Cement: LAFARGE PAKISTAN CEMENT LIMITED - Analysis of Financial Statements - Financial Year 2007 - 3 Q 2010

Lafarge Pakistan Cement Limited was incorporated in Pakistan on 23rd May 1993 as a private limited company and subsequently converted into a public limited company on 18th October 1994 under the Companies Ordinance, 1984.
It is listed on all the three stock exchanges of Pakistan. The principal activity of the company is to manufacture and sale of cement. It is a subsidiary of "Pakistan Cement Holding Limited", a company incorporated in the British Virgin Islands, whereas its ultimate parent company is Lafarge S.A., France.
Cement industry in FY10:
Due to adverse economic and political conditions in the country, the overall performance of the cement sector was very sluggish in FY10. However, Pakistan's cement industry continued to perform well in term of profitability and interest coverage. Despite the worse economic conditions around the globe, the local cement industry witnessed good net margins while the sector also benefited from its superior quality and brand image in the international market as visible from it high retention prices. Attock Cement was the best performer in the sector with excellent net margins and interest coverage results. Other performers include Lucky Cement (13% net margin) in the south region, while in the north region Fauji Cement Company Limited (FCCL) and DG Khan Cement (DGKC) topped the charts.
Revenues fell in FY10 due to a decline in prices by 18%. However, total revenues declined by only 14% due to a rise in the volume sales of 9% in FY10. Rising prices of gas as well as the power tariff added fuel to the rising costs in the industry. The coal prices declined by 16% providing the sector a huge sigh of relief. However the fall in total revenues also had huge impact on the profitability margins as total gross profit fell by almost 49% while the average gross profit margins was 17% compared to the 29% same period last year. Domestic sales in the sector fell by around 16% and exports fell by 21%. The capacity utilisation of this sector stands at 72% in the 3rd quarter of 2010.
Even with a decline of 25%, the financial costs were a huge dent to the performance of the sector in FY10. The interest coverage fell to 0.5x in FY10 compared to 1.69x in FY09. Due to all these factors, the total loss after tax of the sector stands at Rs 3,695 million in FY10, compared to a profit after tax of Rs 6,724 million.
The Super Flood in the 3rd quarter was expected to provide a boost in the total dispatches in the sector. However, due to lack of government assistance, the development has not started yet in flood-affected areas.
Profitability (FY09)
In FY09 the net sales of the company went up to Rs 8.129 billion compared to the net sales of Rs 7.439 billion in FY08. This increase of about 9.28% was due to increase in sales volume. The company was also able to increase its capacity utilization in FY09 to 93% compared to the utilisation of 83.4% in FY08. In FY09, Lafarge Cement posted a gross profit of Rs 983.7 million compared to the gross profit of Rs 574.85 million in FY08 with an increase of 71.12%.
The gross profit margin for FY09 was 12.1% compared to the 7.73% in FY08. This was basically due to the rise in sales volume, fall in coal prices and cost cutting strategy. However, the net profit of the company fell in FY09 due to rising costs of raw material, as well as fall in prices due to the price competition in this sector. In FY09 the company posted a net loss of Rs 1.278 billion compared to the net loss of Rs 1.242 billion in FY08, with an increase of about 3%. The net loss margin of the company fell by 5.81%, going from 16.7% in FY08 to 15.73% in FY09. The company has improved a lot on profitability in FY09 as compared to FY07.
Cost of sales in FY09 were Rs 7.146 billion as compared Rs 6.864 billion in FY08, showing an increase of 4.1%. The operating expenses showed an increase of 85.22%, going from Rs 555 million in FY08 to Rs 1.028 billion in FY09. This dramatic increase was due to the rising energy costs across the world. International coal prices have risen in the first half of FY09, however, the coal prices began to fall during the second half of FY09 and remained in the range of US$65 to US$ 85 per ton.
The company has shown a poor performance when it comes to the return on total assets, which was below 1% for the last 3 years. ROTA was -0.12% in FY09 compared to 0.30% in FY08. The return on equity has been negative in the last 3 years due to the net losses incurred. The return on equity was -13.10% in FY09 compared to- 11.26% in FY08.
Profitability for 3Q10:
Sales till the 3Q10 amounted to Rs 5.039 billion compared to the sales of Rs 6.410 billion during the same period in FY09. This 21.4% fall was due to Super Flood in June to September, which halted the construction activities and also prices in the sector went down due to fierce competition from other firms. The reconstruction in these areas is expected to give a huge boost to the demand. The gross profit in 3Q10 fell to Rs 385 million compared to Rs 902 billion during 3Q09. This shows a decrease of 57.3%. Due to this the gross profit margin also fell down to 7.64% from 14.07% in 3Q09, while the industry average was 17% for the same period. The net loss in 3Q10 was Rs 1.045 billion, compared to Rs 782 million in 3Q09. As a result, the net loss margin increased from to 20.74% compared to the 12.20% in 3Q09. The company's capacity utilisation in 3Q10 fell to 70%, however, it was well above the industry average of 66%.
The cost of sales in 3Q10 fell down to Rs 4.654 billion compared to Rs 5.508 billion in 3Q09, showing a fall of 15.5%. It was due to the production activity affected by the floods in the 3rd quarter. However there was no major decrease in the operating expenses, which stood at Rs 701 million in FY09 compared to Rs 729 million in FY08. The fall in costs were also due to an aggressive cost strategy of the management as well as falling coal prices, which is a major raw material in this sector.
Liquidity (FY09):
Lafarge Cement had a current ratio of 0.31 in FY09 compared to 0.73 in FY08. This was due to the fall in current assets of 44.37% and the increase in current liabilities of 30.30%. The fall in current assets was mostly contributed by the fall in stores and spares of 61.81% and the fall in other receivables of 83.55%. The high rise in current liabilities was solely due to the payables related to other parties.
Company's quick ratio also fell down going from 0.55 in FY08 to 0.21 in FY09. This was due to the fact that stock in trade, which is the least liquid asset, makes up nearly one-third of the total current assets. In FY07 its current ratio was 0.91 and quick ratio was 0.75, however since then these ratios have been going down to the rising short-term financing as well as the fall in highly liquid assets such as cash and the rise in least liquid assets such as inventory.
Liquidity (3Q10):
The current ratio for 3Q10 was 0.27 compared to 0.44 in 3Q09, showing a fall of about 39.28%. The current asset increased by 16.23% contributed by the 86.78% rise in advances and the 185.62% rise in other receivables. However the current liabilities nearly doubled in the same period, rising by about 91.43%. The rise was contributed by 101.41% rise in short-term finance as well as the 46.93% rise in the accrued mark-up. The management should take serious steps to improve the worsening liquidity situation.
Asset management (FY09):
The company has shown a lot of improvement in terms of asset management since FY07. Its operating cycle went down to 35.47 days in FY09 compared to 47.46 days in FY08. This means that the company has decreased the time period taken to convert inventory into sales and the sales into cash. The inventory turnover of the company also fell from 45.82 days FY08 to just 32 days in FY09 due to the rise in sales as well as the fall in inventory.
Total asset turnover ratio for Lafarge Cement was 0.41x in FY09 compared to 0.34x in FY08. It increased due to higher growth in sales revenue as compared to the growth in assets over the years. The sales to equity ratio for FY09 was 0.83x compared to 0.67x in FY08. However this rise was due to the rising accumulated losses which have decreased the shareholder's equity for last 2 to 3 years.
The asset management performance over these 3 years has improved due to sales rising more than growth in assets.
Asset management (3Q10)
Asset management performance for 3Q10 has been very poor compared to that in 3Q09. The operating cycle has increased to 44.41 days compared to 36.49 days in the last period. This was due to the fall in sales as well as the rise in inventory.
Total asset turnover ratio has gone from 0.32x in 3Q09 to 0.26x in 3Q10. This was due to the fact that the sale fell down by a higher percentage compared to the fall in total assets. This downfall also led to the fall in sales to equity ratio, which went from 0.63x in 3Q09 to 0.58x in3Q10.
Debt management (FY09):
The debt to asset ratio for the company was constant at 0.50x for the last 3 years. This was mostly due to the fact that the rise in total assets was mostly financed through short-term borrowings. However, the long-term debt to equity ratio has been falling even though the total debt to equity ratio has been nearly constant for that period. It was 0.31x in FY09 compared to 0.51x in FY08. This shows that the company has been relying more on short-term borrowings and less on long-term ones. Short-term borrowings in an economy with rising interest rates can be a disadvantage in terms of higher interest costs and refinancing issues. The company should look to long-term debts, which have constant interest rates as well as a long maturity period.
Debt to equity ratio for the company has been hovering around 1.00x for the last three years. This is due to the opposite changes in the total debt and equity during this period. Times interest earned ratio has gone from +0.05x FY08 to -0.02x in FY09. This is not a good ratio for a company, which is so heavily dependent on debt to finance its activity. This could lead to difficulty for the company's future borrowings to refinance its current short-term loans.
Debt management (3Q10):
Debt to asset ratio for 3Q10 was 0.55x compared to 0.48x in 3Q09. This was due to 91% increase in current liabilities. Long term to equity ratio fell down from 0.47x in 3Q09 to 0.20x 3Q10. This was due to rising use of short-term borrowings by the company. The debt to equity ratio went up to 1.24x in 3Q10 compared to 0.93x in 3Q09 due to rise in debt and fall in shareholder's equity. The time interest ratio was -0.41x in 3Q10 compared to -0.2x 3Q09 due to the rise in operating loss. TIE was way below the industry average of 0.5x.
Marketability (FY09):
The loss per share was Rs -0.59 in FY07, Rs -1.01 in FY08 and -0.97 in FY09. The consistency in last years was due to similar net losses in these periods. However the average market price has shown a falling trend over the last 3 years due to market crash at KSE in 2007 and 2008. The average stock price went from Rs 10.95 in FY07 to Rs 7.46 in FY08 and Rs 2.81 in FY09. The price earning ratio went up from -18.56x in FY07 to -7.39x in FY09 and -2.9x in FY09. This was due to the falling average market prices as well as the constant loss per share during this era. Due to accumulated losses, the company has not declared any dividends in the past 3 years. This was also a factor in its stocks being undervalued to its book value.
Marketability (3Q10):
Loss per share in 3Q10 increased to -0.80 compared to -0.6 in 3Q09 due to rising net loss. However the average market price has shown a positive trend, going up to Rs 3.30 in 3Q09 compared to 2.97 in 3Q09 showing an increase of about 11.11%. This is due to the rise in KSE indexes in the 2nd and 3rd quarters of FY10. The prices earning ratio has shown slight improvement going up from -4.95x in 3Q09 to -4.13x 3Q10. The company did not declare any dividend during this period and also selling at a huge discount to its book value.
Future outlook:
The company is relying on the reconstruction activity in the flood affected areas in the coming years as a demand booster. This reconstruction phase in expected to increase the industry's demand by about 15%-22%. Also the company has start an aggressive cost cutting measures in the last 2 years which is expected to follow in the coming years as well.
COURTESY: Economics and Finance Department, Institute of Business Administration, Karachi, prepared this analytical report for Business Recorder.
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