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Cement: DG Khan Cement Company Limited - Analysis of Financial Statements Financial Year 2002 - 3Q 2011

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Highlights - Corporate News

DG Khan Cement Company Limited (DGKC) is a unit of Nishat group, and is a producer and seller of ordinary portland and sulphate-resistant cement. It was established in 1978 under the management control of State Cement Corporation of Pakistan Limited (SCCP).

The company started its commercial production on April 1986 with 2000 tons per day (TPD) clinker based on dry process technology. In 1992, DGKC was acquired by Nishat Group under the privatisation programme of the government. Since its privatisation, DGKC has undergone intensive capacity expansion. As a result, DGKC is presently the second largest cement producer of the sector (first is Lucky Cement). DGKC had a market share of 17% in the local cement industry in

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Name of Company                                           D.G Khan Cement Company Limited

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Ticker                                                                               DGKC

Assets (June2010)                                                       Rs.47,046,043,000

Share Capital               Rs.3,650,993,000 (365,099,266 ordinary shares of Rs. 10 each)

Sales Revenue (June 2010)                                               Rs.16,275,354,000

PAT (June 2010)                                                            Rs.233,022,000

Market Share Price (30 June 2010)                                                Rs.23.62

FY10, largest in the cement industry

DGKC has two plants at Dera Ghazi Khan and a new Greenfield cement plant at Khairpur village, which was started in FY04 and began commercial production in June 2007. The plant has a capacity of 2.1mtpa. Commencement of production from the new plant and effective and efficient operations by the management led to 70% and 66% increase in the volume of clinker and cement production respectively. The company has its own power generation plant along with Wapda supply. A dual fuel power generation plant at Khairpur cement plant also started its commercial operations successfully in FY08.

Recent results (3Q11)

DG Khan witnessed gross sales of Rs 13.078 billion representing a 10% top line growth over the same period last year, buoyed up by a 26% growth in the Jan-March quarter because of stronger retention prices locally. Internationally, DG Khan Cement was able to foster growth in the traditional Indian and Afghan markets, besides tapping the new markets in Africa.

Earnings of the company substantially declined by 54% YoY as the company has posted PAT of Rs 177 million and EPS of Rs 0.49 against PAT of Rs 388m (EPS of Rs 1.06) in the corresponding period of last year. The decline in bottom line is attributed to a sharp increase of 106% YoY in operating expenses due to rise in exports and a rise of 9% YoY in financial costs. Moreover, non-availability of gas leading to the usage of costly furnace oil also increased the cost of goods sold, making the performance lacklustre. PBT was recorded at Rs 423 million as compared to Rs 443 million in the same period last year but a higher effective tax rate pushed the PAT down.

Industry comparison

The cement sales in the industry witnessed a growth of 15% in FY10 whereas DGKC witnessed a growth of 27% in sales volume. It also comprised of a 17% market share in local sales.

DGKC has a gross margin and profit margin which is almost similar compared to the industry average of 15.15% and 1.4% respectively.

However, its current ratio is 1.19:1 whereas the industry average is of 0.71:1. This means that DGKC is in a good position to meet its short-term debt. The current liabilities decreased mainly as the provision of tax reduced as profits fell and also export sales fell. Current assets increased mainly due to increase in short-term investments.

The company is reasonably leveraged with a Debt to Asset ratio of 44% compared to the industry average of 50%. This can be owed to its repayment of long-term loans. The Return on Assets of 0.5% is marginally lower than the industry average of 1% mainly due to a reduced sales revenue.

Owing to such factors, its Earning per Share is also Rs. 0.72 as compared to an average of Rs 2, which results in lower investor confidence.

Production

During FY09, the demand for cement and clinker had fallen from FY08 by 8% and 7% respectively due to the economic recession and cut in development expenditure by the government. However due to increased spending in the private sector and higher agricultural support prices provided by the government to the rural sector the overall capacity utilisation of the cement plants increased to 76% in FY10 from 74% in FY09.

This led to an increase of 27% in DG Khan Cement's production from FY09 to FY10 as 4,908,593mts.

Sales

The cement sector posted a 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. Although DGKC's volumetric sales grew by 28%, the sales revenue fell by 10% from FY09 to FY10 as Rs 16,275 million in FY10 from Rs 18,038 million. This was mainly due to lower selling prices internationally plus the tough competition within the cement manufacturers leading to price wars.

However, despite the decrease in sales revenue, the sales volume of the company increased locally by 45% from FY09 to FY10 due to increased private sector spending and higher support prices for agricultural products by the government whereas the export sales decreased by 20% mainly due to a fall in exports to India. Hence an overall increase of 28% in FY10.

The total cement and clinker sales of DGKC had increased in FY10 as higher production enabled it to largely tap the local market. Cement sales rose by 28% but clinker sales fell by 60%.

Profitability

DGKC posted PAT of Rs 233.022 million in FY10 as compared to Rs 525.581 million in FY09. This decline was mainly due to low prices and reduced exports. The net sales revenue of the cement sector in FY10 was 10% lower than the net sales revenue generated in FY09. Although the sales volume increased by 28% - 45% increase in local sales and 20% decrease in export sales, the revenue fell down mainly due to lower selling prices.

Costs of sales increased by 9.8% from FY09 to FY10. The increase was due to increasing coal prices to US$ 115/ton increased the fuel costs. Also a rise in gas and electricity tariffs increased costs of production too. Also the costs of packing material increased in FY10. This resulted in a decline of 9.8% in the gross profit from the last year; reporting to Rs 2,705.36 million from Rs. 5,679.73 million.

The operating expense decreased by 56% on the whole in FY10 mainly because of large decline in selling and distribution expenses as when export reduced, freight charges reduced. Also there was a 27% decline in the financing costs as the company paid off its long-term loans. Yet the PAT declined by 56% in FY10. Therefore the earnings per share (EPS) also fell from Rs 1.63 to Rs 0.72 in FY10.

Profitability (FY02-09)

The profitability ratios of the company have shown a declining trend since after FY05. The gross profit margin increased in FY06 only to fall in FY07 and FY08. The profit margin of the company has decreased continuously along with return on assets (ROA) and return on equity (ROE). The profit after taxation had declined by 33% in FY07 due to lower net retention prices caused by a supply overhang in the overall industry. Also the problem of rising input costs had begun in FY07. This rise in cost of production and raw material had continued into FY08. However in FY09, the boost in export sales led to an increase in the PAT and the profit margin was 2.91%. The operating expenses had also increased due to higher selling and distribution expenses but the increased sales revenue contributed to an increase in PAT.

Increased production facilitated higher sales volume which in turn translated into almost doubling of sales revenue in FY08. The company had earned the highest sales revenue of Rs 12.445 billion in FY08. However, despite this, the gross profit of DGKC in FY08 (amounting to Rs 1.9 billion) was around 6% lower than the gross profit posted in FY07 (Rs. 2.0 billion). The reason for lower gross profit was a 140% increase in the cost of sales during the fiscal year.

However in FY09, major distribution costs increased when exports increased. Also finance charges rose due to higher interest rates and increased long-term borrowing. But the sales revenue had increased by 45% improving the profitability of DGKC and resulted in a profit after taxation of Rs 525.581 million in FY09 against a loss after tax of Rs 53.23 million in FY08.

Liquidity

The liquidity position of DGKC improved in FY10 due to a 24% increase in current assets and a 13% decrease in current liabilities of the company causing a current ratio of 1.19:1. The current liabilities of the company decreased mainly due to 55% decrease in provision for taxation as the profit before tax had reduced in FY10 plus exports also fell and a 35% decrease in outstanding finances. On the other hand, current assets of the company increased due to 20% increase in advances and other receivables and 38% increase in short-term investments as they were revaluated, from Rs. 7 billion at the end of FY09 to Rs. 10 billion at the end of FY10. Thus, decrease in current assets and a corresponding increase in current liabilities resulted in a less favorable liquidity position as compared to that in FY08.

DGKC's liquidity stance had been strengthening since FY04 and in FY07 its liquidity position was the most favourable. The increase in current assets had brought about this change. There was a 98% increase in short-term investments. Furthermore, the cash and bank balances had also risen considerably. In FY08, the current assets of the company declined slightly but a 63% rise in current liabilities caused a decrease in the liquidity of the company. Investments constitute nearly 79% of the company's total current assets and they declined by 11% in FY08. The investments decreased further from Rs. 15 billion at the year-end FY08 to Rs. 7 billion by end of FY09.

Asset management

The performance of DGKC in terms of asset management was weak during FY07. During the year, the inventory turnover (days) of the company more than doubled compared to FY06 when the management of inventory seemed most efficient (evident from the lowest inventory turnover in days). The increase in inventory turnover in days and days sales outstanding (DSO) prolonged the operating cycle of the company in FY07. In FY08, the days to convert inventory into sales became 79. Although the days to convert sales into cash (DSO) increased slightly, the substantial decrease in ITO (days) led to the shortening of the operating cycle in FY08.

In FY09, the inventory turnover days remained same around 77 days but they increased in FY10 to 90 days indicating a lower inventory turn over ratio. This was due to a 118% of capacity utilization of their plant; hence higher production and extreme price competition within cement sellers. The DSO decreased as trade debt reduced by 41% during FY10 as against sales. Yet the operating cycle increased from 87 days to 97 days. Hence the asset management of DGKC worsened as the company earned sales revenue less in proportion to the increase in inventory.

Besides this the sales to equity and total asset turnover of the company which had a rising trend till FY09 decreased in FY10. From FY07 to FY09, the sales to equity ratio increased due to increase in sales revenue from exports sales but it declined in FY10 due to increase in the paid up capital but a decrease in sales revenue due to lesser selling price. Total asset turnover also deteriorated in FY10 because of the decrease in sales revenue but increasing asset base.

Debt management ratios

The debt management ratios of DGKC rose from FY07 to FY09. During FY08 the debt ratios of the company rose because the total debt increased in FY08 mainly due to a 63% increase in the current liabilities however long term debt decreased. The long-term debt to equity increased because of a decline in the equity base due to fall in reserves.

However in FY10, the debt to equity ratio fell from 104% to 77% and debt to asset ratio fell from 51% to 44% as total debt reduced by 6% mainly due to payment of long-term debt and the reduction of 55% in provision for taxation.

The TIE ratio fell in FY10 from 1.3 to 1.19 as although finance charges reduced in the period by 27%, operating income in FY10 decreased by 33%.

Due to reduced sales revenue and in turn the profitability, DGKC experienced a decrease in its Earning Per Share (EPS) and Price to Earning (P/E) Ratio. EPS fell from Rs. 1.63 in FY09 to Rs. 0.72 in FY10. The averaged share price fell from Rs. 39.97 in FY09 to Rs 37. This shows that the lower profits of the company have started reflecting in the low investor confidence and falling share price. The management did not recommend any dividend for FY10 due to reduced profitability situation in the period.

Future outlook

GDP is expected to grow to a target of 4.5% in the Federal Budget of FY11. This means that higher per capita cement consumption is expected in the coming years.

The infrastructure redevelopment of flood affected areas is also a potential area for demand of cement to grow. The government announced to finance every house that was either fully or partially affected by the flood; again a potential demand for the growth of cement industry. Also with increased private sector spending, building infrastructure across the country will also aid in increasing demand of cement. The road networks and dams construction projects are also a potential source to increase demand of cement. Hence demand of local sales is expected to increase

Exports have recently reduced due to gulf region capacity and loss of export sales to India due to political tension in FY09. Yet there is export potential in new export markets like Russia and some European countries.

DGKC is trying to cut down the costs that have significantly and adversely impacted its profits. To reduce electricity cost, DGKC has started a project of power generation from waste heat at DGK Site. The project is expected to generate substantially cheap electricity of about 10.4MW without using any fuel.

This would help to cut down the cost of production. DGKC has also decided to use municipal solid waste as fuel for heating purposes. This project will be beneficial as it would bring down the company's costs of production, help resolve the environmental issues related with disposal of solid waste and most important, it would save huge foreign exchange spent on importing fossil fuels. Also if currently, coal is used as a fuel and is imported, in future local coal can also be used over the cement industry as Lucky Cement has already being supplied by Oracle Coal Fields.

DGKC is already working on 118% capacity utilisation hence production may increase even more. Also as local demand is expected to increase, sales volume is also expected to increase. Yet, to increase its sales revenue, it is only possible if the price wars between the cement manufacturers end.

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Liquidity                 FY'02    FY'03    FY'04    FY'05    FY'06    FY'07    FY'08    FY'09    FY'10

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Current Ratio:             1.07     1.34     1.21     1.37     1.65     2.60     1.59     0.84     1.19

Profitability             FY'02    FY'03    FY'04    FY'05    FY'06    FY'07    FY'08    FY'09    FY'10

Gross Profit Margin       28.35%   22.65%   35.68%   36.91%   49.81%   31.65%   15.39%   31.49%  16.62%

Profit Margin on Sales    10.29%   16.16%   20.46%   31.86%   30.40%   25.27%   -0.43%    2.91%   1.43%

Return on Assets           3.23%    5.08%    6.78%    9.34%    7.05%    3.14%   -0.10%    1.23%   0.50%

Return on Equity           8.01%    9.51%   12.58%   18.05%   12.55%    4.78%   -0.18%    2.51%   0.88%

Asset Management          FY'02    FY'03    FY'04    FY'05    FY'06    FY'07    FY'08    FY'09    FY'10

ITO (Days)                90.51   102.85   105.33    77.47    48.07   100.46    79.40    76.55    89.69

Days Sales Outstanding     3.76     1.83     4.88     5.20     3.36     8.09    10.59    10.26     6.72

Operating Cycle           94.27   104.68   110.21    82.66    51.43   108.55    89.99    86.81    96.41

Sales/Equity               0.78     0.59     0.61     0.57     0.41     0.19     0.41     0.86     0.61

Total Asset Turnover       0.31     0.31     0.33     0.29     0.23     0.12     0.24     0.42     0.35

COURTESY: Economics and Finance Department, Institute of Business Administration, Karachi, prepared this analytical report for Business Recorder.

DISCLAIMER: No reliance should be placed on the [above information] by any one for making any financial, investment and business decision. The [above information] is general in nature and has not been prepared for any specific decision making process. [The newspaper] has not independently verified all of the [above information] and has relied on sources that have been deemed reliable in the past. Accordingly, the newspaper or any its staff or sources of information do not bear any liability or responsibility of any consequences for decisions or actions based on the [above information].

 

Courtesy: Business Recorder

 


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