Among mid-tier cement manufacturers, Kohat Cement (PSX: KOHC) is the one to beat in fundamentals with consistent capacity utilisation and better management of costs that have resulted in flourishing margins at times when the industry demand was up, and less steeper decline when the demand has been down. Kohat was incorporated in 1980 as State Cement Company of Pakistan with a capacity of 1000 tons per day (approximately annual 30,000 tons). In 1992, the government privatised it along with several other cement companies. Kohat was bought by private investors and only two years later, it went public. In 2014, it became a subsidiary of ANS Capital.
Kohat has been expanding capacities since the beginning. The capacity stood at 2 million tons annually as a new grey and a new white cement line were added in 2007. The plant has a standby power plant of 22.4 MW capacity that meets some of its electricity needs. With a capacity utilisation above 75 percent, Kohat has a capacity of 2.7 million tons of grey and 150,000 tons of white cement capacity. Though the market share based on capacity was 6 percent, with the new expansions in town, Kohat's contribution has dropped to 5 percent. However, the company is expanding together capacity with a new production line of 7800 tons per day that would be an annual 2.3 million tons. The new capacity will bring the company's market share to 7-8 percent if it is able to utilise that capacity optimally.
Shareholdings Currently owned by ANS Capital (Private) Limited that has controlling power with 55 percent of the company's shares with little changes to the rest of the shareholding pattern since the company was acquired. The public holds nearly 12 percent of the shares while the rest of the shares are spread across modrabas, mutual funds, banks, DFIs, insurance companies etc. as at June 2018.
Operational and financial performance Kohat is one of the few plants in Pakistan that manufacture white cement which makes its products quite diversified though the capacity for white line is pretty small. Over the years, Kohat has proved its mantle by consistently growing and improving its productivity. At its peak, the company has boasted 46 percent margins during FY16. This was the period of bountiful demand in the cement industry as the NS government was enthusiastically spending on infrastructure development. In expansion mode, the economy was ripe with opportunities in nearly all sectors. Kohat made the bang out of a buck during FY16 enjoying 31 percent in after-tax margins.
During that time, the company had strong growth in sales (production up 19%), and stronger retention prices-fetching Rs500 per ton sold of cement compared to two years go. That is impressive revenue per ton achieved. Moreover, the company also saved Rs200 per ton sold of cement compared to FY13. A waste heat recovery plant with a capacity of 15MW went online in April-16 that contributed to a slash in costs while imported coal prices were on the down. Naturally, the growth in margins followed suit.
Fuel costs play an important role in the financials of cement manufactures that are highly energy intensive. Coal, oil, gas costs in the international market, and the rupee-dollar parity both have a pivotal role in where margins will stand. Grid electricity costs also depend on fuel prices, most of which is imported. But better inventory management goes a long way. In the past two years, costs have been a real kicker to cement manufactures who despite strong demand got hurt in the bottom-line due to rising cost per ton. Meanwhile, expansions have resulted in greater price competition in turn resulting in companies giving discounts on their products to sell excess cement. This has affected the top line together with bringing margins down. For Kohat too, particularly since it is in the north, similar patterns have materialised, though it does a comparably better job than most.
Latest financials and outlook Despite the changing dynamics during 1HFY19, Kohat has not suffered as much as its peers. Domestic demand has been down due to cuts in PSDP spending and government expenditure. Policies such as ban on non-filers of properties have been hurting commercial and housing development activity. Cement manufacturers are reaching out to farther out markets to dispense the excess cement that was otherwise meant for domestic markets to foreign markets. But for north players, it is difficult. Due to unavailability of cheaper transportation through railways, companies incur higher costs. Exports also fetch lower prices in the international markets compared to local. North players are left with Afghanistan and India, both of which are cooling down for Pakistani cement, the latter almost having closed its border for Pakistani made products recently.
In such a scenario, Kohat's high off take and growth in revenues of 22 percent has been much higher than expectations. It has fetched better prices locally no doubt. Because the costs of coal have gone up, other fuel prices have increased and rupee has depreciated, margins have suffered in the first half, coming down to 29 percent from 37 percent despite improved prices.
Kohat did improve its indirect expenses-bringing them down to 4 percent of revenues against 5 percent in 1HFY18 last year. As a result, the fall to the bottom line of 7 percent may have been a save. The year FY19 will continue in the same vein as none of the dynamics are changing. Rupee has further weakened while the policy rate hike will increase financing costs. Coal prices are so far stable but fuel will be expensive since it is imported and depreciation makes for expensive imports. Exports to Afghanistan will remain tamed, while those exporting to India will suffer a lot more. Kohat can optimize its local sales and manage its inventory better but ultimately its fate is tied to the rest of the industry.
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Unconsolidated Half Year Kohat Cement
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Rs (mn) 1HFY19 1HFY18 YoY
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Sales 8,391.65 6,867.62 22%
Cost of Sales 5,984.95 4,339.10 38%
Gross Profit 2,406.71 2,528.52 -5%
Distribution costs 73.08 68.00 7%
Administrative 127.48 101.46 26%
Other operating expenses 171.45 180.88 -5%
Other income 171.06 175.76 -3%
Finance cost 23.74 37.20 -36%
Profit before tax 2,182.02 2,316.74 -6%
Taxation 655.12 672.55 -3%
Net profit for the period 1,526.90 1,644.19 -7%
Earnings per share (Rs) 7.6 8.19 -7%
GP margin 29% 37% -22%
NP margin 18% 24% -24%
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Source: Company accounts
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Pattern of Shareholding (as on June 30, 2018)
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Categories of Shareholders Share
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Directors and their spouse(s) and minor children 0.16%
Associated Companies 55.1%
ANS Capital (Pvt.) Limited 55.00%
Kohat Cement Educational Trust 0.08%
NIT & ICP 0.12%
Shareholder holding 5% and more (other than above) 16.74%
Mrs. Hijab Tariq 16.74%
Modarabas 0.01%
Mutual Funds 11.97%
Insurance Companies 0.23%
Others 1.64%
Banks, development finance institutions,
non-banking finance comp 2.02%
General Public 11.83%
Total 100%
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