Fauji Cement Company Limited is a major producer of cement in Pakistan. Established in 1997 at the Jhang Bhatar District Attock. The company started operations at a production of 3,150 metric tons of cement per day (TPD). In 2011, the production capacity was increased manifold by commissioning a new line of 7,560 TPD, augmenting the total production capacity to 11,445 TPD.
In 2008, FFCL became the first ever cement producer to install a Refuse Derived Fuel (RDF) plant with a capacity of 12 ton/hr. The company is a major concern of the Fauji Foundation, which has businesses in sectors such as fertiliser, gas and oil.
Operational analysis The launch of the new production line diluted the capacity utilisation of Fauji from 90 percent in the period 1HFY11 using Line 1 to 68 percent across both Line 1 and Line 2 in 1HFY12. The current utilisation is marginally lower than the average capacity utilisation across the cement industry but market expansion plans for the company may help improve it.
Power shortages and gas loadshedding diminished the production capacity of the plants severely. In the first quarter of the fiscal year 2012, such interruptions reached up to 10 hours a day. Resultantly, Line 2 had to be periodically shut off until a more reliable source of power was to be found.
Profitability
Fauji Cement Company Limited experienced a significant increment in its top line over the past year. From approximately Rs 2.2 billion in 1HFY11, sales increased by 89 percent to Rs 4.2 billion in 1HFY12. Cost of sales for the period also increased by over 90 percent compared to the corresponding period last year, on the heels of an increment in fuel and electricity prices. Resultantly, gross profit was augmented by 76 percent but due to the increment in costs, gross margins declined by over a percentage point, from 18.7 percent in 1HFY11 to 17.4 percent this period.
Improved operating mechanisms allowed the company to rein in operating costs significantly. Administrative, distributive and other operating costs reduced significantly over the period, as did operating income rise by 46 percent. Consequently, operating profit in the six months ending December 2011 grew by over 120 percent compared to the previous comparable period, and operating margins grew from 12.9 percent to 15.5 percent.
The company sustained a heavy burden on account of a finance cost, amounting to over Rs 700 million, or nearly 17 percent of net sales. The finance cost was related to the expansion and commissioning of the new production line, which has increased capacity significantly. This cost alone converted an Operating Profit of Rs 658 million to a loss before taxation of Rs 52 million. An increase in taxation increased the losses further, leading to a loss after taxation of Rs 102 million in 1HFY12, compared to a profit of Rs 251 million in 1HFY11, a reduction of more than 140 percent. Net margins accordingly plummeted to a negative 2.4 percent from an 11.2 percent in the previous comparable period.
Liquidity Between 2010 and 2011, the liquidity position of Fauji Cement worsened. The Rs 700 million finance cost also placed an additional burden to the cash flows of the company. From a current ratio of 0.89, it decreased to 0.66. Though not optimal, a current ratio under one is not uncommon in the cement industry.
Leverage Much like other players in the industry such as Cherat, D G Khan and Kohat, Fauji Cement has also accumulated debt to finance its expansion. The debt-to-equity ratio had been steadily increasing from 0.09:1 in FY08 to 0.57:1 for FY10. The ratio for FY2011 stood at 0.55:1, showing relative stability in terms of leverage. The major finance cost incurred this year is a one-off charge; finance costs for preceding years have also been relatively stable. With the exception of FY10, finance costs as a percentage of net sales have been under five percent since 2008.
Future outlook An increase in cement prices combined with tax and duty reductions made for a spectacular performance by most cement producers this period. However, the increased prices for cement may not hold up much longer, and fuel and electricity prices do not seem to be going down any time soon. Additionally, power outages in the summer months may increase reliance on fuels, further hurting the profitability of operations.
Post-expansion, a reduction in finance costs for the company will be in order, which may mitigate the impact on profitability. However, Fauji needs to capitalise on the new production line and increase its volumetric performance significantly, if it is to remain as profitable as other players in the industry.
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FAUJI CEMENT
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Rs (000) 1HFY12 1HFY11 chg FY11 FY10 chg
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Net sales 4,256,663 2,252,294 89% 18,577,198 16,275,354 14%
cost of sales 3,517,821 1,831,661 92% 14,192,229 13,569,994 5%
gross profit 738,842 420,633 76% 4,384,969 2,705,360 62%
distribution costs 30,306 38,337 -21% 2,470,599 994,418 148%
administrative expenses 63,615 80,888 -21% 211,362 172,436 23%
Other operating expenses 160 21,046 -99% 37,964 189,015 -80%
Other operating income 13,827 9,502 46% 1,106,662 911,672 21%
Operating profit 658,588 289,864 127% 2,771,706 2,261,163 23%
Finance cost 711,372 6,270 11246% 2,051,678 1,902,760 8%
profit/loss before taxation -52,784 283,594 -119% 720,028 358,403 101%
profit/loss after taxation -102486 251132 -141% 289797 233022 24%
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Source: Company accounts
COURTESY: Economics and Finance Department, Institute of Business Administration, Karachi, prepared this analytical report for Business Recorder.
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