Power Cement Limited (PSX: POWER) was established in 1981 known as Al-Abbas Cement Industries Limited (AACIL). The company was acquired by a consortium of Arif Habib Group and Al Abbas Group. Power is now a subsidiary of Arif Habib Corporation Limited and has been listed on the stock exchange since 1987. The company has two production lines with a combined capacity of 0.9 million tons making it one of the smaller cement manufacturers and sellers in the industry. The company mainly supplies cement to the southern zone of the industry and has about 12 percent market share in the region. Given its proximity to the ports, the company also exports to South and East Africa, India, UAE and Afghanistan.
Ownership
End of FY17, nearly 30 percent of the company's shares are held by Arif Habib and 22 percent by International Complex Projects Ltd, the real estate developers that own Dolmen city while 28.8 percent of the shares of the company are held by general public. The company is part of the Arif Habib Group that has a diverse range of investments in securities brokerage, investment and financial advisory, investment management, commercial banking, commodities, and private equity, cement and fertilizer industries.
Environment, expansions and future plans
Following on the industry's aspirations to nearly double the existing capacity, the company has also embarked on an ambitious expansion moving from its current 3000 tons per capacity to 7700 tons per day which would bring up its total capacity to 3.4 million tons annually when the project completes. The company's share according to its annual report would make it the second largest player in the south zone.
The contract with FL Smidth for equipment is worth over Rs 90 million while the construction contract was awarded to a Chinese company costing Rs 7.5 million, together the expansion costs come around to Rs 25 billion. Power also contracted GE power's Grid Solutions to deliver air-insulated switchgear for the plant. Arif Habib Limited announced that it would provide a guarantee for Power to negotiate a better deal with suppliers.
The company installed a pollution control bag house system which it believes is the cleanest air discharging plant in the south zone with emissions better than the limits allowed by World Bank/IFC guidelines.
Almost two-thirds of the project will be financed through debt with the rest as equity. According to a JCR-VIS Credit Rating Company Limited report, the expansion is expected to go live in June-19 with repayment of principal starting June-20.
Financial and operational performance
Power cement can be characterized as small, slow and steady with capacity utilization remaining in-between 51 percent to 65 percent over the past decade. As compared to peers in the industry, this utilization is low and part of the reason may be the lower efficiency of the older plants. Production has remained on similar levels and volumetric sales grew by 18 percent between FY15 and FY17.
As Pakistani cement to export markets has receded, Power's export share in its total sales mix has also fallen-coming down from eight percent in FY15 to one percent in FY17, with numbers for FY18 not yet available. There has not been a lot of competition in the south as has been in the north, so prices have remained consistent and manufacturers have been able to raise them as well. In fact, revenues per production ton has grown by 53 percent between FY11 and FY17- nearly Rs 2000 per ton of cement. That's pretty decent.
Cost of production is a concern for the company. Its margins increased to 25 percent from 10 percent between FY12 and FY15 but have dropped to 22 percent and 16 percent in FY17 and FY18. The margins have remained low comparable to other players that have seen margins move between 30 and 40 percent. This is because being small; the company is more sensitive to global commodity and fuel prices, as well as negative exchange rate fluctuations. The efficiency of its plants also comes into question. Coal prices had been climbing globally since FY17 which resulted in the hike in costs of production. The further decline during FY18 came due to the dual effect of high input prices and the falling value of PKR against dollar.
During FY18, the company saw its revenues fell by 3 percent (as per notice of the company to the PSX), and costs go up by 5 percent. While local demand in the south has remained strong, the falling exports no doubt may have affected the company's top-line as prices have remained pretty consistent in the region. Selling cement to far-off locations in the north or in the central markets of Punjab may have incurred Power more distribution expenses. However, it seems that is what may have happened. Indirect expenses stood at 7 percent of the revenues during FY18 against 4 percent during FY17. As a result, the bottom-line dropped by 31 percent during the period.
Challenges and outlook
Hopefully the new expansion of the company will be more efficient in terms of plant's functioning as well as energy usage. Using waste and alternative sources of energy may also come handy to improve margins. Costs of production are the bane for Power at this moment. All hands must be on deck to tighten the purse strings. As competition in the south increases-with Lucky's expansion and DGKC's new Hub plant-the prices may also come into play in the region that would require Power to up its game substantially. However, its expansion does put it in a leading position.
Soon after launch of its new plant, the company will have to be repaying its debt which will shore about costs further. The company needs to focus on reaching more local markets using the linkages of the Arif Habib group and development work taking place in the south region.
Though the new government's policies are not entirely mapped out-while CPEC projects mostly will go through as planned, real estate and commercial development may see a slowdown. The SBP just raised the monetary rate to 8.5 percent-highest in nearly three years-to help stabilize inflation and reduce the twin deficits. This means lower economic activity and decreased investments.
On the other hand, Imran Khan has vowed to build nearly five million houses over the next five years. This construction activity could bring in more than 20 million tons of cement demand each year. Should that replace the commercial and real estate construction demand, companies will remain more or less stable.
However, canceling of any major development happening under CPEC will affect demand adversely given a time when organic demand from the private sector will have reduced significantly.
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Pattern of Shareholding (as on June 30, 2017)
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Categories of Shareholders Share
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Directors, CEO and their spouse(s) and minor children 6.490%
Syed Salman Rashid 6.21%
Kashif Habib- CEO 0.27%
Associated Companies 51.20%
Arif Habib 29.50%
International Complex Projects 21.67%
Banks, development finance institutions, insurance, 8.73.%
non-banking finance companies etc.
J.S Bank 6.32%
Insurance companies 0.42%
Foreign 0.45%
Modrabas and Mutual Funds 1.32%
General Public-local 28.28%
Others 3.15%
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Source: Company accounts
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Power Cement (Unconsolidated)
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(Rs mn) FY18 FY17 YoY
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Sales 4,343.2 4,480.6 -3%
Cost of Sales 3,668.2 3,500.1 5%
Gross Profit 675.1 980.5 -31%
Distribution costs 115.8 106.2 9%
Administrative expenses 131.7 76.4 72%
Other operating expenses (gain) 71.2 -4.1 n.a
Finance cost 9.2 242.9 -96%
Other income 1.7 6.0 -72%
Profit before tax 348.8 565.2 -38%
Income tax (credit)/expense 28.9 98.4 -71%
Net profit for the period 319.9 466.8 -31%
Earnings per share (Rs) 0.32 1.14 -72%
GP margin 16% 22% -29%
NP margin 7% 10% -29%
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