DG KHAN CEMENT COMPANY LIMITED.- Analysis of Financial Statements Financial Year 2002 - Financial Year 2010

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. DGKC 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 privatization program of the government. Since its privatization, DGKC has undergone intensive capacity expansion. As a result of this, DGKC is presently the second largest cement producer of the sector (second only to Lucky Cement). DGKC had a market share of 17% in the local cement industry in FY'10, largest in the cement industry.

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Name of Company                     D.G Khan Cement Company Limited

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

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DGKC has two plants at Dera Ghazi Khan and a new Greenfeild cement plant at Khairpur village, which was started in FY'04 and began commercial production in June 2007. The plant has a capacity of 2.1mtpa. Commencement of production at the new plant and effective and efficient operations 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 FY'08.
Recent Results 1Q'11:
Cement sales have seen a negative sign both in the local as well as export markets during the period July-September 2010. Local sales dropped by 16% to be 4.6 million tons due to lower governmental spending along with lower spending by people ravaged by the floods. Export sales of the industry dropped by 21% due to increased supply in the regional markets, forcing some of the players to look for better markets.
Rising cost of coal, fuels and packing materials also badly hit the production costs. Coal in international market is hovering around US$ 120/ton against US$75/ton last year same period. In addition, constant rise of gas and electricity tariff also posed negatively to the profitability of the cement sector.
For DG Khan cement, during the first quarter ie July-September 2010 the local sales witnessed a decline of about 27% by reason of flood in most parts of the country. Whereas, exports of cement plunged by 8% from the corresponding period. Sales revenue and gross profit declined by 23% and 48% respectively during the period under report compared with the same period last year ensued from low sales volume and increase in production costs. Administrative, distribution and selling expenses decreased in accordance to lower sales volume. However, financial charges were slightly higher than last years' at Rs 488 million as compared to Rs 468 million in the same quarter last year. DG Khan earned a net profit of Rs 22.146 million (2009: Net profit Rs 584.619 million). EPS was Rs 0.06 (2009: Rs 1.6)
DG Khan Cement in comparison with the cement industry
The cement sales in the company witnessed a growth of 15% in FY10 whereas DGKC witnessed a growth of 27% of 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 taxation 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 FY'09, the demand for DG Khan Cement and clinker had fallen from FY'08 by 8% and 7% respectively due to the economic recession plus low developmental 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 utilization of the cement plants increased to 76% in FY'10 from 74% in FY'09. This led to an increase of 27% in DG Khan Cement's production from FY'09 to FY'10 as 4,908,593 m. tons.
Sales
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. Although DGKC's volumetric sales grew by 28%, the sales revenue fell by 10% from FY'09 to FY'10 as Rs 16,275 million in FY'10 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 FY'09 to FY'10 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 FY'10. The total cement and clinker sales of DGKC had increased in FY'10 as higher production enabled it to largely tap the local market. Cement sales rose by 28% but clinker sales fell by 60%
Profitability - Recent Results DGKC posted PAT of Rs 233.022 million in FY'10 as compared to Rs 525.581 million in FY'09. This decline was mainly due to lower prices and reduced exports. The net sales revenue of the cement sector in FY'10 was 10% lower than the net sales revenue generated in FY'09. 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 FY'09 to FY'10. 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 FY'10. 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 FY'10 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 - FY'02 to FY'09
The profitability ratios of the company have shown a declining trend since after FY'05. The gross profit margin increased in FY'06 only to fall in FY'07 and FY'08. 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 FY'07 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 FY'07. This rise in cost of production and raw material had continued into FY'08. However in FY'09, the boost in export sales lead 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 FY'08. The company had earned the highest sales revenue of Rs 12.445 billion in FY'08. However, despite this, the gross profit of DGKC in FY'08 (amounting to Rs 1.9 billion) was around 6% lower than the gross profit posted in FY'07 (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 FY'09, 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 FY'09 against a loss after taxation of Rs 53.23 million in FY'08.
Liquidity
The liquidity position of DGKC improved in FY'10 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 FY'10 plus exports also fell and a 35% decrease in outstanding finances. On the other hand, current assets of the company increased due to20% 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 FY'09 to Rs 10 billion at the end of FY'10. Thus, decrease in current assets and a corresponding increase in current liabilities resulted in a less favorable liquidity position as compared to that in FY'08.
DGKC's liquidity stance had been strengthening since FY'04 and in FY'07 its liquidity position was the most favorable. 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 FY'08 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 FY'08. The investments decreased further from Rs 15 billion at year end FY'08 to Rs 7 billion by end of FY'09.
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 FY'07. In FY'08 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 FY'08.
In FY'09, the inventory turnover days remained same around 77 days but they increased in FY'10 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 FY'10 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 FY'09 decreased in FY'10. 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 FY'08 the debt ratios of the company rose because the total debt increased in FY'08 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 FY'10 from 1.3 to 1.19 as although finance charges reduced in the period by 27%, operating income in FY'10 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 FY'09 to Rs 0.72 in FY'10.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 FY'10 due to reduced profitability situation in the period.
Future Outlook
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 on 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.

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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

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

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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%

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

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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

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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].
Copyright Business Recorder, 2011