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Fecto Cement Limited (PSX: FECTC) was set up in 1981 as a public limited company. It produces and sells ordinary Portland cement. The company’s plant is located at Sangjani village, Islamabad, with cement production capacity of 869,400 metric tons and clinker capacity of 828,000 metric tons.

Shareholding pattern

Over 75 percent of shares of Fecto Cement is with the directors as of June 30, 2020. Within this category, Mr. Mohammed Yasin Fecto, the CEO of the company, holds nearly all the shares. Some 8.5 percent shares are held by the banks, DFIs, NBFCs, insurance and modarabas, followed by 13 percent held under “others”. The remaining close to 4 percent shares are owned by the rest of the shareholder categories.

Historical operational performance

Fecto Cement witnessed a rising topline up until FY17; FY18 and onwards it has seen a continuous decline in its sales revenue. Profitability, too, peaked in FY16 after which it has been on a gradual decline.

There was marginal growth in sales revenue of nearly 2 percent during FY17. Local dispatches for the company grew by a little over 11 percent whereas exports dispatches registered a 22 percent decline. The latter was due to lower exports to Afghanistan due to slow demand and border remaining closed for a significant period of time. Along with higher production, cost of production also increased, to nearly 70 percent of revenue. Coal prices, that had remained stable, started increasing towards the end of the first half of FY17. This also put pressure on transportation charges. The overall fuel and power cost rose by 25 percent. With minute changes in other aspects of the financials, net margin reduced to almost 15 percent.

In FY18, the overall dispatches for the cement industry grew by 13.8 percent, whereas the company saw an increase of 2.58 percent in its total dispatches. Of this, local dispatches saw a 9.11 percent increase, and export dispatches saw a notable reduction of 36 percent. The latter was again attributed to lower exports to Afghanistan, one of the prime destinations for Pakistani cement. Despite an overall increase in dispatches of 2.58 percent, revenue was unmatched, as it saw a decline of 4.4 percent. This was due to decline in prices, in addition to increase in rate of Federal Excise Duty by the government.

Cost of production during FY18 went up significantly year on year, to 79 percent of revenue. This was due to a combination of factors: increase in coal prices internationally, currency depreciation, and transportation cost of coal due to increase in diesel prices; last but not the least, increase in cement bag prices as well. Although other income provided some support to bottomline, but it could not offset the increase in costs. Thus, net margin further fell to 9 percent.

Fecto Cement saw another year of contracting topline during FY19, by 3.3 percent. The total dispatches for the cement industry grew by 2.15 percent, largely supported by the 37.7 percent rise in export dispatches, while local dispatches saw a contraction of close to 2 percent. For the company, too, local dispatches were lower by 14.4 percent. But export dispatches were also lower by 7.2 percent. The reason for lower local dispatches was lesser demand as a result of a slowdown in economic activities. While export dispatches were lower, revenue from exports was up by 14.55 percent due to better prices currency depreciation that led to higher retention one exports. However, cost of production continued to squeeze profitability, consuming 87.5 percent of revenue. This was mainly due to increase in coal prices internationally, further aggravated by currency depreciation; coal cost per ton of clinker increased by Rs 603 per ton. Thus, the effect on gross margin also trickled down to the bottomline, with net margin recorded at close to 2 percent.

During FY20, the company saw the highest decline in sales revenue by almost 27 percent. While local dispatches for the company fell by 7.5 percent, export dispatches actually saw an incline of 6 percent. For the industry also the trend was similar. Revenue from local dispatches was lower due to lower prices, combined with lower volumes. This was attributed to slowdown in construction activities as well as excess capacity. On the other hand, currency depreciation had a positive effect on retention on exports. Cost of production, however, was much higher, that it resulted in a gross loss. power expense was higher as there was an increase of Rs 5.53 per unit of electricity. Thus, net margin fell to its lowest of a negative 22 percent.

Quarterly results and future outlook

During 1QFY21, topline increased by 20.5 percent; local dispatches were nearly 31 percent higher year on year while export dispatches witnessed a 58 percent reduction. The increase in local dispatches was due to reopening of the economic activities after the lock down imposed towards the end of the third quarter of FY20. This also led to an improvement of prices. Exports were lower due to border closure; the situation only improved towards the end of 1QFY21. While power cost was higher, stability in coal prices offered some cushion. Moreover, increase in sales volumes as well as prices allowed for cost of production to be lower year on year at 94 percent of revenue. Although it was better than the same period last year, it was still high, leading to a net loss of 39 million- lower than Rs 53 million in 1QFY20.

So, while demand has been generated post lock down, in addition to the construction package that would also help to stimulate demand, the company foresees growth being hampered for the cement industry due to excess capacity and increasing cost of energy and inflation.

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