Introduction: Thatta Cement Company Limited was incorporated in 1980 as a public limited company. The Company was set up as a wholly owned subsidiary of State Cement Corporation of Pakistan (Pvt) Limited. The plant's manufacturing facility is based on dry process technology and was commissioned in 1982 with an installed capacity of 310,000 tonnes annually.
The manufacturing facilities are located 115-km north-east of Karachi at Makli, district Thatta. The facility was set up keeping in mind the large reserves of limestone and clay located in the vicinity. As a state-owned enterprise, Thatta Cement was awarded mining rights for extracting limestone from 2,364 acres, shale from 1,121 acres, and silica sand from 1,239 acres of land that are expected to last for over hundred years.
Ownership The facility was privatised under the second privatisation wave of 2000s, acquired by a consortium of Arif Habib group and Al-Abbas group of Haji Ghani Usman. During late 2000s, Ghani Holdings divested its share in favour of Arif Habib Equity Limited.
In 2013, Arif Habib Corporation announced that it would sell 61 percent of its share in the Company to a consortium of four private companies in order to focus on Power Cement, another group company previously known as Al-Abbas Cement. Currently, Thatta Cement's ownership is held 30 percent by Arif Habib Equity Limited, Summit Bank 8.5 percent, Sky Pak Holdings 19.4 percent, and Rising Star six percent.
Post privatisation, the new management invested heavily in BMR to improve productivity of the business. Plant capacity was increased by 50 percent and now stands at 465,000 and 488,250 tonnes of clinker and cement, respectively. Despite the expansion, Thatta Cement remains the smallest cement manufacturing facility in the country, equal to 1.01 percent of total installed capacity (44.5 million tons)--thanks to major expansion carried out by other players at the same time.
About Arif Habib Group One of the leading business conglomerates in the country, Arif Habib has well-diversified interests spanning fertilizer Pak-Arab Fertilisers Limited, Fatima Fertilizer; financial services Arif Habib Securities, Arif Habib Investments; commodities AHL Commodities; real estate Javedan Corporation and Dolmen City; industrial metals Aisha Steel Mills; energy Thatta Power; and construction materials Power and Thatta Cement.
The entrepreneurial group began its modest journey as a Karachi based brokerage house in 1970s focused on financial services. During the early 2000s, Arif Habib group expanded its interest in the financial sector, beginning with an asset management company. Soon after, the group acquired the business operations of Rupali Bank in Pakistan, reorganising it as Arif Habib Bank in 2007. The move brought AH group at the forefront of country's leading financial conglomerates.
However, the onset of 2008 financial crisis put the group's financial interests in jeopardy, forcing it to divest its stakes in banking and asset management. Ever since, the group re-organised itself, expanding its business interests in non-financial industrial and manufacturing sectors. The group emerged stronger from the crisis, with a holding company by the name of Arif Habib Corporation that now manages its diverse stakes across several sectors.
Industry Review FY13 was a year of tremendous growth for the cement sector, which came close to recovering its lost volumes from a couple of years ago. Total cement dispatches clocked in at 33.43 million tons for the year, second highest volume in the sector's history.
This was despite the two percent decline in cement export, which dropped due to lower demand for bagged cement from neighbouring countries. However, domestic sales proved to be the saving grace for the sector, which saw growth by more than 1.11 million tons, a year-on-year growth of 4.64 percent making up for the lost export volumes.
The industry has 18 major players, with installed capacity greater than demand for cement in the country. In line with industry wide trend, Thatta Cement's plant operated below capacity during FY13, with utilisation clocking in at 80 percent. However, it is important to put this performance in perspective: average capacity utilisation in the cement sector clocked in at 74.7 percent, indicating that the Company's performance was way above industry average. In fact, Thatta's utilisation is one of the highest in the sector, close to that of industry leader, Lucky Cement.
Still, the number should be understood in context of cement industry dynamics: the underutilization is a direct result of overcapacity in the sector, which has established production quotas allotted to member companies of All Pakistan Cement Manufacturers Association. Therefore, lower utilisation recorded by firms in the sector is not exactly a failure on part of the management but a consequence of surplus capacity in the country due to poor economic growth recorded in recent years.
Performance Brief FY13 proved to be a year of highly varied performances for Thatta Cement. While domestic dispatches saw record growth, thanks to a nine percent year-on-year improvement in off-take of ordinary Portland cement produced by the Company. Sale of GBFS (ground Granulated Blast-Furnace Slag) grew by 81 percent, from 10,545 to 19,046 tonnes-it is notable that Thatta cement is one of the only GBFS producers in the country, a construction material known for its concrete durability that extends building's lifespan by fifty to hundred years.
On the other hand, export dispatches declined by 88 percent during the year, from 78,196 tonnes in FY12 to a little over 9,000 tonnes in FY13. The whopping decline in exports also brought down the total dispatches for the Company, which recorded a year-on-year decline of 7.4 percent, clocking in at 388,479 tonnes.
Purportedly, the decline in export was a part of Company strategy that involves shifting focus to local market. According to Company sources, the declining size of the export market has made it unfeasible for smaller players to compete for a share.
Financial Performance Sales for the Company recorded a 2.03 percent year-on-year growth, clocking in at Rs 2.4 billion. This was despite a slowdown in cement dispatches. Cement prices in the North region recorded 18 percent growth on average during the year, compared to eight percent growth in the South. The stellar growth in cement prices has brought the gap between prices in the two regions to a naught, from above Rs 25 percent last year to less than a rupee this year.
The decline in international coal prices during the year also contributed to financial performance of the Company, with cost of sales declining by nine percent year on year. Gross margin during the year clocked in at 20.6 percent, up by a massive 10 percentage points since last year. However, gross margin still further away from record high of 28 percent during FY09. Productivity improvements in operations helped pull-up operating profits of the Company. The Company recorded decline of 200 basis points in distribution, further propping up bottom line.
Reduction in discount rate by the central bank during the year also boosted net profitability, which turned green after bleeding red for past two years. The Company recorded profits after tax of Rs 149 million, from a loss of Rs 44 million in FY12.
Outlook Going forward, cement sector in general as well as Thatta Cement is expected to see growth in FY14 on the back of higher budget allocations towards PSDP by the new Federal Government. However, inflationary macroeconomic outlook for FY14 and depreciation of Pak rupee may prove to be the sector's undoing.
However, given the inflationary pressures, lesser than expected government infrastructural spending for the first six months of FY14, and increased volatility in international coal prices going forward, things may not turn out as wonderful for the sector as was expected previously. The decline in cement demand in the South region, coupled with Thatta's lack of focus on export, where export by sea recorded double digit growth during the first six months of FY14, could prove to be the Company's undoing. Fingers remain crossed for the review of Bestway's performance during the 1H FY14.
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Thatta Cement Company Limited
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Rs (mn) FY13 FY12 FY11 FY10 FY09
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Financial Performance
Turnover - net 2,361 2,314 1,855 1,544 1,795
Cost of sales (1,876) (2,064) (1,616) (1,267) (1,298)
Gross profit 486 250 239 277 497
Selling & Distribution cost (66) (108) (225) (191) (130)
Administrative expenses (68) (70) (52) (46) (26)
Operating Profit 351 71 (38) 41 341
Other operating expenses (36) (3) (6) (9) (29)
Finance cost (83) (96) (79) (46) (64)
Other income 24 20 59 16 15
Profit before taxation 257 (7) (64) 2 263
Taxation (109) (36) (10) (1) (60)
Profit after taxation 148 (44) (74) 1 204
Earnings per share Basic (Rs) 1.49 (0.44) (0.93) 0.01 2.56
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Source: Company Accounts
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Year ending June FY13 FY12 FY11 FY10 FY09
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Profitability
Gross margin 20.6% 10.8% 12.9% 18.0% 27.7%
Operating marign 14.9% 3.1% (2.0%) 2.6% 19.0%
Pre tax margin 10.9% (0.3%) (3.5%) 0.1% 14.7%
Net margin 6.3% (1.9%) (4.0%) 0.1% 11.4%
Valuation
Long term debt to equity 6.26 12.09 12.75 5.10 9.76
Return on assets 6.8% (2.2%) (3.7%) 0.1% 14.4%
Return on equity 13.4% (4.6%) (10.6%) 0.1% 26.5%
EPS 1.49 (0.44) (0.93) 0.01 2.56
Solvency
Working capital ratio 1.05 0.91 0.92 1.02 1.17
Acid test ratio 0.29 0.28 0.50 0.26 0.28
Inventory turnover 57.0 39.66 51.75 66.87 49.73
Dispatches (metric tons)
Local 379,476 341,437 289,600 217,165 272,740
Ordinary portland 360,022 330,742 285,640 212,859 248,299
Class G Local 408 150 - - -
Clinker local - - - - 1,492
GBFS Local 19,046 10,545 3,960 4,306 22,949
Export 9,001 78,196 133,202 164,276 127,174
Cement 9,001 78,196 102,337 107,079 72,798
Clinker - - 30,865 57,197 54,376
Total 388,477 419,633 422,802 381,441 399,914
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