of 285 percent owing to massive gain on investment, kept buttressing the bottomline. Handsome other income soaked up the growth of operating expenses and OP margin remained almost intact in 1HFY23. Finance cost grew by 45 percent year-on-year owing to high discount rate. Then imposition of super tax also elevated the taxation charges. The bottomline grew by 25 percent year-on-year in 1HFY23 with a 100 bps drop in NP margin to stand at 19 percent.

Future Prospects

Going forward, the demand is expected to remain tamed as construction activities are feeble and are not expected to rebound until the economy stabilizes which doesn’t appear to be happening in the near future. However, high pricing power comes to rescue the cement sector’s topline. The cement sector soon has to revisit its elevated prices if it wants to cope up with the downward demand pressure. Subdued demand coupled with roaring prices of coal as well as power and energy tariffs will remain a bane for the cement companies.