Power Cement Limited was established as a private limited company on 1 December 1981 and was converted into a Public Limited Company on 9 July 1987. The Company is also listed on Pakistan Stock Exchange. The Company’s principal activity is manufacturing, selling and marketing of cement. The company operates under Arif Habib Group even though it has no holding or subsidiary company.
From a review of latest result for 1Q 2021 and historical annual results for last 5 years, it appears that the company is still expanding. Company’s directors’ report for 1Q 2021 also attributes increased capacity as one of the primary factors contributing towards the astounding increase of 459% in sales in 1Q 2021 on YOY basis. Despite this, the company incurred net loss in 1Q 2021 and in FY2020. Possible reasons for this will be discussed later. Company expects future sales to increase further based on expectations of increased demand in post COVID-19 economy due to various housing and construction schemes announced by the Government.
Latest Results Review
In 1Q 2021, effects of expansion can be seen when compared to corresponding quarter of 2020 financial year. Sales have increased with increased production from expanded capacity resulting in positive gross profit and improved GP margin on account of better cost control than previous year. Administration and distribution expenses have also correspondingly gone up as a result of expansion in capacity and sales. Company however incurred a loss mainly due to mark up on long term finances. Company expects this to come down in the future. This loss is also the primary reason for negative cash flow from operations.
Current ratio has fallen by 41% primarily due to increase in trade & other payables account and short term borrowings. Trade and other payables increase seems to be the result of additional working capital requirements due to expansion.
Company also incorporated cumulative preference shares into its paid up capital in this quarter. These are convertible into ordinary shares after one year. Unappropriated profit is in negative primarily due to loss incurred in FY2020, which will be discussed in the next section.
Overall the company is in expansion phase and performance in coming quarters will show how that plays out. Much depends on working capital management through increased sales to bring that operating cash flow in black.
Historical Results Review
First thing to note in the balance sheet is the steady increase in fixed assets indicating company’s continuous expansion. This expansion has been carried out through both equity and loan financing. Ordinary share capital increased from almost 3.57 billion rupees to 10.6 billion rupees in 2018 while long term financing has been steadily increasing in congruence with fixed assets as indicated by the above chart.
Loan structure of the company has a higher proportion of long term loans than short term loans. Finance cost took a jump in 2020. This was the primary factor that contributed to loss incurred in FY2020. In FY2020, current portion of long term financing increased from around Rs. 176 million in 2019 to Rs. 1.65 billion. This could be the reason behind this extraordinary increase in finance cost in FY2020.
Company’s sales fell in 2019 but recovered to some extent in 2020 even under COVID-19 economy. However, company incurred a gross loss in 2020. According to directors’ report, this loss was due to load restriction on trucks, increased fuel and power costs. Also company’s clinker production plant started its trial production only in mid of 2020 and this trial continued till end of FY2020. As result full effect of that expansion was not reflected in that year. Net profit margin became negative due to increased finance cost and associated reasons as discussed above. Things to look for in coming quarters are company’s ability to translate increased expansion into sales and more efficient cost control. Finance cost is also a factor, which ate up quite a chunk of profits in 2020.
Even though, company has been able to meet its financial obligations and appears to be in a position to do so in the future, falling current ratio due to increasing short term loans and trade payables as a result of increased working capital requirements is also to be looked at in coming quarters and in FY2021.