Kohat Cement Company Limited
Kohat Cement Company Limited was incorporated in 1980 and is one of the leading cement manufacturers of Pakistan. It is an ISO 9001-2008 certified company, with an annual capacity of 2.8 million tonnes of Grey Cement and 148.5 thousand tonnes of White Cement. KOHC is listed on the Karachi Stock Exchange and its plant is located in Kohat, about 60 kilometers from Peshawar.
Copyright Business Recorder, 2013
Industry Overview After a tough FY11 when the country was hit by the Great Floods of 2010, FY12 saw the cement industry grow by a sturdy 3.45 percent. This growth was largely fuelled by local despatch expansions fuelled by post-flood reconstruction activities; a boom in the rural economy of Pakistan; and inward remittances from expatriate Pakistanis leading to new construction - all of these factors culminated in an 8.84 percent volumetric growth in local sales. Local cement retention prices also saw an upward trend, lending some price-based support to local cement manufacturers.
Exports, however, continued to stifle the growth of the cement industry. Exports declined by 9.12 percent from FY11. This was largely due to two coinciding factors: the first being surplus capacity for cement production in the Middle East; and the second being a 15.7 percent decrease in exports to India due to persisting non-tariff trade barriers such as deficiencies in transport infrastructure and procedural opacity.
Key challenges to the industry during the year were the exorbitant increases in fuel prices; persisting high costs of borrowing; and low prices in the international market combined with higher import costs due to the depreciating rupee.
Performance Snapshot FY12 FY12 showed a remarkable turnaround for KOHC. The company posted a 53.09 percent increase in turnover, largely driven by better domestic prices for cement coupled with a 27.72 percent increase in local despatches. This growth was in line with the overall improvement in market conditions for the cement industry, where most cement companies have registered a highly profitable year. The 29.16 percent decline in export despatches was, to some extent, offset by the upward adjustment in the selling price of cement for Afghanistan.
Analysing the performance of KOHC from a shareholders' perspective, a DuPont analysis shows a sharp upshot in the return on equity (ROE) from 3.03 percent in FY11 to 44.2 percent in FY12. The increase came at the heels of a 1733bps increase in returns on assets, thus displaying the positive ramifications of the sales performance described above. This came despite the fact that the financial leverage position (the ratio of total assets to total shareholders' equity) reduced from 4.34 times in FY11 to 2.45 times in FY12. The reduction precipitated from bifurcated causes - a profitable year caused revenue reserves to swell, thus leading to a 71 percent increase in the book value of equity; and the unwinding of non-current liabilities (which saw a decrease of 39 percent) both contributed to the reduction in financial leverage. In terms of the risk profile of the company, interest cover rose to 4.25 times; and even the cash flow to finance cost ratio shot up to 4.49 times, up from 1.12 in FY11.
In analysing the return on assets (ROA), the 53.09 percent increase in sales was further augmented by a high degree of operating leverage, where the sales increase translated into a 2506.11 percent increase in the bottom line. The largely fixed-nature payments of coal and fuel (accounting for 50 percent of total costs), electricity (21 percent of total costs), depreciation (five percent of total costs), and other fixed production charges (seven percent of total costs). The net profit margin stood at 17.82 percent, 1678bps over the corresponding FY11 figure.
The liquidity position remained worrisome for KOHC. With a negative net working capital, the current ratio remained at 0.8 times. This, however, does not take into account the fact that 73 percent of current assets were locked into illiquid assets of inventories and manufacturing materials. Short-term borrowings for working capital requirements stood at 12.6 percent of total assets, a controllable but significant figure on the balance sheet.
However, the effect of these low liquidity ratios is by-and-large offset by the credit policy of the company. With days in receivables being almost zero, down from one day in FY11, the cash conversion cycle is at a negative 31 days, thus displaying the company's ability to meet short-term obligations as they fall due. Furthermore, the ratio of net operating cash flows to current liabilities was a healthy 0.86, while the ratio of net operating cash flows to net income was 1.5 times; both ratios indicate a sturdy position regarding cash and cash balances in the company.
Performance over the years In the last five years, the local dispatches and total dispatches market shares of KOHC saw their highest point if FY12. The expansion in market share has steadily been observed - local dispatches market share increased from 2.93 percent in FY09 to 5.89 percent in FY12; and total dispatches market share increased from 2.55 percent in FY09 to 5.19 percent in FY12. The export market share had also been showing a steady increase, but declined in FY12 to 3.22 percent, from 4.13 percent in FY11. However, this is still a huge improvement from the FY09 position of 1.84 percent of total exports.
Over the period of FY07 to FY12, sales showed robust CAGR of 43.08 percent, while gross profits showed a CAGR of 52.73 percent - both healthy indicators of profitability. The variability of earnings and returns has been high, ranging from a net profit margin low point of -16.17 percent in FY08 to the high point of 17.82 percent in FY12. In fact, FY12 was the only year in this five-year period under study with a decent net profit margin - in FY10 and FY08 competitive forces drove prices down such that the company generated net losses; and in FY09 and FY11, the company's net profit margin was in the 20bps range of one percent.
Future Outlook The cement sector as a whole is poised for a promising FY13, with favourable budgetary policies, such as an enhancement of PSDP expenditures and reduction in FED. FED on cement was reduced by a further Rs 100 per ton for FY13, and the budgeted increase in PSDP is also more than 19 percent of last year's outlays - aspects that bode well for cement players like Cherat Cement.
More factors are to be watched out for. Local demand is projected to increase based on increased private spending fuelled by increased remittances from expatriate Pakistanis and improvements in the performance of the agricultural sector. Furthermore, with interest rates already slashed by 150bps, and speculations abound for further slashes, the cost of borrowing for the cement sector will likely reduce, which will allow for greater expansion and reduced costs of business. The ICCI President has shown a remarkable amount of interest in the sector which contributes Rs 30 billion to the exchequer on an annual basis and employs approximately 150,000 people - that interest is now translating into a bid to establish export ties with Sri Lanka, where the demand for Pakistani cement is expected to be high.