LUCKY CEMENT – Analysis of Financial Statements

Lucky Cement Limited, a company belonging to the Yunus Brothers Group, is the largest manufacturer and exporter of cement in Pakistan. With two production facilities in the country, one in Karachi and other in Pezu in NWFP, Lucky Cement is also Pakistan’s only cement manufacturer to have a loading and storage terminal at the Karachi port.

Thanks to location advantages of being in the South, it is not surprising that Lucky accounts for more than one-thirds of the total cement exports from Pakistan, and caters to the Asian, Middle Eastern and African markets.

PROFITABILITY

The first half of FY11 sales revenues dipped further on account of the devastating floods in the country. 3QFY11 and 4QFY11, however, saw revenues lifting up due to a revival in cement prices and post-flood reconstruction activity. Overall, volume of local sales went up in FY11 against FY10, while that of export sales declined.

The cost side has been particularly hard-hitting on the company lately. Coal and electricity, which constitute 63 percent of the total production cost, have been true culprits. International coal prices increased by 37.5 percent during 9MFY11 compared to the same period last year. Yet, the net rise in the cost of sales was contained with the help of the Waste Heat Recovery system. Cost of sales rose by 4.7 percent in FY11 relative to FY10.

Despite rising cost of inputs, Lucky seems to have managed its cost of sales well as the gross margins went up to 33.5 percent in FY11 in contrast to 32.6 percent in the previous fiscal year.

On the operating side, distribution costs are a key component because of the nature of the business which warrants distribution across local as well as export markets. Though distribution costs had stayed under 10 percent of sales in FY08 and FY09, they saw an upsurge in FY10, accounting for 14 percent of net sales.

This was driven mainly by an increase in export sales, increase in transportation prices and particularly the increase in sea freights, which accounted for nearly 50 percent of total export expenses in FY10.

However, owing to the decline in export sales volumes, distribution costs went down by nearly 6 percent in FY11 vis-à-vis FY10.

Finance costs have stayed around 2 percent of net sales for all the years since FY08, including 9MFY11. However, FY09 saw an upsurge in finance costs to around 5 percent of net sales due to the winding up of cross currency swap transactions. Finance costs declined in FY11 declined by about 9 percent from that in FY10.

The net profits have grown at a cumulative average growth rate (CAGR) of about 10 percent between FY08 and FY11. Profit after tax increased by 26.5 percent in FY11 compared to FY10, netting at Rs 3.97 billion.

LEVERAGE

Lucky’s debt to equity ratio is relatively stable at a lower proportion of debt relative to equity. In particular, the debt to equity ratio for FY11 was contained at 0.48:1. This was helped by a reduction in long-term debt in FY11 of about Rs 1 billion. This also plausibly helped bring down the company’s mark-up expense by over 80 percent to Rs 85 million. The interest coverage ratio also witnessed an improvement in FY11 relative to the last fiscal year.

Compared to DG Khan Cement, another key player in the cement industry, the company’s leverage position is relatively on the higher on the debt side but still appears stable. DGKC’s debt-to-equity ratio has stayed at roughly about 0.4:1 for FY10 and FY09.

OPERATIONS

Lucky’s inventory management appears commendable looking at the inventory turnover (number of days). While the company’s average turnover cycle is around 20 days, that of DGKC is around 80 days on average.

However, Lucky’s accounts payable turnover – which shows how quickly the firm pays its creditors – is higher at about 78 days in a year relative to DGKC’s approximately 15 days. Consequently, since FY08, Lucky’s operating cycle has been in the negative, indicating that the company’s creditors are providing it a higher credit period. This is further indicative of the fact that creditors trust the company and it has a credible reputation.

PAYOUT

Being a mature and well-established company, Lucky distributed cash dividends in the past three fiscal years, including FY11, of 40 percent. While DGKC and most other cement companies have distributed rights shares or no dividends over the past three years, Lucky’s payout has been on the higher side within the industry and thus lucrative for investors.

OUTLOOK

The company’s presence in the South lends it a huge geographic advantage of reduced freight charges. Consequently, the company stands at an advantage to industry peers and the outlook appears positive.

With post-flood reconstruction going on, and many flood-affected areas located in the southern half, Lucky is expected to witness a boost in its sales.

Further, the abolishment of FED from Rs 700 per ton to Rs 500 per ton, and the reduction in GST by one percent would lead to improved gross margins, as the company is not likely to pass down the benefit to consumers in the form of reduced cement prices due to the daunting impact of cost pressures on gross margins.

Further, there are also anticipations of recovery on the export side, with development work leading to a great potential market in Afghanistan and resumption of cement exports to India.

Bearing these factors in mind, Lucky’s overall prospects appear promising.

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LUCKY CEMENT – KEY PERFORMANCE INDICATORS
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FY08 FY09 FY10 FY11
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Profitability
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Gross profit to sales % 26 37 33 34
Net profit after tax to sale % 16 17 13 15
Return on Equity after tax % 14 20 13 14
Return on Capital Employed % 10 16 11 17
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Leverage
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Debt : Equity ratio times 0.84:1 0.65:1 0.53:1 0.48:1
Interest Coverage ratio times 24.27 5.83 7.45 9.97
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Operations
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No of days in Inventory days 20 21 20 –
No of days in Payables days 74 69 63 –
Operating Cycle days -54 -48 -43 –
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Investment/ valuation
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EPS Rs 9.84 14.21 9.7 12.28
P/E Rs 9.96 4.12 6.4 5.93
Cash Dividend per share Rs – 4 4 4
Dividend Yield % – 6.8 6.4 5.5
Dividend Payout % – 28.2 41.2 32.6
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Source: company accounts
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