Fauji Cement Company Limited

We are previewing financial results for the quarter ending June 2014 for Fauji Cement Company Ltd (FCCL – 4QFY14).

We expect FCCL to post 68%YoY and 19%QoQ higher 4QFY14 EPS of Rs0.66 which is expected to deliver FY14E basic EPS of Rs2.16 (+37%YoY). We also expect FCCL to announce a final cash dividend of Rs0.75/share.

Strong bottom-line growth is margin driven, due to the combo of high cement prices (+6%YoY) and uptick in volumes. Moreover, lower financial costs (-62%YoY) in the period under review is also likely to boost earnings.

FCCL is trading at FY15F P/E of 8.3x (vs. JS Cement Universe FY15F P/E of 8.0x). The premium is justified given that FCCL offers relatively healthy dividend yield (FY15 D/Y 8%) compared to its peers (JS Cement Universe D/Y of 3%).

We re-iterate our ‘Buy’ rating on the stock with a TP of Rs21.5.

Basic EPS likely to grow by 68%YoY in 4QFY14

The Board of Directors of Fauji Cement Company Limited (FCCL) is scheduled to meet today to announce FY14E results. In 4QFY14, we expect the company to post PAT of Rs884mn (Basic EPS: Rs0.66) which translates into a growth of 68%YoY and 19%QoQ. The strong earnings growth is largely margin driven on the back of higher cement prices and uptick in sales volumes. Consequently, gross margin is likely to expand to 33.6% from 30% in the same period last year. Another key driver of profitability during the period under review is lower financial costs       (-62%YoY). The company has used its strong cash flows to deleverage its balance sheet where currently the interest bearing debt/assets ratio of FCCL stands at 29% as against 35% in FY13. Incorporating our 4Q earnings expectations, FCCL’s full year FY14 earnings arrive at Rs2,879 (Basic EPS: Rs2.16), up 37%YoY.

However, after adjusting for preferential shares dividend payments, EPS amounts to  Rs1.99. We also do not rule out a  possibility of the company announcing a finalcash dividend of Rs0.75/share taking the full year cash dividend to Rs1.5/share.

Recommendation: Re-iterate ‘Buy’

Despite the prevailing uncertainty on the pricing arrangement of the cement sector, FCCL’s stock has outperformed the market by 6.8% in FY15 (year to date). The strong price performance is partially attributed to FCCL being among the main beneficiary of the Rawalpindi-Islamabad Metro Bus project. However, due to the current political uncertainty in Islamabad the project has come to a halt for now. That said, on a relative basis, FCCL is still trading at FY15F P/E of 8.3x (vs. JS Cement Universe FY15F P/E of 8.0x). The premium is justified given that FCCL offers relatively healthy dividend yield (FY15E D/Y 8%) compared to peers (JS Cement Universe D/Y of 3%). We re-iterate our ‘Buy’ rating on the stock with a TP of Rs21.5 where the stock offers a potential total return of 16%.

The board of directors of Pakistan State Oil (PSO) is meeting on August 26, 2014 to announce FY14 results.

Profitability to show robust growth

PSO is expected to post massive growth in earnings as profit after taxation to surge at Rs 22.86 billion (EPS: Rs 84.16) from Rs 12.63 billion (EPS: Rs 46.51) in FY13. Healthy performance likely to driven by increase in penal interest income of Rs 13.30 billion, inventory gain of Rs 373 million, surge in volumetric sales by 1% and lower financing cost.

Decline in earnings growth is expected QoQ

In 4QFY14, we expect company to post net earnings of Rs 3.46 billion (EPS: Rs 12.75) against Rs 3.60 billion (EPS: Rs 13.25) in 3QFY14. Lower earning is expected due to inventory losses of Rs 943 million (after tax Rs 3.70/share), hike in financing cost of 58% QoQ and no exchange gains.

DPS of Rs 5/share; bonus 10% expected

We expect the result to be accompanied by a final dividend of Rs 5/share cumulating the FY14 dividends to Rs 9/share. Furthermore, possibility of 10% stock dividend can not be rule out.

Top line to likely to up by 4%

Top line likely to surge by 4% to Rs 1,143 billion compared to Rs 1,100 billion in FY13 mainly due to higher product prices. However, volumetric sales likely to surge by 1% to 12.72 million tons mainly due to increase in MS sales by 11% in FY14. Cost of product sales is expected to hike by 4% at Rs 1,106 billion against Rs 1,064 billion in FY13. Gross profit likely to increase by 4% to Rs 37.79 billion against Rs 36.50 billion in FY13.

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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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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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LUCKY CEMENT LIMITED – Analysis of Financial Statements Financial Year 2003-3Q Financial Year 2011

Lucky Cement Limited is currently one of the largest manufacturers of cement in Pakistan. During FY10, in order to decrease cost of production, Lucky Cement signed an MoU with Oracle Coal Fields for coal supply and also implemented the Waste Heat Recovery Project in Karachi that uses wasted heat from the production system to run turbine engines.

It also led to signing of MoU to sell 50 MW to Karachi Electric Supply Company. In FY09, the plant’s production capacity was increased to 7.75mtpa. During FY10, the company’s production of clinker and cement increased by 7.92% and 13.05% respectively. Lucky Cement produced 6.054 million tons of clinker and 6.461 million tons of cement during FY10. As a result of massive capacity expansion over the past years, Lucky Cement has been able to consolidate its position as the largest cement exporter.

During 1H11, the company’s production of clinker and cement decreased by 3.7% and 9.1% respectively. Lucky Cement produced 2.908 million tons of clinker and 2.785 million tons of cement during 1H11. As a result of massive capacity expansion over the past years, Lucky Cement has been able to consolidate its position as the largest cement exporter.

Overview

The three quarters ended March 31, 2011 have marked a period of grave turmoil and adversity for the cement industry. Overall, the industry suffered from a 10% negative growth over the nine-month period, covering both domestic and export sales. For the company in particular, local sales increased by 12.43% while the export sales declined by 32%. This turn came as a result of the sharp decline in clinker and loose cement sales in the Middle East, the slack in construction activities and cement over-supply. However, bagged export sales of cements increased by 5.5% for the firm over the tenor. The firm’s market share in the local segment increased from 12.79% to 15.61% while that in the export segment declined from 33% to 26.51%.

Financial performance (3Q11)

Lucky Cement experienced a revenue growth of 2.8% in the nine months despite the declining wave being experienced by the industry. Clinker production decreased by 6.5% while cement production fell by an astounding 9.93% as compared to the similar tenor last year; the dispatches of clinker and cement were adversely affected as well, declining to 4.277 million as compared to 4.865 million last year, representing a decline of over 12%.

Coal and electricity form a major component of the cost structure of the company totalling to a massive 63% of the cost of sales; over the nine-month period under review, coal prices increased by 37.5% internationally translating into a 21.11% rise in the cost of production for the company. The impact was neutralized to some extent by the Waste Heat Recovery system that helped to pacify the increase in costs due to rising electricity tariffs.

As the graph above depicts, GP margin fell by -4.05% over the nine-month period whereas operating profit margin declined by -5.84% in the same period due to the reasons disclosed above. The inability of the firm to absorb the high power and fuel costs was also reflected in the consequent fall in the return on assets and common equity ratios.

As far as the efficiency of the firm’s operations is concerned, the graph above depicts the story clearly; the performance of Lucky Cement worsened on all counts whether it be the rate of use of total assets or the ability to manage debtors via an effective credit policy. The total asset turnover took a dip from a well-balanced 47% to 45%, while the inventory turnover ratio declined from 19.28 times to 12 times. The fears that this imposed regarding the lengthening of the cash/operating cycle were proved correct by the corresponding increase observed in inventory days from 18.9 days to 29 days; the marginal decrease in the debtor days perhaps resulting from the implementation of a stringent credit policy could not help offset the negative impact this caused on the bottom line operating cycle length. Surprisingly enough the liquidity position of the firm strengthened as the current ratio increased from 0.7 to 0.81 over the nine-month period.

It is crucial to consider the debt profile of Lucky Cement over the tenor and not quite astounding to find that the debt position worsened during these months of adversity. The debt to asset ratio increased from 34% to 36% as did the debt to equity ratio from 53% to 55%. For the stockholders such high debt on takes present a grave question mark regarding the leverage advantages available for grabs and the firm undoubtedly forms a very risky investment. When we stratify the debt of the firm according to their relevant time horizons, it is interesting to find that the majority of the debt taken has been on a short-term basis. This implies from the decline in long-term debt to equity proportion from 14% to 10% over the period. Also that the debt servicing ability of the firm has suffered marginally, with the Times Interest Earned shrinking from 8.4 times to 8 times over the period. Lastly the EPS shrunk from 7.92 rupees to 7.65 rupees this march yet again presenting bad news for the investors.

Cement sector during FY10

The cement sector posted a reasonable growth of 9.4% as the total sales volume increased by 2.94 million tons to reach 34.22 million tons by June 2010 from 31.28 million tons. Local cement demand increased by 14.6% to 23.53 million tons in FY10 against 19.4 million tons in FY09 mainly due to increased spending in the private sector and higher agricultural support prices provided by the government to the rural sector.

Northern region cement market recorded a growth of 18% in export volume while the southern region market posted a decline of 2% during FY10. However the export sales were at 10.7 million tons compared to 11.4 million tons i.e. a drop of 6.1% from the previous year mainly due to a drop in exports to India by 52%. However in the Middle East, Iraq and Afghanistan export demand was relatively similar.

The overall capacity utilization of cement plants increased to 76% in FY10 from 74% in FY09 due to increased domestic demand with capacity expansions in the sector. According to recent statistics released by APCMA, 3 million tons of capacity expansion took place in FY10 (as compared to 5 million tons in FY09). The total cement production capacity of the industry stands at 45 million tons by end of FY10 as against 42 million tons in last fiscal year.

Comparison with industry

Lucky Cement has a gross margin of 32.56% compared to the industry average of 15.15% due to cost deductions due to local coal supplies and new electricity generation plants. Being one of the largest cement manufacturers, Lucky Cement has a profit margin of 12.84% compared to the industry average of 1.4%, depicting its profitability owing to a large proportion of export sales.

The company is also not highly leveraged with a Debt to Asset ratio of 34.5% compared to the industry average of 50%. This can be owed to its reduced financing costs and its financial stability. The Return on Assets is also much above the industry i.e. 8.19% as compared to 1% indicating a well above proportionate increase in the net profit as compared to the assets acquired.

Owing to such factors, its earning per share is also Rs. 9.7 as compared to an average of Rs 2 showing high investor confidence and growth potential.

Profitability (FY10)

Lucky Cement Limited posted a profit after tax of Rs. 3.137 million in FY10. The profit for FY10 was 32% lower as compared to the profit earned in FY09 (PAT FY08: Rs. 4.597 million). The gross sales of the company decreased by 6% to Rs. 29.052 million in FY10 from Rs. 30.915 million in FY09. The decrease in gross sales was largely due to lower cement prices, locally and internationally. The local sales volume of the company increased by 26.32% and the exports increased by 2.21%, hence doing better than the sector trend.

The net sales of the company decreased by 6.92%; from Rs. 26.330 million in FY09 to Rs. 24.509 million in FY10. The increase in sales revenue was thus mainly due to lesser prices as although sales volume had increased, sales price remained constant. Lucky Cement decreased exports, which had increasing distribution cost.

Cost of sales of the company increased by 0.07% during FY10. The cost per ton of cement decreased by 11% due to the implementation of Waste Heat Recovery Project and using lesser expensive coal from a local supplier. The fuel and coal costs are 62% of the total costs, which went down by 16.2%. In the previous years, the profitability of the cement sector was greatly affected as cost of sales had increased by 31% in FY09.

Thus, a decrease in sales revenue as compared to costs resulted in a decrease of 18.68% in the gross profit for FY10. The operating expenses increased by 44.05% mainly due to distribution costs of exports, however, it was the drastic decrease in the finance costs (from Rs. 1237 million in FY09 to Rs. 569 million in FY10) that increased the profitability of the company. The finance cost was mainly reduced due to early repayment of high mark-up carrying long-term loans and resorting to export refinance and Foreign Currency Import Finance (FCIF), hence the company recovered via the hedge of exports.

Profitability (FY03-10)

The profits of Lucky Cement has been increasing since FY03, however, at varying rates. The growth in profits had been declining from FY06 to FY08 due to rising costs but surged during FY09. During FY08, the growth of the company’s profits slowed down to 5%.

FY08 was marked by the cement sector as not only the year which saw growth in cement prices, both locally and internationally, helping the companies to secure more profits; but also the year in which they faced massive growth in operation costs, primarily fuel and electricity costs. This led the cement companies of the country to face massive problems in continuing productions and even to obtain profits from sales after the deduction of operation costs. Many cement companies were faced losses due to these costs.

Lucky Cement managed to obtain profits during FY08 when other companies posted losses. Lucky Cement anticipated these events and quickly employed counter strategies, like shifting to exports and reducing finance costs, resulting in high profits for the company. Also the energy and fuel crisis has also been spotted by the company in due time and preventive measures are employed with the hope that they will reduce operations and fuel costs in the future.

Lucky Cement had showed a growth of 35.4% in sales, from 12.25bn in FY07 to 16.95bn in FY08. This growth was achieved through increase in exports, along with the rise in cement retention prices over the year. Local retention prices showed an increase of Rs 133.7 per bag in FY08 from Rs 129.7 per bag last year, having a growth of 3.1%. Export retention prices, on the other hand, showed an increase of US$55.7 per ton (Rs 152.6 per bag) in FY08 as against US$47.2 per ton (Rs 133.2 per bag) in FY07.

Although sales volume of the company grew by 19.7% to 5.56m tons as compared to 4.64m tons last year, yet domestic sales for the same period declined by 9.2% to 2.89m tons as against 3.18m tons last year. This occurred due to more focus toward high yield exports, which showed a growth of 83.0% to 2.67m tons in FY08 from 1.46m tons last year. During FY08, ratio of local sales to export was 52:48 against 69:31 in FY07.

Profitability ratios

The gross profit margin of the company fell to 32.56% during FY09 from 37.26% in FY08. Likewise, the profitability margin of the company also fell from 17.46% in FY09 to 12.8% in FY10. This shows that the profitability of the company has deteriorated during FY10 after improving in FY09.

The gross margin showed a rising trend in FY09, primarily due to the increasing export demands. Net margin showed a slight increase as finance charges drastically increased to Rs 1237 million from Rs 127 million representing a rise of 881%, as the company was wound up in cross currency swap transactions which were providing interest rates hedging and SBP had also increased its markup rate- hence a higher financing cost.

Return on assets (ROA) and Return on Equity (ROE) also decreased during FY10 due to a lesser proportionate increase in profits as compared to the increase in asset and equity base of the company. The assets of the company decreased by 0.2% and equity increased by 7.93% but the profit after taxation fell by 51.75%.

Asset quality

The company’s performance in terms of asset management remained more or less the same during FY10 as compared to in FY09. The operating cycle of Lucky Cement became 79 days in FY10 as opposed to 80 days during FY09. However during FY10, it took Lucky Cement 68 days to sell its inventory as compared to 63 days during FY09. This is because the stock of the company increased while the sales reduced. Also, the day sales outstanding went from 15 days to 11 days during FY10, depicting that it took the company greater period of time to recover credit payments.

The Total Asset Turnover ratio of the company had a declining trend till FY05, after which it started improving. The ratio continued to improve during FY09 but again declined marginally in FY10. The total asset turnover ratio had been increasing due to higher growth in sales revenue as compared to the growth in assets over the years till FY09 but then it slightly decreased due to lesser selling price despite high sale volume.

The rising trend of sales/equity was disrupted during FY08 when the ratio declined from 1.34 times in FY07 to 0.91. However, the Sales/equity ratio improved to 1.13 times in FY09 due to higher sales revenue and again declined to 0.98 due to lower sales revenue.

Liquidity

The liquidity position of the company became lesser favourable during FY10 as the current ratio fell from 0.86 in FY09 to 0.71 in FY10. This was due to 12.55% decrease in current assets and 6% increase in current liabilities. The stores, spares and inventory of the company declined by 2% and the net taxation income fell by 17%. However, the major reason behind decline in current assets was a 68.2% decrease in cash and bank balance of Lucky Cement. Cash is the most liquid asset and such a substantial decline could make it difficult for the company to meet its obligations.

Lucky Cement had shown a positive trend in FY09. The current assets were raised by cash in hand due to a smaller Days Sale Outstanding time period and also sales tax refundable by the company. On the other hand, current liabilities had increased, there were quite a few short-term borrowings done by the company as financing facilities, along with many bills payable. Liquidity position may remain weak until the company reduces its bills payable and short-term borrowings.

Debt management

Lucky Cement has a strong position when it comes to debt management. Since the end of FY06, the company has employed strict measures to keep its debts under control. This futuristic preventive measure has helped the company a lot in these times when interest rates are continuously on the rise. The action to reduce loans and to depend on equity for expansionary purpose finances has been critical in saving the company valuable profits that would have been otherwise lost in the name of finance costs. The swap agreements are another preventive measure the company is employing to save itself further from interest rates.

The results of the preventive measures are visible in the debt to asset ratio and the long-term debt to equity ratio, which show a downward trend since FY06. Total debt to equity has also been on a declining rate. In FY08 although the total debt increased significantly due to the rise in current liabilities, the overall effect has been declining owing to the rise in equity by the issuance of GDRs. Recently cost reduction measures like the Waste Heat Energy Project and using local coal has also helped in reducing debt. Hence the debt to asset ratio signifies that the company succeeded in lowering its overall debts and strengthening its financial position.

The TIE ratio had been declining from FY04 to FY07 but in FY08 the TIE raised significantly, i.e. from 4.28 to 24.48 times. It again declined in FY09 to 5.85 and then marginal increase in FY10 to 7.46. Although the EBIT for the year was less than that of FY07 (3,077,660 as compared to 3,695,402), but in FY08 the finance costs were reduced drastically through swap agreements, causing the rise in TIE. Still, for future times, the company would have to reduce its operating costs along with its finance costs to maintain the positive stream of TIE.

The earning per share of the company had a general positive trend that has been established since FY05. The Earning per share of Lucky Cement decreased to Rs. 9.7 in FY10 from Rs 14.21 in FY09, due to a lesser PAT. However, the price to earning ratio rose during FY10, depicting high investor confidence in the company. The average market price of the company’s shares in FY09 was Rs. 54, which rose to Rs. 71 during FY10. The company announced a dividend of Rs. 4 per share for FY10.

Future outlook

Although currently the price of cement has fallen worldwide, major construction projects due to the rising income per capita of countries leading to more residential and commercial construction projects worldwide will boost its sales and within the next 3-4 years, the price of cement is expected to increase.

Local cement sales can be expected to show positive growth during FY11 due to the construction of 8 dams in each province, rehabilitation of flood victims in Pakistan and increased spending by the private sector will give a boost to local cement sales.

Export sales growth may slow down as it has slightly reduced already due to Gulf region capacities. Also, political tension with India has already closed a window of opportunity that had appeared in FY09. India constitutes 8.5 percent of total Pakistan’s cement exports. However, local cement manufacturers are exploring markets like Central Asia and other new markets to enhance cement exports.

As for Lucky Cement, the working capital ratio can easily improve if they manage and reduce their Days Sales Outstanding. Also a likelihood of increasing in world cement prices plus increase in local demand may lead to higher selling prices which can in turn increase its sales revenue leading to higher gross margin. As investor confidence is already there, company’s share prices are expected to increase too.

Cement: LAFARGE PAKISTAN CEMENT LIMITED – Analysis of Financial Statements Financial Year 2008 – 1Q – Financial Year 2011

Lafarge Cement which is a subsidiary of Lafarge. It started its operations in 2006 with an annual capacity of 2.5m tons of cement. Its state of the art plant is located at Kalar Kahar, Chakwal in Punjab. The plant produces Ordinary Portland Cement (OPC) and Sulphate Resistant Cement (SRC). The plant is located in Kalar Kahar because Kalar Kahar is rich in good quality limestone.

The packaging options at LPC are 50 k bags, 1.5 tons, 2 tons and bulk carriers. PACKEM, a product by LP is the first cement in Pakistan to have reached European and Indian standards.

Lafarge, of which Lafarge Pakistan Cement is a subsidiary, has its headquarters in Paris, France. It is the leader of building materials and is present in 76 countries. Lafarge Pakistan complies with International standards. It also complies with the World Bank Environmental Standards. LP has invested it energy efficient plants due to which it has been able to produce cement with the least CO2 and green house gases emissions. The Quality Management System at Lafarge ensures high quality cement.

RECENT RESULTS (1Q11)

The sales in the first quarter of 2011 have not been very positive for the industry, both locally and in exports. Local dispatches have amounted to 5.85 million MT, and exports have been 2.07 million MT, a decline of 7.9% and 8.9% respectively from the corresponding period last year*. The company sold 399,000 MT during the quarter. There was a substantial drop in its exports’ volumes to 104 thousand MT. Similarly, domestic volumes also declined to 295,000 MT due to shrinkage of the domestic market and unprecedented cold and rainy spells in January and February. Net turnover at Rs 1.68 billion was witnessed in 1Q11. Gross profit of Rs 353 million was witnessed as compared to Rs 28.5 million loss in the same period last year. Distribution costs were much lower partly because of lower export volumes, along with administrative charges and other operating expenses. Other operating income was considerably lower at Rs 8.4 million as compared to Rs 14 million in the same period last year. Operating profit was Rs 231 million as compared to Rs 224 million loss in the same period last year. PAT was Rs 13.8 million, a massive improvement from Rs 407 million in the same period last year.

FINANCIAL ANALYSIS (FY10)

The local dispatches improved from 22.1million tons in FY09 to 22.6 million tons in FY10 as the cement industry recovered a bit from fall in the previous years. Because exports to gulf states declined exports fell from 11.2 million in 2009 to 9.7 million tons in 2010. The gross profit in FY10 declined to Rs 856 million from Rs 984 million in FY09. The company had an operating loss in FY09 of Rs 172 million, which converted to a profit of Rs 62 million in FY10. The company used local coal and bio-mass in FY10 instead of imported coal and the finance costs of the company fell from Rs 1231 million in FY09 to Rs 981 million in FY10. The capacity utilisation of LP fell from 92.68% in 2009 to 79.65% in 2010.

The year 2009 was very difficult for the entire cement industry due to economic crisis and security threats. The local dispatches of LP in FY09 were 20.5 million tons, which was a decrease from FY08. The export in FY09 increased from 9.8 million tons in FY08 to 11.7 million tons. The gross profit in FY09 was Rs 984 million as compared to Rs 979 million in FY08. The company reported an operating loss in FY09 but was able to financial costs from Rs 1482 million in FY08 to Rs 1231 million.

LIQUIDITY

The current ratio of the company fell from 0.73 in 2008 to 0.31 in 2009 and then 0.26 in 2010. This is because the current assets increased by 9.9% in 2010 as compared to 2009 but the current liabilities increased by a much greater 30%. The shorter borrowings increased by a significant 94.3% in FY10 as compared to FY09, which constituted the increase in current liabilities. The quick ratio too declined from 0.55 in 2008 to 0.2 in FY09 and 0.19 in FY10. The reason is again the increase in current liabilities.

The current ratio fell in FY09 as compared to FY08 because the current assets fell by 44% in FY09 as compared to FY08 and the current liabilities increased by 30%. The increase in current liabilities was also a reason due to which quick ratio fell.

ASSET MANAGEMENT

The inventory turnover increased from 7.7in FY08 to 9.9 in FY09 and then fell to 9.6 in FY10. The minor fall from FY09 to F10 was due to a 15.7% decline in cost of sales and a 13.7% decline in average inventory. The total asset turnover increased from 0.34 in FY08 to 0.41 in FY09 and then fell to 0.35 in FY10. The fall of total asset turnover in FY10 was because the sales in FY10 fell by 15.4% as compared to FY09. The sales to equity ratio fell from 0.83 in FY09 to 0.78 in FY10. This is due to the 15.4% decline in sales.

The inventory turnover increased in FY09 as compared to FY08 because the cost of sales increased by 10.6% in FY09. The total asset turnover increased in FY09 due to a 9.3% increase in sales. This was also the reason due to which the sales to equity ratio increased slightly.

DEBT MANAGEMENT

The total debt to asset ratio has remained relatively constant in FY 08, FY09 and FY10 at 0.5, 0.5 and 0.55. The long-term debt to asset ratio has declined 0.26 in FY08 to 0.16 in FY09 and 0.09 in FY10. This is because the long-term debt has declined by 42.7% in FY10 as compared to FY09. And it has declined by 30% in FY09 as compared to FY08. The TIE ratio declined from 0.045 in FY08 to -0.16 in FY09 and then increased to 0.06 in FY10. The increase in TIE from FY09 to FY10 is because the EBIT in FY10 was Rs 61.7 million as compared to an operating loss of Rs 171.5 million in FY09. The TIE was negative in FY09 because the EBIT too was negative. The debt to equity ratio on the other hand has increased from 0.99 in FY08 to 1 in FY09 to 1.2 in FY10.

PROFITABILITY

The Return on Asset was same in FY 08 and FY09 at -0.06 and improved in FY10 to -0.05. The negative ROA is because in all these three years the company has had a net loss. However there has been an improvement in FY10 because the net loss is Rs 948.4 million as compared to Rs 1277 million in FY09. The loss was Rs 1242.5 million in FY08. The ROE fell from -0.11 in FY08 to -0.13 in FY09 and improved slightly to -0.1 in FY10. The negative ROE is again due to the net loss in all the three years. The ROE improved slightly in FY10 because the net loss is lesser than that in FY09 as mentioned earlier.

The gross profit on sales is constant in both FY10 to FY09 at 0.12. It fell in FY09 as compared to FY08 (when it was 0.13). The fall in F09 was due to the 9.3% increase in sales but very little increase (0.04%) in gross profit. The net profit margin has improved from -0.17 in FY08 to -0.16 in FY09 and -0.13 in FY10.

The EPS in FY10 is -0.72 due to the net loss reported. It was -0.97 in FY09 and -1.01 in FY08. The improvement is because the amount of net loss is reducing as mentioned earlier.

FUTURE OUTLOOK

Lafarge Pakistan hopes 2011 will be a better year than 2010. Natural calamities and social changes will affect the economy and hence the company but LP is still hopeful. The company hopes government support, an increase in price, construction activities in Pakistan and a possible start of reconstruction in Afghanistan will bring about a good year for the company and its shareholders.