Distribution takes toll on DGKC

Cement makers are in a tough spot. Brittle economic conditions, combined with higher interest rates and weak government spending, stifled construction activities across the country during the last fiscal year. And for the same reason, D.G. Khan Cement Limited (DGKC), one of the largest cement manufacturers in Pakistan, saw a thin bottom-line in FY11.
The DGKCs local sales toppled by 30 percent to around 2.8 million tons in FY11. However, a phenomenal jump in exports, which grew by 62 percent to 1.3 million tons, protected total volumetric sales from a greater fall. The company sold a total of 4.2 million tons of cement in FY11, down from 4.9 million tons sold a year ago. DGKC exports are mainly concentrated in Africa, Afghanistan and India.
Increased local cement prices came as a saving grace, with the average cement prices nearly 35 percent higher compared to the last year. On the other hand, the cement export prices improved marginally, but were still far below cement manufacturers comfort zone. The cement exports from Pakistan fetched an average of $50 per ton in FY11, up from average $44.6 per ton last year, according to the FBS.
In keeping with higher energy cost and coal prices, despite a fall in total volumetric sales, the cost of goods sold increased by around 5 percent. The makers gross profit margin improved by 7 percentage points to 24 percent, mainly on account of the higher cement prices.
Better gross margins didn translate into a healthy bottom-line due to very high selling and distribution cost, impairment on investments and deferred taxes.
A massive jump in selling and distribution cost is symptomatic of higher fuel prices and increases in export volume. DGKCs investment in Adamjee Insurance inflicted 119 million impairment charges.
The cement industry is pinning hopes on post-flood reconstruction activities and dam construction projects this year. It might be too early to be certain, but provided that the economic outlook for the rest of the year remains intact, in all probability the local cement sales are likely to register marginal growth - to say the least.
But, in light of growing competition in the cement international market, the industrys export will continue to stay on thin ice.

=========================================================

DG KHAN CEMENT COMPANY LTD

=========================================================

Rs (mn)                             FY11     FY10     chg

=========================================================

Sales                             18,577   16,275     14%

Cost of sales                     14,192   13,570      5%

Gross profit                       4,385    2,705     62%

Gross margin                          24%      17%    42%

Selling & distribution expenses    2,471      994    149%

Other operating income             1,107      912     21%

Impairment on investments            119        -     N/A

Finance cost                       2,052    1,903      8%

Profit                               171      233    -27%

EPS                                 0.45     0.70    -36%

---------------------------------------------------------

Source: KSE notice

=========================================================