Lafarge Pakistan Cement (LP) is a part of Lafarge, a French company specialising in the manufacture of construction materials. It is the only multinational cement manufacturer in Pakistan, which commenced commercial operations in December 2006 with an annual cement production capacity of 2.5m tons. LP's unique product offering is its product PAKCEM, which is the first cement in Pakistan to comply with European Standards (EN 197) and Indian Standards (IS 12269), and also exceeds requirements of Pakistani Standard (PS 232).
INDUSTRY REVIEW
After a challenging FY11 for the cement industry due to the Great Floods of 2010, FY12 saw local cement retention prices going up, lending some price-based support to local cement manufacturers. Following that, FY13 saw a continuation of high retention prices that helped cement companies improve their margins. Export sales, however, continued to be stifled during the year, due to a relatively less price competitive international market.
PROFITABILITY
Sales and gross margins
In a year that has seen the financial health of many cement companies improve on account of better retention prices at home, smaller companies like Lafarge Cement have also benefited. With turnover improving by over 23 percent in CY12 relative to CY11, the company's gross margins improved phenomenally by about 11 percentage points. Much of the improvement in gross margins can be attributed to better retention prices of cement, which have lately risen significantly, helping improve the margins of several cement players.
However, export sales remained lull in line with the industry trend. Much of the decline in exports is attributed to capacity expansions regionally, as well as non-tariff barriers imposed by India and sluggish demand in Afghanistan.
The improvement in turnover was brought on more due to improving prices rather any improvement in volumes of sales. The company's capacity utilisation remained at the ebb because of a general over capacity in the cement industry of the country.
Operating margins
The improvement in gross margins cascaded down into an improvement in operating margins for the company of about 11 percentage points. Distribution expenses helped this increase, as they slid by about 8.5 percent, plausibly owing to declining exports.
However, finance costs continue to be the Achilles heel of Lafarge Cement, though they did go down in CY12. The finance costs have stayed above 12 percent during CY09, CY10 and CY11. In CY12, however, the finance cost as a percentage of sales slid to 11 percent as Lafarge Cement significantly reduced its short-term borrowings and also managed to reduce its overall debt by Rs 1.8 billion.
Net margins
With retention prices of cement improving in the local markets, the company's net margins have been improving considerably. After making losses in 2009, 2010 and 2011, the company reported a healthy profit of Rs 1.5 billion in CY12, with an EPS of 1.13.
LEVERAGE
Debt to equity ratio
As mentioned earlier, Lafarge Cement managed to deleverage its balance sheet by paying off nearly Rs 1.8 billion due to healthy cash flows. This helped improve the company's debt to equity ratio to 0.92, which is even better than the industry average of about 1.1.
Interest coverage and current ratio
Thanks to this reduction in liabilities and a better operating performance, Lafarge's interest coverage ratio improved considerably. The current ratio, however, declined slightly because of an increase in the company's current liabilities, brought about by an increase in liabilities to creditors, as well as a significant portion of long-term liabilities payable for the year.
OUTLOOK
Owing to improving cement prices this year, the outlook for most cement players has been a positive one, and Lafarge Cement is no different. Exports will continue to be a challenge, though devaluation of the rupee and local manufacturers' efforts to increase prices in Afghanistan will be of some help. Local cement dispatches are also expected to go up owing to an improvement in PSDP expenditures this year, primarily due to election-led boost in infrastructural spending.
Overall, analysts are positive about the prospects of the company, leading to expectations of improvement in the scrip's prices. "Our indicative target price (is) Rs 7.3 per share, providing an upside of 11 percent with dividend yield of six percent for CY13," said a research report by BMA Capital issued later in March. In fact, helped by the deleveraging of the balance sheet, the scrip is expected to trade at a premium in the local bourse relative to comparable peers.
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Selected performance indicators - Lafarge Cement
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CY12 CY11 CY10
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FINANCIAL DATA (Rs in mn)
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Turnover 9,624 7,804 6,881
Gross profit 3,135 1,656 856
Operating profit 2,294 973 62
Finance costs 1,053 1,064 981
Profit/(loss) after tax 1,488 -118 -948
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RATIO ANALYSIS
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Profitability ratios
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Gross profit ratio (%) 32.6 21.2 12.4
Operating margin (%) 23.8 12.5 0.9
Finance cost to sales ratio 10.9 13.6 14.3
Profit after tax ratio (%) 15.5 -1.5 -13.8
EPS (Rs/ share) 1.13 -0.09 -0.72
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Leverage ratios
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Debt : equity ratio 0.92 1.21 1.21
Current ratio 0.68 0.71 0.26
Interest coverage ratio 2.18 0.91 0.06
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