Fauji Cement Company Limited (FCCL)

Fauji Cement (PSX: FCCL) is a prominent cement manufacturer in the industry in the North block of the sector as its two cement lines are located in Jhang Bahtar, Punjab. Fauji was incorporated in 1992 with an initial capacity of 945,000 tons per annum and started operations in 1997. And after a series of capacity expansions, the company raised capacity to 3.27 million annually. The plant's initial capacity was raised in 2005 and subsequently another production line was introduced in 2011.
While expanding capacity, some capital expenditure was also devoted toward gaining energy efficiencies within through better consumption of power and reusing waste. The company installed a refuse derived fuel processing plant in 2009 and also set up a 12 MW of waste heat recovery unit that started to produce electricity for the plant in 2015.
The company supplies cement to local markets in the north of the country as well as exporting markets including Sri Lanka, India, Afghanistan, South Africa, and the MENA region even though exports in the total sales mix has reduced in the past few years.
The company had an accident at its manufacturing site early 2016 when a raw meal cement silo collapsed on a coal mill and brought production to a standstill. The destroyed production line had to be completely rehabilitated together with the reconstruction of the silo and the coal mill. The company saw this opportunity to upgrade the capacity of line-2 from 7200 tons per day to 7600 tons per day-a difference of 120,000 tons annually. The company was able to revive its plant in October 2017.
Meanwhile, the company is now installing another waste heat recovery unit of 7.6MW for its line-1 and a 16MW dual-fuel captive power plant for its energy requirements. Total self-generation of electricity will go up to 39.3 MW, according to the company's annual report. This is likely to help in reducing costs and reliance on national grid.
The company is part of the Fauji group with many of the associate companies holding shares in Fauji cement. At the end of FY17, majority of the company's shares (36.87%) were held by Committee of Admin Fauji Foundation, while Fauji Fertilizer (6.79%), Fauji Foundation (3.53%), Fauji Fertilizer Bin Qasim (1.36%) and Fauji Oil Terminal (1.36%) also hold shares in the company (see table). The public holds 28.3 percent of the company's shares.
Operational and financial performance With high capacity utilisation, the company has managed to retain a strong market share of about 5- 7 percent within the industry. It was improved from 36 percent in FY11 to 75 percent in FY15 and to 85 percent in FY17. Though the company could lose its market share during the time between FY16 and FY17 when its plant was being rehabilitated and out of commission, the company wisely retained its market share at the cost of its profits by buying clinker from nearby cement companies. Supply to customers was not undermined by the fact that the plants were not operational. The company saw the highest capacity utilisation during these past two years.
Sales have kept up with production. Most recently, demand has been robust in the north seeing a strong boost because of the various infrastructure projects currently under due to CPEC and other development work undertaken by Pakistani government to overhaul the entire communications and transport network in the country. At the same time, housing demand and commercial construction has also been a strong driver of cement demand, especially in urban areas and transitioning localities from the Punjab and upwards.
While local demand is on its side, exports have continued to slide down for the industry with the sector losing a lot of market share in key markets like South Africa and Afghanistan; the latter of which took in more than 50 percent of the Pakistani total cement exports during FY14 and earlier. Pakistan was also a top supplier of cement for Afghanistan but dynamics changed as Iran's sanctions were lifted and the country started supplying much cheaper cement to the market usurping a big chunk of the market share that belonged to Pakistani cement.
Exports as a share of total sales have slid for Fauji from 25 percent during FY13 to 14 percent in FY16 and 4 percent in FY17. Some cement makers claim it is not as much them losing these key export markets as much it is the companies themselves adjusting their sales mix as local demand has been picking up. However, since the industry is embarking on an expansion spree, it is likely that exports will have to be shored up to keep capacity utilisation high; otherwise, the industry will be left with idle capacity for a couple of years; and margins will slide.
While Fauji had an insurance claim for the damage done to its plants, financially the company saw its fundamentals plummet. The company chose to keep its market share but buying clinker from nearby companies meant a significant bump to costs. The company saw its revenues grow from FY16 to FY17 by 2 percent brought by a 4 percent increase in sales. During this time, retention prices were also on a decline in the north, which may have resulted in lower sales price per unit.
Clinker purchase costs during FY17 were about 53 percent of cost of goods sold. The company's margins dropped from 46 percent to 22 percent due to these higher costs. The rest of the industry also saw its margins drop as coal prices were on a rise and retention prices were low. The company experienced a drop in earnings of about 52 percent between the two fiscal years. As a result, net profit margin was 13 percent during FY17 (FY16: 27%).
Recent operations and future outlook: The company continued to purchase clinker well during FY18 as the plant was revived in October of 2017. This bought the tough times into FY18 as well. During the first quarter, the company saw its margins drop further down from 24 percent in 1QFY17 to 17 percent in 1QFY18, despite a 9 percent growth in revenues. However, once the plant was recovered, the company was able to revive, if not its lost glory, a little bit of confidence.
Margins grew to 24 percent in 9MFY18 from 22 percent in 9MFY17-cost of sales actually saw a drop of 2 percent between the two periods. The rest of the industry was also having a difficult phase as coal prices were growing and due to higher competition, revenue per unit had fallen. Meanwhile, the rupee to dollar parity made input imports more expensive for cement manufacturers that also contributed to the decline in margins. For Fauji, the impact of these dynamics may not be very visible on its financial accounts but needless to say, after the plant recovery, the company could have done better had prices in the north remained on the same levels on average as before and cost of inputs were not rising so much.
In indirect costs, Fauji saw a growth in distribution costs as export sales rose. However, all indirect expenses remained 4 percent of revenues during 9MFY18 same as the previous year. Borrowing costs were significantly high last year, which came down during the period of FY18. Together these factors allowed net margins to float at 13.4 percent in 9MFY18, against 12.5 percent the previous year.
As Fauji levels up with the rest of the industry, it has some silver linings-its plant is back into operation so it no longer has to buy clinker at premium rates and lose margins further. It has a new WHR on its line-1 that together with the waste heat recovery plant installed with line-2 and the captive power plant will help bring down power costs. Demand will be strong for the north players with infrastructure projects picking up steam and real estate construction continuing. Even exports have been seeing some upward movement.
On the flip side, rising coal prices will remain a major concern as it's a primary cost component. If China restricts supply as it has been claiming it might in order to focus on combating the environmental repercussions of heavy industrial activity, coal prices may rise further. Meanwhile, rupee depreciation against the dollar will also balloon the cost of production. While retention prices have come up again, the industry may see fluctuations if demand recedes against growing capacity enhancements.

=========================================================

Fauji Cement-Nine Months FY18

=========================================================

Rs (mn)                        9MFY18      9MFY17     YoY

=========================================================

Sales                       15,814.06   15,759.79    0.3%

Cost of Sales               12,085.72   12,297.64     -2%

Gross Profit                 3,728.34    3,462.15      8%

Distribution costs             192.06      120.48     59%

Administrative                 272.98      243.41     12%

Other operating expenses       227.95      208.53      9%

Other income                    71.69       97.75    -27%

Finance cost                   120.52      159.92    -25%

Profit before tax            2,986.51    2,827.56      6%

Taxation                       864.35      855.55      1%

Net profit for the period    2,122.17    1,972.02      8%

Earnings per share (Rs)          1.54        1.43      8%

GP margin                         24%         22%      7%

NP margin                         13%         13%      7%

=========================================================

Source:PSX notice

=========================================================

Pattern of Shareholding (as on July 30, 2017)

=========================================================

Categories of Shareholders                          Share

=========================================================

Directors and their spouse(s) and minor children    0.04%

Associated Companies                                48.9%

Committee of Admin Fauji Foundation                35.87%

Fauji Foundation                                    3.53%

Fauji Fertilizer Bin Qasim                          1.36%

Fauji Oil terminal                                  1.36%

Fauji Fertilizer                                    6.79%

Modarabas and Mutual Funds                          0.02%

Mutual Funds                                        5.35%

Insurance Companies                                 0.91%

Investment Companies                                0.12%

Joint Stock Companies                               6.08%

Foreign Companies                                   5.08%

Pension Funds                                       0.33%

Others                                              0.90%

Banks, development finance institutions,            3.94%

non-banking finance companies etc

General Public                                     28.31%

---------------------------------------------------------

Total                                                100%

=========================================================