Thatta Cement Company Limited (PSX: THCCL) is one of the smaller cement firms within the industry occupying only one percent of the industry capacity and about the same market share. Founded in 1982, the company's manufacturing facilities are located in Thatta, which started production with an initial 300,000 tons annually growing it to 450,000 tons.
The factory is in close proximity to raw material reserves such as limestone and clay for which the company has mining rights as well. In 2010, the company acquired rights to additional piece of land to mine limestone. Today, the company has a capacity to produce 1,700 tons per day (150,000 tons annually) which was enhanced after a Balancing, Modernization and Rehabilitation of the existing plant in 2015. The company hit its highest sales ever in the outgoing fiscal and reached maximum capacity utilization.
Compared to other firms in the industry, Thatta has a very diverse product portfolio producing special cement varieties other than Portland and sulphate resistant cement. The company manufactures blast furnace slag, ground granulated blast furnace slag (GGBF) used in blending and as filler in foundations, and Class G Oil Well Cement used by oil and gas exploration companies.
For the latter, the company received a certification by the American Petroleum Institute (API). Meanwhile, Thatta also invested capital in making its plant environmentally friendly by installing environment impact control equipment. Despite being a small player, Thatta's venture into diversified product lines and markets is a great competitive advantage.
Its main domestic markets are near Thatta but due to the nature and quality of some of Thatta's specialized products, the company reaches market as far as Azad Kashmir. Though recently exports have come down significantly, the company exports to markets including Sri Lanka, India, Middle East and some African countries including Sudan.
Company's ownership and investments
As mentioned above, the cement company was owned by the Arif Habib group, which sold out its majority stake in 2013 at transaction value of Rs 1.5 billion to four private companies. Together they now hold 51 percent of the company's shares. This used to be 44 percent during FY16. Sky Pak Holding holds more than 21 percent while Al-Miftah Holdings has 14.94 percent shares. Golden Globe Holding and Rising Star Holding hold 8.5 percent and 7 percent respectively.
In efforts to become self-sufficient in energy, the company (Thatta Power) set up a subsidiary company which commenced operations in 2012. Thatta Power was a 62.43 percent wholly-owned subsidiary of Thatta Cement year end FY17. The company also supplies electricity to Hyderabad Electric Supply Company Limited (HESCO) after entering into an agreement with HESCO.
The captive power plant within Thatta Power has the capacity to produce 23 MW of electricity, of which 10MW is used by Thatta while the rest is provided to the grid. This capacity is about half of total capacity that the Thatta Power was granted a generation license from NEPRA. During the past two years, Thatta has loaned out Rs 300 million to help its subsidiary out of liquidity crunch so it can meet its working capital requirements.
Operational and financial performance
Even though after initially expanding its production capacity, Thatta has not enhanced capacity and has remained at one percent of the industry capacity. However, it has worked to improve utilization and efficiency of its existing facility. The company underwent a Balancing, Modernization and Rehabilitation (BMR) in 2015 to enhance its capacity. The BMR helped in the conversion of existing cement making process into pyro-process system which was efficient and more environments friendly. Meanwhile, the company's subsidiary is setting up a 5MW Waste Heat Recovery (WHR) unit utilizing waste to produce power.
Along with the BMR, the management has tried to adopt alternative fuels to diversify and improve energy inputs. The company also modified its clinker transport system while adding a new rotary packing system to speed up the bagging process at the end of the manufacturing cycle. Such efficiency measures go a long way.
Due to improved demand and greater efficiency, capacity utilization for the company grew from 79 percent during FY10 to 100 percent in FY17, though utilization went down in the middle as demand dropped. This is only for clinker production.
As mentioned above, the company manufactures other varieties of cement that are produced based on needs and demand. GBFS production has been erratic though it reached over 33,000 tons during FY15. Average production for Oil Well Cement for the past three years is about 3,000 tons. This remains a niche market that Thatta is catering to.
In terms of costs and margins, some risks cannot be averted specially in the cement industry. A prominent one is international coal prices, which affects costs for cement manufacturers who depend on imported coal. Fluctuations in coal prices affect their margins greatly.
Thatta grew its margins to 32 percent during FY16 from 28 percent in FY15 and managed to maintain margins during FY17 at 32 percent. Its net margins dropped to 16 percent in FY17 from 22 percent in FY16 as indirect costs during the fiscal grew.
The company would have to grow in scale to cut down costs further enough to gain higher margins. Indirect costs especially distribution and selling costs can take up a chunk of costs that can be minimized when the facility has scale. Meanwhile, Thatta has the advantage of being located near the port so transportation to and from the ports would be less costly.
Even though sales have improved and revenues have grown, the company still has earnings less than a billion rupees in a year. It has been a slow and steady rise for Thatta. The earnings per share have grown since the loss making days of FY11. In terms of financing, the company meets its working capital requirements with internal cash, though long and short term credit facilities are taken for projects.
Recent operations and outlook
This fiscal year is going to be difficult for the entire cement industry and Thatta will be caught in the wind no doubt. In the first quarter of FY18, Thatta saw a drop in sales volumetrically and in terms of revenues. However, finance costs were reduced as outstanding long term facility obtained for BMR was repaid.
Distribution cost also decreased on account of lower sales. Margins also dropped to 30 percent in 1QFY18 as coal prices rose. The effect of higher costs was not as much for Thatta as other players especially compared to those located in the north who have higher transportations costs from the port.
The company will see its financing costs rise as it required funding for its WHR but which will in turn help smooth costs of production down. On the other hand, fluctuation in coal prices will affect costs going forward. Demand incoming from infrastructure and development projects across the country seems strong though decreasing demand in oversees' markets is a legitimate threat in the sector.
For Thatta, exports share is already only one percent though it used to be 19 percent of its cement sales in FY12. Being small, Thatta will continue to cater to domestic demand in the south. Thatta is also not expanding production capacity like other players so it intends on keeping its existing market share and not grows it, though the share may fall as other companies expand capacities.
There will be a price competition once capacity within the industry is much higher than demand-retention prices have already risen in the northern zone, but overall margins will drop. Thatta may be able to use its unique position of marketing its other cement varieties and reach exporting markets though at such small production capacities, it may not be competitive overseas.

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Pattern of Shareholding (as on July 30, 2017)
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Categories of Shareholders                     Share
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Directors and their spouse(s) and minor c     0.003%
Associated Companies                           51.2%
Al-Miftah Holdings Limited                    14.94%
Golden Globe Holding Pvt. Ltd                  8.50%
Rising Star Holding Pvt Ltd                    6.55%
Sky Pak Holding Ptv Lid                       21.21%
Mutual Funds                                   9.84%
Banks, development finance institutions,      11.96%
non-banking finance companies etc.
General Public                                21.53%
Others                                         5.43%
Total                                           100%
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Source: Company accounts

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Thatta Cement First Quarter FY18
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(mn Rs)                     1QFY18    1QFY17      YoY
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Sales                        613.3     638.5      -4%
Cost of Sales                426.3     412.4       3%
Gross Profit                 187.0     226.1     -17%
Administrative                32.0      28.5      12%
Distribution costs            15.3      17.5     -12%
Other operating expenses       9.1      11.0     -18%
Finance cost                  16.8      27.3     -38%
Other income                  10.9      10.7       2%
Profit before tax            124.6     152.5     -18%
Taxation                      36.3      46.2     -21%
Net profit for the period     88.3     106.3     -17%
Earnings per share (Rs)       0.89      1.07     -17%
GP margin                   30.49%    35.41%     -14%
NP margin                      14%       17%     -14%
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