Gharibwal Cement

Gharibwal Cement (PSX: GWCL) is in the business of manufacture and sales of cement and clinker with its plants located in Tehsil Pind Dadan Khan, District Chakwal. The company was incorporated in 1961 and started its operations in 1965 with a capacity of 360,000 tons per annum. Like other cement plants, it was nationalized as part of the then-government nationalization policy. Subsequently in 1993, Gharibwal was privatised. The company went through a series of expansions over the years. In 2003, the company merged with GCL Electric with power generators of 10MW, later adding on two gas power generators of 12 MW. Meanwhile, another plant of more than 2 million tons per annum was added with three dual-fuel power generators of 16MW. The company discarded its old plant-a capacity of 540,000 tons per annum-in 2011 leaving the company with the 2 million tons of capacity and about 4 percent of the capacity within the industry.
In 2013, it upgraded its electric grid stations. Recently the company invested in a 20 MW of a Waste Heat Recovery (WHR) unit and a downhill conveyor belt to improve the operational performance of its plant. Like much of the sector, Gharibwal is also expanding its capacity, more than doubling it. The plant is a brownfield project in Jhelum taking up 2.4 million tons of capacity and will likely bring up the market share for Gharibwal though competition in the north will be stiff.
Shareholdings, investment, and debt
In terms of shareholdings, the general public holds only 6 percent of the shares as at June 30, 2017. This used to be only 4 percent in FY16. The company is almost entirely held by one family (89%) where the CEO holds 56 percent of the company's shares, while nearly 23 percent shares are held by an executive director.
The company has been investing in uncollateralized, extendable, short term loan or advance facilities to its associate company Baluchistan Glass Limited (BGL) for the purpose of working capital of BGL. Located in Hub, Baluchistan, the associate company was incorporated in 1980 and is listed on the PSX. BGL has three glass plants, which are engaged in the manufacturing and sales of glass containers, tableware, glass products and plastic shells for beverage companies. In the latest AGM for Gharibwal, the facility was extended for another year. The loan is up to Rs 250 million with a mark-up of one percent above the average borrowing rate of the company.
During FY17, the company started commercial production of its WHR plant to reduce energy costs as well as the down-hill conveyer belt, which will reduce the cost of raw material transportation. For its expansion plants, the company has attained mining licenses for limestone and shale clay in KP.
The company is now in the process of setting up a new vertical cement grinding mill of 250 tons per hour, which will increase the cement grinding capacity while reducing the energy consumption on cement grinding. This mill will potentially become operation in the next few months. Meanwhile, the company is also upgrading its power generators to enhance power consumption efficiency. Last year, the company paid off one of its major loans but it obtained new borrowings amounting to Rs 950 million during FY17 to finance the cost of new cement mill and building for head office.
Operational and financial performance
Gharibwal amongst its peers of similar capacity no doubt stands out. It was only producing about 519,000 tons of clinker in FY10 even though it had a capacity of more than double of that coming through its two cement lines at the time. The old plant was not working out for Gharibwal and eventually, it discarded that plant during FY11 left with 2 million tons of capacity.
Capacity utilization since then climbed from 38 percent in FY11 to 85 percent in the outgoing year FY17. Production has been increased year after year as demand grew and the company was able to cater to it by making its plant more efficient. Revenue stream through the years has remained strong as prices have increased. Coming years however will prove to be tough (more on that in the outlook section). Gharibwal conducted a Balancing, Modernization and Replacement (BMR) to work on said efficiency and also reduce power and fuel costs. It is now upgrading its existing installed power generators to cut down on costs significantly.
Fuel and power costs as a share of cost of sales were reduced from 64 percent in FY11 to 53 percent in FY15 and 50 percent in FY16. Margins improved from 27 percent in FY14 to 40 percent in FY16. FY17 however is a different story as costs soared as a result of higher fuel (coal and gas) prices. Coals being a major cost input for the production of cement were savage to the margins of cement companies and Gharibwal was no different. This is why despite a growth in dispatches and a subsequent growth in revenues; margins dropped to 34 percent in FY17.
Gharibwal's outlook and industry dynamics
Latest financials for Gharibwal show similar trends to other companies in the sector, especially those in the north. Retention prices have taken a nosedive as competition increased. Though Gharibwal's dispatches grew by 37 percent in Q1FY18; revenues grew by only 8 percent.
Meanwhile, finance costs rose by 58 percent as a result of higher borrowing as mentioned above. These costs will likely dominate the expense side as expansion and other projects come through. The company has kept a tighter fist on all indirect expenses including distribution costs. These are likely lower because exports have been falling and which carry a major portion of these costs. The combination of higher coal prices and lower retention prices together pushed margins down to 24 percent in Q1FY18 against 34 percent in Q1FY17.
The new WHR, the conveyor belt installation and the vertical cement mill will all contribute to lower input costs and high productivity which could in turn help shore up margins though coal prices fluctuations may hurt costs anyway. The new expansion too comes just in time as capacity utilization is much higher at 85 percent and demand in the north is increasing manifolds.
However, the threat for price competition as expansions come through remains viable. It is clear that the additional 30 million tons the cement industry is installing will bring capacity utilization down as demand would not be able to absorb the capacity completely. To keep utilization at maximum, cement firms may have to export cement at greater price cuts which again would hurt margins. Right now, prominent markets such as Afghanistan and India aren't receptive to Pakistani cement given competition from Iran and Indian cement. This slowing down of exports also does not bode well.
This doesn't seem like the time to pad the bottom-line, but the tide will likely turn post FY20. Even when CPEC related infrastructure is complete, the growth in economy will likely help. Cities will be expanded to incorporate for the urbanization, more malls will be built for the rising consumer and housing demand will go up as more people can afford real estate. That, at least is the hope. For now, Gharibwal like other cement players must ride the storm.

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Gharibwal Cement (Financial performance in Q1)

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Rs (mn)                    Q1FY18    Q1FY17    YoY

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Sales                       2,692     2,488     8%

Cost of Sales               2,044     1,642    24%

Gross Profit                  647       846   -24%

Administrative                 99       109    -9%

Distribution costs            5.3       7.6   -30%

Other operating expenses     31.4      44.8   -30%

Other income                  7.0       5.1    37%

Finance cost                 95.6      60.6    58%

Profit before tax             423       629   -33%

Taxation                      121       185   -34%

Net profit for the period     302       444   -32%

Earnings per share (Rs)      0.75      1.11   -32%

Dispatches (tons)         421,501   306,753    37%

GP margin                     24%       34%   -29%

NP margin                     11%       18%   -37%

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Source: PSX notice

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Pattern of Shareholding (as on July 30, 2017)

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Categories of Shareholders                          Share

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Directors and their spouse(s) and minor children    88.8%

Mr. Abdur Rafique Khan                              22.7%

Mr. Muhammad Tousif Peracha- CEO                    56.3%

Mr. Nazir Ahmed Peracha                                0%

Mr. Muhammad Niaz Peracha                              0%

Mr. Ali Rashid Khan                                  4.0%

Mr. Daniyal Jawaid Parcha                            0.0%

Mrs. Tabassum Tousif Peracha                         0.1%

Mrs. Amna Khan                                       5.7%

Mrs. Salma Khan W/O A. Rafique Khan                  0.0%

Modarabas and Mutual Funds                           0.8%

Joint Stock Companies                                0.5%

Foreign Companies                                    2.2%

Associations                                         0.0%

Others                                               0.3%

Banks, development finance institutions,

non-banking finance companies etc.                  1.49%

General Public                                       5.9%

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Total                                                100%

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