D.G. Khan Cement was incorporated in Pakistan in 1978. The Company is principally engaged in production and sale of Clinker, Ordinary Portland and Sulphate Resistant Cement. It has four cement plants, two plants located at Dera Ghazi Khan ('D.G. Khan'), one at Khairpur District, Chakwal ('Khairpur') and one at Hub District, Lasbela ('Hub').
From a review of company’s directors’ reports for FY2020 and 1Q 2021, it appears that the company faced pressure on sales side from declining sales due to COVID-19 lock downs and declining global cement prices while on cost side it faced pressure from inflation, currency devaluation, rising energy prices and high competition. Overall this resulted in lower gross profit which was unable to cover costs further down the income statement resulting in net loss for 2020 and first quarter of 2021. However, future assessment seems to be positive if pace of construction picked up in first quarter is maintained in light of growth in housing sector, work on dams and CPEC related projects. There is also expectation of increase in scope of CPEC investments, which can lead to sales growth.
Latest Results Review
When compared with 1Q of 2020, company did quite well in 1Q of 2021 and appears to be getting into a stride that may generate a net profit in FY2021 but it still depends on a lot of factors as discussed in the review of directors’ report.
Sales registered growth of 16% in 1Q 2021 on YOY basis. Company also recorded gross profit as compared to gross loss a year ago in same quarter. Even though company incurred loss in 1Q 2021, this loss is lower by 75% as compared to that incurred in 1Q 2020. Consequently both gross profit and net profit margins registered increase of 262% and 79% respectively on YOY basis.
Current ratio is up by 5% even though short term loans have increased by 24%. It should be noted that without short term financing, company’s cash levels would be negative as per its cash flow statement. Current ratio was maintained primarily through increase in levels of stores and spares, trade receivables and short term investments.
An area that may develop into a cause of concern is cash from operations. It declined by 34% on YOY basis even with increasing sales and improving margins. Share capital remained the same while total equity remained more or less at the same level as a year ago. Thus it can be assumed that long term financing was primarily carried out through long term loans, which showed an increase of 53%. Even with increase in both short term borrowings and long term finances, finance cost showed a decline of 39% on YOY basis.
Historical Results Review
It can be seen from the above chart that even though sales increased in 2019 and remained above 2016, ‘17 and ’18 levels in 2020 despite declining afterwards; net profit and gross margins were constantly falling with NP margin becoming negative in FY2020. This translates to costs spiraling out of control instead of sales being the issue. Consequently earning per share (EPS) also declined in 2019 and became negative in 2020. This is in accordance with company’s directors’ report that also indicates rising costs as a major factor for loss in FY2020. However, company is optimistic for the future and does not expect this trend to not continue in face of increasing demand due to various upcoming large scale government construction projects and expected economic recovery in 2021.
Constantly falling current ratio however, can prove more of a problem since most of this fall is due to increasing short term borrowings and running finance that the company took on to meet cash short falls. As the loan structure chart shows, short term borrowings have been constantly rising and are adding to increasing finance costs. With NP margin and EPS in the negative, these increasing finance costs can prove to be a hurdle for sustained future growth.