Fecto Cement Limited (PSX: FECTC) was established as a public limited company in 1981 under the repealed Companies Act, 1913. It produces and sells Portland cement. As of June 2020, it has a cement production capacity of 869,400 metric tons and a clinker capacity of 828,000 metric tons at its plant located in Sangjani village, Islamabad.
As of June 30, 2020, over 75 percent of shares are owned by the company’s directors. Within this category, Mr. Muhammad Yasin Fecto holds the vast majority of shares. Over 13 percent of shares are held under the “others” category, followed by 8.4 percent in banks, DFIs, NBFCs, insurance, and modarabas. The remaining about over 3 percent shares were with the rest of the shareholder categories.
Historical operational performance
Fecto Cement has mostly seen a growing topline, except for the last three years, when it contracted consecutively between FY18 to FY20. Profit margins saw a gradual incline till FY16, which is when they reached a peak; since then, profit margins have followed a downward trend.
The overall dispatches for the cement industry in FY17 increased by 3.7 percent; for the company, the total dispatches registered a 4.75 percent raise, while revenue rose by a marginal 2 percent. With this, local dispatches actually grew by over 11 percent, but export dispatches saw a 22 percent contraction. This was mainly attributed to lesser exports to Afghanistan along with the border being closed for a considerable period. Production cost, on the other hand, saw a more than the corresponding rise, to almost 70 percent of revenue. This was due to a rise in coal prices in the international market. In addition, to the commencement of coal-based power plants, production was also higher; together these two factors put pressure on transportation costs, and also required a higher coal import. But the relatively higher other income sourced from mark up on bank deposits kept profits from declining significantly. Net margin was recorded at 14.8 percent, compared to 16.2 percent in FY16.
In FY18, industry dispatches registered a 13.8 percent growth, with the majority of this growth concentrated with local dispatches. For Fecto Cement, total dispatches rose by 2.6 percent; local dispatches were higher by 9 percent but were diluted by the 36 percent drop in export dispatches. The latter was due to lower exports to a prime export destination- Afghanistan. Despite a volumetric sales gain, sales revenue, in value terms fell by 4.4 percent. This was due to a decline in prices, coupled with an increase in the rate of Federal Excise Duty. To further aggravate the situation production cost jumped to 79 percent of revenue due to a number of factors- increase in coal prices, currency depreciation, a rise in diesel prices that increased the transportation cost of coal, and an increase in cement bag prices. Thus, the net margin shrunk to 9 percent for the year.
Growth in industry dispatches during FY19 was relatively subdued at over 2 percent, with local sales declining and export sales increasing; but export sales made a smaller share in the total pie. For the company, however, total dispatches reduced by close to 14 percent, with both, local and export dispatches decreasing by 14.4 percent and 7.2 percent, respectively. This translated into a 3.3 percent contraction in total revenue. Although prices improved, a lower demand due to a slowdown in economic activities kept sale volumes in check. Lower revenue, combined with a rise in production cost to over 87 percent, squeezed profitability for the year; gross margin stood at 12.5 percent. The rise in costs was attributed to a rise in coal prices, a rise in transportation expenses, and currency depreciation. Net margin, therefore, fell to its lowest thus far, at 1.9 percent.
In FY20, the company witnessed the highest drop in revenue, by almost 27 percent. In value terms, it fell from Rs 4.7 billion to Rs 3.46 billion. In volume terms, dispatches were lower by 6 percent. While local dispatches were lower by 7.5 percent, exports were up by 6 percent. Prices in the local market remained low as demand was also slow due to a slowdown in construction activities, excess capacity, and lockdown associated with the Covid-19 pandemic. With the drop in revenue, the company was unable to cover costs; therefore, the company incurred a gross loss of Rs 715 million for the first time, which grew to Rs 770 million in net loss, as further costs were incurred.
Quarterly results and future outlook
Revenue was higher by over 20 percent in the first quarter of FY21 year on year with volumes higher by 16 percent. This was mostly associated with the local sales as business activities resumed after lockdowns eased. Although production was lower than that in 1QFY20, it was still above 90 percent of revenue. Therefore, the company incurred a net loss of over Rs 39 million, versus Rs 53 million in 1QFY20.
The second quarter saw a similar trend, with revenue higher by almost 23 percent. Costs again were better than last year, but still exceeded 90 percent of revenue, leaving little room for absorption of other costs. Thus, the net loss was Rs 20 million, compared to Rs 246 million in 2QFY20. Third-quarter also saw revenue higher, by almost 74 percent. There was some improvement in production cost, at 92 percent. Higher costs have primarily been due to higher fuel and power costs. 3QFY21 saw a net profit of Rs 15 million.
While demand and industry activity has picked up as lockdowns eased and with the announcement of the construction package, costs continue to remain a challenge. However, the company is working on a 5 MW solar project that could reduce energy costs substantially in the future.