History and ownership: DG Khan Cement Company Limited (PSX: DGKC) was established in Dera Ghazi Khan under the control of State Cement Corporation of Pakistan Limited (SCCP) in 1978 and started manufacturing operations in 1986 with a production capacity of 2,000 tons per day (about 600,000 tons annually). The company was acquired by Nishat group in 1992 after the government's privatization scheme where many other cement companies were deregulated and privatized. At that time, the company was the larger of two cement producers.
In efforts to keep growing, more capacity was added through the years-going from 2,000 tons per day to 6,700 tons per day to later setting up a new plant in Khairpur with a capacity of 6,700 tons per day (approximately 2 million tons). Combined, the two plants have a capacity of 4.02 million tons annually, placing DG Khan in the nook of the other two cement giants today, Bestway and Lucky.
Cement manufactured is around 4.22 million tons per annum which would give DGKC a market share of around 9-10 percent though the company puts its own market share somewhere on the 10-12 percent level for domestic and exports markets. Comparatively, Lucky and Bestway capture about 16-18 percent of the market each.
The company went public after privatization and is listed on the stock exchange. The company caters to the northern market usually but also exports to Afghanistan (36% in FY15, 28% in FY16), India (32% in FY15, 51% in FY16), Kenya and other African countries.
Energy efficiency has been a prominent addition to DGKC's facilities which has helped cut down on costs and improving overall efficiency of the energy intensive cement production business. The company has a gas fired plant with a capacity of 25.5MW, furnace oil fired plant (23.84MW), two waste heat recovery units (10.4MW and 8.6MW) and a dual fuel plant with a capacity of 33 MW.
Financial and operational performance DGKC has positioned itself in the market as a fast growing company with strong long term returns as it continues to become cost efficient and also plans to massively expand its capacity over the next few years. The company's sales have been sold since FY10, going from Rs 16 billion to Rs 29.7 billion in FY16. This is despite the fact that production has come down and capacity utilization is maintaining at about 83 percent to 85 percent. In FY16, this utilization has gone up to 94 percent which also makes a strong case for expansion.
The company's sales mix today is 84 percent going to domestic markets and 16 percent to exports markets. Exports' share has squeezed due to the slowdown in world demand for cement in general and particularly the usurping of the Afghanistan market by Iran's cheap cement. Pakistan was the lead supplier of cement to that market but since, that share has come down significantly as Iranian cement took over.
Energy woes have propelled the company to install its own captive power generating units at both the facilities. The captive power units are designed on dual basis to reduce reliance on a single fuel. The captive power generation in both factories has a combined capacity of over 100 MW where each factory has Waste Heat Recovery with a combined capacity of 19 MW.
Cement companies' margins are often an interesting point of discussion as more and more companies have taken to adopting own-power generation measures to reduce dependence on the grid as well as cut down costs. DGKC's margins have moved up from 17 percent to 43 percent in FY16. The company also used a number of alternate fuels including rice husk, poultry waste, corn cob, corn stick, cotton dust and cotton sticks.
Net profit margin's growth from one percent to 30 percent today is a good indicator of the company's growth trajectory. The company has efficient distributor networks in place for domestic and export markets. It has managed to remain above the fray by maintained indirect costs and cutting down significantly on cost of goods. The proof is in the pudding. Earnings per share is Rs 20 in FY16, up from Rs 17 in FY15.
Snapshot of latest financials and DGKC's future The company's financials speak for itself. Some slowdown may be a result of falling exports which will eventually hurt the industry on the whole but domestic market is only moving upwards-with an estimated growth of 10 percent. With this burgeoning demand in mind, much of the sector has announced expansion plans-coming up to about 30 million tons over the next five years if all plans materialize. DGKC is adding nearly 5 million tons to this mix.
Per its capacity, the market share the company captures is around 9 percent but post-expansions, this will go up to 12 percent keeping in mind capacity enhancements of other companies also.
The interesting bit is that 2.8 million tons of this capacity is a new plant in Hub Balochistan which is a Greenfield project that will give DGKC a logistically and geographical advantage-not only to reach exporting markets through the port nearby but in reaching domestic markets in the south. This has been the company's mission for a while and this would really put DGKC in the group of the big wigs that have a footprint in both the major cement industry focal points. This low-cost, high efficiency plus expansion plans together promise hefty bottom and top lines.
There is a deluge of opportunities from CPEC and other construction projects, not to mention, the housing demand that is picking up, which cement companies in good standing can dip their feet in. DG Khan with its strong margins and growing footprint tells a compelling story for the future.
Exports will remain a touchy spot for cement makers in Pakistan and more outreach is needed to expand the exports reach. Lest they lose sight of it, a healthy share of exports in total sales should be a goal for cement manufactures as they shouldn't entirely depend on the local market. Plus, competition in global markets gives producers an opportunity to keep innovating and becoming efficient.
====================================================================
Shareholders Holding 5% Or More (as at June 2016) Shares %
====================================================================
Associated Companies and related parties 141,246,945 32.24%
Nishat Mills Limited 137,574,201 31.40%
Mutual Funds 30,300,764 6.91%
Directors/ Spouses 18,705,416 4.27%
Mian Raza Mansha 12,696,880 2.90%
General public 5% or more voting interests 52,178,287 11.90%
Nishat Mills Limited 137,574,201 31.40%
Mian Umer Mansha 27,295,313 6.23%
Mian Hassan Mansha 26,879,917 6.14%
====================================================================
Source: Company accounts
=========================================================
DG Khan Cement Company Limited (unconsolidated) 9MFY17
=========================================================
Rs (mn) 9MFY17 9MFY16 YoY
=========================================================
Sales 22,632.9 21,318.1 6%
Cost of Sales 13,418.0 12,423.2 8%
Gross Profit 9,214.9 8,895.0 4%
Distribution cost 727.7 622.6 17%
Administrative cost 395.1 359.6 10%
Other operating expenses 715.5 690.4 4%
Finance cost 272.3 98.7 176%
Other income 1,617.4 1,804.5 -10%
Profit before taxation 8,721.6 8,928.2 -2%
Taxation 2,267.6 2,549.7 -11%
Net profit for the period 6,454.0 6,378.5 1%
Earnings per share (Rs) 14.73 14.56 1%
GP margin 41% 42%
NP margin 29% 30%
=========================================================