COMPANY INTRODUCTION: Lucky Cement Limited, a company belonging to the Yunus Brothers Group, is the largest manufacturer and exporter of cement in Pakistan. With two production facilities in the country, one at Karachi and one at Pezu in NWFP, Lucky Cement is also Pakistan's only cement manufacturer to have a loading and storage terminal at the Karachi port.
Thanks to location advantages of being in the South, it is not surprising to know that Lucky accounts for more than one-third of the total cement exports from Pakistan, and caters to the Asian, Middle Eastern and African markets.
PROFITABILITY Sales and gross margins FY12 commenced on a good note for Lucky. During the first half, the Company's revenues witnessed a year-on-year increase of about 28 percent, lead primarily by a surge in local sales as opposed to export sales. While local sales volumes registered an 11 percent growth to 1.68 million tons, export sales volume decline by 8 percent to 1.19 million tons during the first half of this fiscal year against the same period last year. Overall, a marginal volumetric increase in net sales of slightly over 2 percent was seen, including both local and export sales.
As for revenues from sales, local sales fetched a whopping 54 percent increase in revenues, thanks to an increase in domestic retention prices of cement, which went up by roughly 24 percent, year-on-year during 1HFY12.
As for the export side, though export sales volumes declined vis-à-vis the previous year as discussed, better export prices helped generate 4 percent higher export sales revenues during the first half this fiscal year relative to the same period of last year.
The cost of sales for the first quarter of FY12 also went up by about 19 percent, led by increases in prices of coal, fuel, and other packing materials. Yet, as a percentage of sales, the cost of sales was 62 percent in 1HFY12 versus 67 percent in 1HFY11, indicating good cost management by the Company. Overall, gross margins increased by about 5 percentage points in 1HFY12 against 1HFY11.
Lucky has initiated an alternate fuel facility using used tyres and agricultural and municipal waste called the RDF. These will help replace coal in the production process, and the trial runs for the project had already started in December 2011. This initiative will further help reduce Lucky's cost of production in the days to come and help improve margins further.
Distribution costs
On the operating side, distribution costs are a key component because of the nature of the business, which warrants distribution across local as well as export markets. Though distribution costs had stayed under 10 percent of sales in FY08 and FY09, they saw an upsurge in FY10, declining marginally in FY11 to 12.4 percent of sales.
For 1HFY12, distribution costs were nearly 11 percent of sales, versus 15 percent during 1HFY11. The decline in distribution costs as a percentage of sales in 1HFY12 against the same period last year is attributable to the volumetric decline in export sales during FY12.
On the whole, operating margins were higher by about 8 percentage points in 1HFY12 relative to the same period of last year.
Net margins
Net profits have grown at a Cumulative Average Growth Rate (CAGR) of about 10 percent between FY08 and FY11.
In 1HFY12 profit after tax increased by a whopping 107 percent year on year in 1HFY12 to Rs 3 billion for the first half of this fiscal year. The improvement in profitability was reflected in an improvement of about 7.5 percentage points in net margins for 1HFY12 relative to the first half during the previous fiscal year.
LEVERAGE
Lucky's debt to equity ratio is relatively stable at a lower proportion of debt relative to equity. In particular, the debt to equity ratio for FY11 was contained at 0.02:1. The debt-to-equity ratio depicted a consistent decline for the past 5 years, with interest coverage ratio in FY11 also depicting an improvement since FY09.
In 1HFY12, the Company's long-term finances also decreased marginally, from Rs 658 million the last fiscal year to Rs 525 million at the end of 1HFY12. Current liabilities also decreased by roughly Rs 1 billion from the end of the previous fiscal year to Rs 9.5 billion at the end of 1HFY12. The effect was evident in a decline in the Company's financial charges from 2.45 percent of sales in 1HFY11 to 1.1 percent of sales during 1HFY12.
OPERATIONS
Lucky's inventory management dwindled slightly in FY11, with the inventory turnover in days increasing by about 26 percent relative to that in FY10. Similarly, Lucky's accounts payable turnover - which shows how quickly the firm pays its creditors - increased by about 18 percent in FY11 to nearly 75 days against FY10.
INVESTMENT & VALUATION
According to JS Research, Lucky is trading at a FY12F P/E of about 4.7 times. The house commented in a report last week, "The stock currently trades at FY12E PE of 4.7x versus market's PE of 6.3x and offers an upside of 30% to our target price of Rs 112." As of yesterday, the stock was trading at Rs 88.51 per share.
Being a mature and well-established Company, Lucky distributed cash dividends in the past three fiscal years, including FY11, of 40 percent. While DGKC and most other cement companies have distributed rights shares or no dividends over the past three years, Lucky's payout has been on the higher side within the industry and thus is lucrative investment for investors.
OUTLOOK
As far as local sales are concerned, Lucky's got a promising outlook ahead. While the increase in retention price of cement promises a year-on-year increase in the Company's revenues for FY12, a volumetric increase is also expected because of a low-base effect and also due to reconstruction work in flood-affected areas in Sindh, together with an improved PSDP allocation for FY12 because of the run-up to the elections.
On the export side, while volumes have depicted a fall in the first quarter of the current fiscal year, the Company is hopeful that exports to Afghanistan will reach the 5million ton level in FY12. Cement exports to Afghanistan were 4.7 million tons in FY11. For 4MFY12, exports to Afghanistan had registered a 17 percent year-on-year growth. Similarly, there are expectations of better exports to India in the wake of improving trade relations with the neighbour. However, exports to other destinations are expected to stay on the ebb.
At the same time, the Company is expanding its horizons, to the Domestic Republic of Congo (DRC), investing around $40 million for an equity stake in a joint venture with a local cement manufacturer of DRC.
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Lucky Cement - key performance indicators
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FY09 FY10 FY11 1HFY12
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Profitability
Gross profit to sales % 37.3 32.6 33.5 37.8
Net profit after tax to sales % 17.5 12.8 15.0 19.6
Return on Equity after tax % 19.8 12.5 14.3 -
Return on Capital Employed % 15.7 10.9 14.4 -
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Leverage
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Debt : Equity ratio times 0.18:1 0.07:1 0.02:1 -
Interest Coverage ratio times 5.83 7.45 9.97 -
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Operations
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No of days in Inventory days 105 102 128 -
No of days in Payables days 69 63 75 -
Operating Cycle days 49 54 64 -
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Investment/ valuation
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EPS Rs 14.21 9.7 12.28 9.33
P/E Rs 4.12 6.4 5.77 -
Cash Dividend per share Rs 4 4 4 -
Dividend Yield % 6.8 6.4 5.5 -
Dividend Payout % 28.2 41.2 32.6 -
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Source: company accounts
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