Cement: PAKISTAN CEMENT COMPANY LIMITED - Analysis of Financial Statements Financial Year 2004 - H 2001 2008
The first foreign investment in the cement industry of Pakistan was from Orascom Construction Industries (OCI) when it acquired the Chakwal Cement Company in March 2005, now it was known as Pakistan Cement Company Limited (PCCL). Pakistan Cement is the country's fifth largest cement manufacturer with a manufacturing capacity of 2.11m tons of cement per annum, which is 5.9% of the total cement manufacturing capacity of the country.
It commenced commercial operations in December 2006 with an annual cement production capacity of 2.5m tons. The plant is located at Kalar Kahar, District Chakwal in Punjab, which is rich in limestone reserves. The quality of limestone in this area is the best in the region. In addition to Ordinary Portland Cement (OPC) the plant can also produce Sulphate Resistant Cement (SRC). PCC manufactures cement under the brand name of PAKCEM. PAKCEM is the first cement in Pakistan to comply with European Standards (EN 197) and also far exceeding the requirements of Pakistani Standard (PS 232). The company is among seven companies, which obtained certification from Board of Indian Standards (BIS), for cement export to India.
Being at the stage of infancy, PCC has incurred huge losses in its initial years under view. PCC has not been able to fare well so far. However, during 16 months of operation, Pakistan Cement has got the status of country's second largest cement exporter, exported 276.9k tons of cement in 5mths'08 witnessing some uplift in its overall performance and it is hoped that the company will soon move towards stability. In FY06, the company achieved many technical milestones. The company's kiln started operation in July.
In cooperation with FLSmidth, PCC upgraded its capacity to 2.4mntpa. Moreover, it has also finalized the contract for its coal mill project that may be operational soon. Currently, there are 18 cement producers in Pakistan with 28 plants. PCC has a very marginal market share of 4%. Constant innovation, expansion and investment can lift the share of PCC in future. It is listed on all the three stock exchanges of the country. Major shareholders of the company include, Pakistan Cement Holding Limited and Camden Holding PTE Limited, currently own 44% and 25% stakes respectively. Orascom Construction Industries is the parent company of the Pakistan Cement Holding and Camden Cement Holding.
Recently, Lafarge S.A., a world leader in cement, aggregates, concrete and gypsum, operating in over 70 countries, acquired entire cement operations of the Orascom Construction Industries Cement Group. The Cement Group includes all aggregates, ready-mix concrete and cement bags manufacturing operations. It owns and operates cement plants in Egypt, Algeria, Iraq, Pakistan, UAE, Turkey and Spain, which have a combined annual gross production capacity approaching 35m tons. New investments in Nigeria, Saudi Arabia, Syria, DPRK and South Africa would increase the annual gross production capacity of cement to 45m tons by 2010.
Under the terms of agreement, OCI will receive a total payment of euro 8.8bn (US $12.9bn) and Lafarge will assume euro 1.4bn (US $2.0bn) of Orascom's debt. The transaction is subjected to the approval of the shareholders and is expected to complete by the end of Mar 2008. Moreover, through the acquisition, Lafarge got access in Pakistan's emerging cement market via 69% stakes in PCCL.
RECENT RESULTS 3Q09During the 3rd quarter of current year, cement industry dispatched 7.2 million tons, which was 1% higher than the same period last year. While exports grew by 54%, domestic demand declined by 14% as compared with the same period last year. The domestic decline is due to the faltering economic situation, which is a cause of concern for the industry. The local supply is expected to remain depressed due to a cut in the PSDP as well as decline in local construction activities due to tight monetary policy and lower credit appetite in uncertain and inflationary times. Export opportunities kept the industry afloat in spite of depressed environment.
Company posted operating profit of Rs 261.6 million; however, the company was unable to absorb the increasing borrowing costs in the local market and drastic devaluation of the rupee, thereby suffering a net loss after tax of Rs 208.2 million during the quarter. Sales increased by 83.3%, while the cost of production increased by 50%, resulting in a higher gross profit margin. Selling and administrative expenses have increased by 33.3%, while the financial charges have become more than two-fold. The financial charges have pushed the figures in the red. The company faced a net loss of Rs 1044 million, as compared to a loss of Rs 788 million in the same period last year. This has resulted in a loss of Rs 0.87 million.
FINANCIAL PERFORMANCE FY04-FY07During the first half of FY07, cement industry dispatched 12.8m tons of cement, which was 33% higher than the 9.6m tons for the same period last year. Domestic demands registered a growth of 21% while exports sharply rose by 172% as compared to the same period last year. On the other hand, capacity utilisation level declined as the industry capacity has increased from 26mntpa in June 06 to 32mntpa in June 07. As a result, industry utilization levels have dropped to 82% with a market price level touching as low as Rs 4,000/ton during June 2007.
The company incurred a loss after taxation Rs 521 million in FY07 as against Rs 38 million in last year, depicting a significant decline due to low retention prices and high financial charges. Primarily the loss can be attributed to low retention price as experienced by the cement industry as a whole and higher operating costs due to use of furnace oil during gas supply cut off in winter of 06/07.
As company started its commercial production on August 28, 2006, FY07 was the first full year of operations after declaring commercial production. However, during the period under review, sales volume figures are very encouraging and local sales volume stood at 5.1m tons whereas cement exports increased by significantly to 1.1m tons in FY07.
As a nascent company, it has witnessed negative growth in the initial years, as zero sales and zero inventories signify zero production for the company. In FY06, PCC started its production and with its commencement, the company showed negative profit margins that are way too lower than the industry trends. ROA and ROE are positive in FY05 as a result of waiver of interest and penal charges. After that ROA and ROE have posted a negative growth continuing till FY07.
Since the start of operations, Pakistan Cement Company Limited is actively finalizing the ancillary facilities development and infrastructure projects to facilitate smooth operations. Work on the coal conversion project is commissioned, which after completion will bring substantial savings in production cost as compared to the furnace oil.
PAKCEM has received a remarkable feedback from the market with ever growing demand from its customers. The company has shown a very weak liquidity trend in past 3 years due to its infancy and only 1-1/2 years of operation. There was an acute dearth of liquid assets such as cash, bank balances and other current assets which reflected in company's less than 0.5 current ratio prior to FY07.
FY06 had witnessed a sharp downturn in the current ratio mainly on account of very high trade payables and short-term borrowing. However, its liquidity position improved considerably in FY07 with current ratio close to 1, mainly due to tremendous increase in current assets (in particular cash, bank balances and inventory) compared to fall in current liabilities.
This shows that the company has started to take serious steps for improving its liquidity position. Presently, the company's liquidity position is well below the industry average trend. Once the company starts its operations in a sustainable manner, only then it will be able to come out of this impasse.
Pakistan Cement had no history of sales as such. FY06 started showing some results with some sales and that too was of nominal amount. In real sense, PCC has not demonstrated asset management ability as such as it started its commercial production only 1-1/2 years ago. Sales/equity ratio has risen by a considerable amount in FY07 but remained well below the industry average.
It has shown a sharp spike in FY07 mainly on account of numerator effect of higher sales. Consequently, TATO and ITO have also shown improvement in FY07. The company has now started commercial production and likely to show some positive results in the coming years. The company can use better marketing strategies to develop its reputation in the market. In this regard, its brand PAKCEM can prove to be a competitive edge if it capitalizes on it prudently.
On March 2005, there was a reversal of 767 million being waiver of interest on Sojitz loan as per revised agreement between Pak Cement and Pakistan Cement Holding Limited which reflected positive impact on the earnings of the company which otherwise would have been negative.
Major financing for PCC comes through long-term debt and that has subsequently risen in consequent of development and infrastructure projects. Furthermore, the debt paying ability has improved slightly as the company started its Cement production. Sales spurred, although at a lower rate of growth. The company plans a reduction in financial costs by replacement of interim funding facilities through injection of funds by way of rights issue and direct equity.
Pakistan Cement was under construction phase during FY06 and started its commercial production in Dec'06, it has not yet break even, therefore no dividends have been declared up till now. As for the previous years, the company doesn't have a performance history because of being in the inception stage.
EPS of the company is very low and worse than the industry. It has been negative in FY07 owing to huge losses. The positive EPS (Rs 1.09) in FY05 can be attributed due to the waiver of interest and penal charges on long term financing expensed during FY04 otherwise the EPS would have been negative by Rs 0.27.
Similarly price-earning ratio has also been negative till FY07 signifying the poor performance and lack of investors' confidence in company's shares. Also as the price chart indicates the company's share price outperformed the 100-index till first quarter of FY05 but later it showed an erratic trend.
Company is expected to fetch profits in coming years by reducing production costs due to availability of multiple fuel system and reduction in financial costs by replacement of interim funding facilities through injection of funds by way of rights issue and direct equity. Only then it can gain investors' confidence.
FUTURE OUTLOOKIn FY07, PCCL has successfully commissioned its local coal firing system that has fulfilled the partial requirements of fuel substitution while the work on imported coal firing is in final stage after which company can substitute 100% of its fuel requirement with coal, resulting in cost saving which is expected to have positive impact on the company's profitability in the coming years.
The slowdown in the ME region and halt of exports to India, will signify depressed profitability for the cement industry. This coupled with the slowdown of the domestic construction activity plus added pressure of high interest rates will create problems for the cement sector. Future plans of big players to add capacity will depress the prices further.
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PAKISTAN CEMENT-KEY FINANCIAL DATA
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Income Statement (Rs) FY'04 FY'05 FY'06 FY '07
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Total Revenue 0 0 88,585,535 4,191,594,084
Cost of Goods Sold 0 0 230,399,966 4,690,913,001
Selling, General & Administrative 15,368,509 50,888,015 150,781,932 -355,790,406
Expenses
Other Expenses 185,000 541,700 2,733,750 -3,187,200
Operating Loss (EBIT) -15,553,509 -50,879,700 -295,330,113 -140,341,311
Financial Charges 208,328,789 6,505,164 5,134,126 -795,984,503
Other Operating Income - 550,015 1,634,361 41,310,783
Net Loss Before Taxes -288,529,946 638,800,619 -301,294,934 -797,783,886
Net Loss After Taxes -288,529,946 615,300,619 -38,223,961 -521,096,900
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Balance Sheet (Rs) FY'04 FY'05 FY'06 FY '07
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Stores & Spares 0 0 273,440,674 1,249,318,008
Stock in Trade 0 0 158,358,236 498,784,914
Cash & Bank Balances 338,504 933,119 41,909,797 678,424,680
Total Current Assets 142,062,877 368,226,372 774,278,244 2,831,769,702
Total Non Current Assets 7,596,832,518 8,447,188,433 17,396,049,540 18,646,920,360
Total Assets 7,738,895,395 8,815,414,805 18,170,327,784 21,478,690,062
Total Current Liabilities 2,054,320,462 1,472,580,255 3,687,719,177 3,122,289,185
Total Non Current Liabilities 885,288,858 784,432,616 8,018,308,565 7,855,445,349
Total Liabilities 2,939,609,320 2,257,012,871 11,706,027,742 10,977,734,534
Paid Up Capital 5,624,563,630 5,624,563,630 6,768,378,870 11,345,149,360
Total Equity 4,799,286,075 5,414,586,694 6,464,300,042 10,500,955,528
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LIQUIDITY RATIO FY'04 FY'05 FY'06 FY '07
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Current Ratio 0.07 0.25 0.21 0.91
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ASSET MANAGEMENT FY'04 FY'05 FY'06 FY '07
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Inventory Turnover(Days) - - 1754.77 112.60
Total Asset turnover - - 0.0049 0.1952
Sales/Equity 0.00 0.00 0.0137 0.3992
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DEBT MANAGEMENT FY'04 FY'05 FY'06 FY '07
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Debt to Asset(%) 37.98 25.60 64.42 51.11
Debt/Equity (Times) 0.61 0.42 1.81 1.05
Times Interest Earned (Times) -0.07 -7.82 -57.52 0.18
Long Term Debt to Equity(%) 18.45 14.49 124.04 74.81
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PROFITABILITY (%) FY'04 FY'05 FY'06 FY '07
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Gross Profit Margin 0.00 0.00 -160.09 -11.91
Net Profit Margin 0.00 0.00 -43.15 -12.43
Return on Asset -3.73 6.98 -0.21 -2.43
Return on Common Equity -6.01 11.36 -0.59 -4.96
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PER SHARE FY'04 FY'05 FY'06 FY '07
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Earning per share -0.51 1.03 -0.06 -0.59
Price-Earnings ratio -16.24 7.29 -173.67 -20.21
Dividend per share 0.00 0.00 0.00 0.00
Book value 8.53 9.63 9.55 9.26
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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].
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