Kohat Cement Company Limited

In 1984, the State Cement Corporation of Pakistan established a thousand Tons Per Day (TPD) Romanian cement line in Kohat town, about sixty kilometers from Peshawar. The facility was privatised and subsequently incorporated during the 1992 privatisation wave, and was taken over by a new management with Tariq Sheikh as CEO. The incorporated entity was registered as Kohat Cement Company Limited and is in the business of manufacturing and sale of cement.

In 1995, the company underwent an extensive Balancing, Modernisation and Restructuring (BMR) programme, funded by the proceeds of public offering and issuance of commercial debt. Subsequently, the Company expanded its production capacity to eighteen hundred tons per day as a result of technical collaboration with KHD Humboldt Wedag, a renowned German engineering company.

Ever since, the Company has undergone several expansion phases, including establishment of a white cement facility with a capacity of 450 tons per day. The high point in KCCL’s history came with the commencement of 6,700TPD grey cement line. Its current annual production capacity stands at 2.8 million tons for grey cement and 148,500 tons for white cement. The Company is listed on the Karachi, Lahore and Islamabad stock exchanges known by the ticker symbol KOHC. The Company is majority owned by the Tariq and Nadeem Sheikh Family, which has business interests in lesser known enterprises in the construction, textile, automobile and hospitality industry.

INDUSTRY REVIEW FY13 proved to be an excellent year for the cement sector, with total industry cement dispatches growing by nearly three percent. This was despite the two percent decline in cement export, which dropped due to lower demand for bagged cement. However, domestic sales proved to be the saving grace for the sector, which saw growth by more than 1.11 million tons, making up for the lost export volumes.

For several years, exports have stood at around a quarter of total cement dispatches for the industry. During the year, Kohat cement’s cumulative share in the export market was 3.7 percent, a gain of 50 basis points since last year. Kohat’s share in the export market has flip-flopped over the years, from a low of 2.1 percent in FY09 to peaking at 4.2 percent in FY11, registering a cumulative growth of six and a half percent over the past six years.

In the domestic market, Kohat’s share remained intact at six percent on a year-on-year basis. However, this was less than half of the domestic market share of industry leaders Lucky Cement, with share of 15 percent. Overall, Kohat’s market share was 5.5 percent of total industry off-take.

While Kohat is known to be a significant player in the cement industry, its plant operated much below its full capacity, with capacity utilisation for clinker and cement (grey) averaging at sixty-five percent. Capacity utilization for white cement was much worse, with 13.4 and 14.4 percent utilization for clinker and cement, respectively.

According to the Company report, the underutilization is a direct result of overcapacity in the cement industry; Kohat’s old grey cement line remained non-operative with new grey cement line operating at 83.4 percent.

PERFORMANCE BRIEF FY13 As for the rest of the industry, FY13 was a good year for the Company as local industry sales rose by 4.6 percent on the back of growing domestic demand. According to the industry experts, the catalysts for this demand was higher government spending on infrastructure during an election year, coupled with increased private spending on new construction driven by growth in remittances from expatriate Pakistanis. For Kohat cement, growth in local sales was in line with the industry, growing by seven percent.

Over the years, the saturation of the export market has stifled growth for the sector. Surplus production capacity in the Middle East as well as decline in exports has encouraged players to look inwards. During the past two years, Kohat has been successful in doing just that: the Company has reduced its reliance on exports from the peak of 36 percent export share in FY08 to just 17 percent in FY13, while at the same time maintaining its overall sale volumes and market share in the total industry off take by increasing focus on the local market.

Growth rate in local sales has outperformed the industry for last many years. On a cumulative basis, Kohat’s local sales have increased by 30.61 percent year on year since FY08, at a time when the industry local sales have seen a cumulative year-on-year growth of only 1.76 percent. Surely, the lost share in the export market has been more than made up for by increasing reliance on domestic market.

FINANCIAL PERFORMANCE FY13 Increase in cement prices in both domestic and international markets allowed turnover to grow by 21.26 percent compared to last year. Coal prices also remain under control. As a result, cost of sales declined as percentage over net turnover from 69.4 percent to 61.4 percent last year.

Distribution and administrative cost grew with inflation but remained stable as a percentage of sales. Other operating expenses grew disproportionately on account of exchange rate fluctuation related loss, growing by nearly 100bps as a percentage of sales. Decline in discount rate by the central bank also helped trim finance costs for the Company during the year, which declined by 61 percent on a year-on-year basis. Other income remained stable but insignificant.

PROFITABILITY Stable product prices allowed gross margin to grow by a healthy eight percentage points during the year. Gross margin stood at nearly 38.6 percent, up from just 30.6 percent last year. Nominal growth in distribution expenses allowed the Company to sustain the growth in gross margin. Operating margin hence also grew by nearly eight percentage points, clocking in at 37.3 percent.

Lower finance cost allowed Company to bag a fat bottom line, although offset partly by increased taxation. Profit after tax grew by 58.5 percent, from Rs 1.6bn last year to 2.6bn in FY13. Earnings per share stood Rs 20.45, with net margin improving from 17.8 to 23.3 percent.

OUTLOOK Going forward, cement sector in general as well as Kohat is expected to see growth in FY14 on the back of higher budget allocations towards PSDP by the new Federal Government. However, inflationary macroeconomic outlook for FY14 and devaluation of Pak rupee may prove to be the sector’s undoing. On the other hand, currency depreciation could increase the cost of inputs, eroding the ground gained by gross margins. Kohat also plans to continue reducing its debt over the next year; however, a successive increase in discount rate may make the process difficult.

Political and security uncertainty in the region makes export to Afghanistan and India an unstable demand factor. The cement sector in general not only needs to look inward but also expand its export market from traditional Middle Eastern to potential markets in emerging African economies. Going forward, Kohat cement has plans to incorporate cost reduction processes in production, including setting up of a Waste Heat Recovery Plant to mitigate the increase in energy costs.
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Kohat Cement Company Limited
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Rs (mn) FY13 FY12 FY11 FY10 FY09 FY08
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Financial Performance
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Sales – net 11,297 9,316 6,085 3,692 3,396 1,372
Cost of goods sold -6,936 -6,464 -5,158 -3,335 -2,591 -1,284
Gross profit 4,361 2,852 927 357 805 87
Selling & distribution expenses -58 -46 -41 -56 -111 -25
Administrative and general expense -86 -67 -49 -36 -30 -41
Operating profit 4,216 2,739 837 265 663 22
Other operating expenses -234 -108 -16 -5 -3 -21
Other income 36 31 20 23 34 36
Finance cost -249 -626 -715 -665 -673 -49
Voluntary Seperation scheme 0 0 0 0 0 -267
Profit before taxation 3,770 2,036 126 -382 21 -280
Taxation -1,137 -375 -62 54 6 57
Profit after taxation 2,633 1,661 64 -328 27 -222
Earnings per share (Rs) 20.45 12.9 0.49 -2.55 0.21 -1.73
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Source: Company Accounts
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Year ending June UoM FY13 FY12 FY11 FY10 FY09 FY08
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Profitability
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Gross margin % 38.60% 30.60% 15.20% 9.70% 23.70% 6.40%
Operating margin % 37.30% 29.40% 13.80% 7.20% 19.50% 1.60%
Net margin % 23.30% 17.80% 1.00% -8.90% 0.40% -16.20%
Return on equity % 53.70% 56.70% 3.10% -15.50% 0.70% -9.60%
Return on capital employed % 47.30% 42.20% 12.30% 6.20% 12.30% -3.10%
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Liquidity & Solvency
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Current ratio 1.8 0.8 0.7 0.43 0.56 0.66
Debt-to-equity 0.88888889 43:57:00 70:30:00 72:28:00 69:31:00 67:33:00
Interest cover ratio 16.14 4.25 1.18 0.42 1.26 -4.71
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Investment
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EPS (basic) Rs 20.45 12.9 0.49 -2.55 0.21 -1.73
Breakup value per share Rs 46.92 29.17 ============================================================================================
Kohat Cement Company Limited
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Rs (mn) FY13 FY12 FY11 FY10 FY09 FY08
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Financial Position
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Share capital and reserves 6,041 3,756 2,103 1,961 2,272 2,329
Non-current liabilities 2,459 2,557 4,211 3,470 3,407 3,278
Current liabilities 2,294 2,899 2,811 3,242 2,946 2,016
Total liabilities 4,754 5,456 7,022 6,712 6,353 5,295
Total equity and liabilities 10,795 9,213 9,124 8,673 8,625 7,624
Non-current assets 6,668 6,894 7,171 7,266 6,979 6,291
Current assets 4,126 2,318 1,954 1,407 1,646 1,333
Total assets 10,795 9,213 9,124 8,673 8,625 7,624
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Source: Company Accounts
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16.33 15.23 17.64 19.9
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Source: Company Accounts
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