D G Khan Cement was incorporated as a private limited company in 1978 under the management control of State Cement Corporation of Pakistan Limited (SSCP). The Company commenced its operations in 1986 with 2,000 tons per day (TPD) clinker. The Company was acquired by Nishat Group in 1992 under the privatisation initiative of the Federal Government and listed on all three stock exchanges of the country the same year.
At present, DGKC has a production capacity of 14,000 tons per day with three cement plants--two located at Dera Ghazi Khan and one at Khairpur in Chakwal district. All three plants are based on latest Dry Processing Technology. The Company has a countrywide distribution network, with the second largest market share in the industry. In an effort to embrace environmentally acceptable technology, the Company has also undertaken projects such as Waste Heat Recovery Plant Project and alternative fuel projects.
ABOUT NISHAT GROUP Nishat group is one of the most diversified in Pakistan, with its footprint in varied sectors of economy such as textiles, cement, financial services, power generation, paper products, hospitality industry, agriculture, dairy industry and aviation.
INDUSTRY REVIEW FY13 proved to be an excellent year for the cement sector, with total industry cement dispatches growing by nearly three percent. This was despite the two percent decline in cement export, which dropped due to lower demand for bagged cement. However, domestic sales proved to be the saving grace for the sector, which saw growth by more than 1.11 million tons, making up for the lost export volumes.
For several years, exports have stood at around a quarter of total cement dispatches for the industry. DGKC's cumulative share in the export market was 13.4 percent during FY13, a decline from 120 bps last year. However, it should be noted that DGKC's share at export share was 10 percent in FY08, and has grown annually at five percent cumulative ever since. In the domestic market, DGKC share remained intact at 11.5 percent, closely trailing that of market leader. Overall, DGKC's market share was 14.5 percent of total industry off-take, reportedly the second largest in the cement industry.
PERFORMANCE BRIEF FY13 As for the rest of the industry, FY13 proved to be a good year for D.G. Khan Cement which recorded it's the highest-ever after tax profit of Rs 5.5 billion. Local cement dispatches grew by more than four percent, a consistent three year growth after the dismal performance of FY10. The Company sold nearly 2.89 million tons of cement, up from 2.76 million tons last year.
Top line grew by 8.6 percent to Rs 25 billion with cost of sales displaying tremendous stability, growing by a nominal one percent. Compared to FY12, cost of sales declined as a percentage of turn over from 67.3 to 62.6 percent in FY13. The decline in COGS was a result of alternate fuel use, electricity generation through waste heat recovery, and reduced coal prices--offsetting the impact of overall inflationary environment in the country.
In response to these cost savings measures, gross margin rose sharply by 472bps, clocking in at 37.4 percent. A lower proportion of exports resulted in reduced distribution expenses, declining by 20 percent on a year-on-year basis. In contrast to S&GA expenses, administrative cost grew by more than half to Rs 406 million, but remained a negligible two percent of total sales. Other operating expenses grew by Rs 278 million on the back of rising contribution to Workers Profit Participation Fund.
Other income for the year stood at six percent of total revenue on account of dividend income from associated companies, with dividends from MCB growing by 24 percent on a year-on-year basis. Other dividend contributing related parties included Nishat Mills, Adamjee Insurance, and Nishat Chunian Limited.
A highly leveraged company in previous years, DGKC saw its finance costs decline by 41 percent compared to FY12. Interest and mark-up on long-term loans as well as short-term borrowings saw reduction by nearly half. Debt to equity ratio dropped to 11:89 from 19:81 last year, signalling that the Company is on its way to retire the long-term borrowings made for expansion in previous years.
PROFITABILITY Profit before tax for the Company rose by a whopping 75 percent. The Company posted record after tax earnings of Rs 5,502 million, with EPS clocking in at 12.56 rupees, a rise of 34 percent on year-on-year basis. Net margin for the year rose by 418bps to 22.1 percent, in line with industry numbers. Return on equity, however, clocked in at 13.6 percent, much lower than ROE of 23 percent recorded by industry leader Lucky Cement. ROE remains low mainly due to the degree of leverage, which is still much higher compared to the negligible debt levels of its primary rival.
FUTURE OUTLOOK Going forward, cement sector in general as well as DGKC is expected to see growth in FY14 on the back of higher budget allocations towards PSDP by the Federal Government. The government's decision to increase gas tariffs for captive power plants by only 17 percent (compared to 50 percent increase for industrial consumers) benefited the Company disproportionately since it meets most of its electricity demand through captive generation.
However, inflationary macroeconomic outlook for FY14 and devaluation of Pak rupee may prove to be a double-edged sword for DGKC. A successive rise in discount rate by the central bank could increase the finance cost for the still highly leveraged firm. On the other hand, currency depreciation could increase the cost of inputs, eroding the ground gained by gross margins. However, the Company expects its next Waste Heat Recovery plant to come online in FY14 at the Khairpur site, partly offsetting the potential consequences of inflation.
The Company is also working on refused derived fuel obtained from waste processing near Lahore and Multan and expects these to become operation by the end of CY13. In terms of investments, the Company abandoned plans to gain exposure in cement manufacturing in Mozambique. Plans were announced by the Company initially to inject equity in Sumeria Holdings, Maurituus--full owner GS Cimento in Mozambique. Lack of infrastructure required was cited as a major reason for not going forward with the investment.
The Company, however, reiterates its intention to venture into the African continent later at some point. Currently, the Company has announced plans for a green field cement plant at Hub, District Lasbela (South division) with a capacity of up to 2.6 million tons per annum to explore the unattended market and benefit from the proximity to port.
In its bid to diversify and gain from a fast growing population, the Company invested Rs 500 million in Nishat Dairy (Private) Limited. An associated company through Nishat Group, DGKC owns 10.6 percent shares of the Company, which began operations this year.
While the FMCG sector showed subdued growth this year due to rise in inflation, the project has very high long-term prospects, given the rise of the middle class in the country.
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D.G. KHAN CEMENT COMPANY LIMITED
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Rs (mn) FY13 FY12 FY11 FY10 FY09 FY08
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Financial Performance
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Turnover - net 24,916 22,950 18,577 12,464 18,369 12,464
Cost of sales (15,590) (15,443) (14,192) (13,570) (12,564) (10,528)
Gross profit 9,326 7,507 4,385 (1,106) 5,805 1,936
Administrative expenses (406) (268) (211) (172) (146) (111)
Selling & distribution expenses (1,751) (2,203) (2,471) (994) (1,881) (563)
Other operating expenses (545) (501) (38) (189) (824) (596)
Other income 1,466 1,188 1,134 912 735 847
Impairment on investments 0 0 (119) 0 (257) 0
Profit from operations 8,091 5,723 2,680 (1,550) 3,432 1,514
Finance cost (995) (1,671) (2,079) (1,902) (2,778) (1,689)
Profit before taxation 7,096 4,052 601 (3,452) 654 (175)
Taxation (1,594) 56 (430) (125) (239) 201
Profit after taxation 5,502 4,108 171 (3,577) 415 26
Earnings per share (Rs) 12.56 9.38 0.45 0.70 1.68 0.12
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Source: Company Accounts
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D.G. KHAN CEMENT COMPANY LIMITED
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Rs (mn) FY13 FY12 FY11 FY10 FY09 FY08
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Financial Position
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Share capital and reserves 47,998 32,931 30,217 26,519 20,918 30,080
Long term liabilities 3,054 4,883 5,091 5,275 4,528 8,539
Current liabilities 9,308 11,206 12,687 13,786 15,835 12,055
Total liabilities 12,361 16,088 17,778 19,061 20,363 20,594
Total equity and liabilities 60,360 49,019 47,995 45,580 41,281 50,674
Property, Plant & Equipment 27,325 25,192 24,612 25,307 24,346 22,978
Current assets 25,984 18,440 18,325 16,417 13,288 19,203
Total assets 63,527 50,685 49,703 47,046 42,723 51,993
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Source: Company Accounts
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D.G. KHAN CEMENT COMPANY LIMITED
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Year ending June UoM FY13 FY12 FY11 FY10 FY09 FY08
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Profitability
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Gross margin % 37.4% 32.7% 23.6% (8.9%) 31.6% 15.5%
Operating margin % 32.5% 24.9% 14.4% (12.4%) 18.7% 12.1%
Net margin % 22.1% 17.9% 0.9% (28.7%) 2.3% 0.2%
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Return to Shareholders
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Return on equity % 13.6% 13.0% 0.6% (15.1%) 1.6% 0.1%
EPS (basic) Rs 12.56 9.38 0.45 0.70 1.68 0.12
Breakup value per share Rs 55.23 44.17 41.75 37.28 39.97 41.89
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Solvency & Liquidity
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Debt-to-Equity times 11:89 19:89 25:75 28:72 27:73 45:55
Current ratio times 2.79:1 1.65:1 1.45:1 1.19:1 0.84:1 1.59:1
Net working capital Rs (mn) 16,676 7,234 5,638 2,631 (2,547) 7,148
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Source: Company Accounts
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