Kohat Cement Company Limited

Kohat Cement (PSX: KOHC) is one of the stronger cement manufacturers remaining consistent in its performance while being a mid-sized player that has been expanding capacity slowly but surely. KOHC was incorporated in 1980 as State Cement Company of Pakistan with a capacity of about 30,000 tons annually. In 1992, the government privatized the company along with several other cement companies. Kohat was bought by private investors and only two years later, it went public. In 2014, it became a subsidiary of ANS Capital.

The holding company owns over 55 percent of the company’s shares. The company’s shareholdings have not seen many changes over the years. The directors, CEO, their spouses and minor children own 17 percent shares within which, majority is owned by Mrs. Hijab Tariq. Close to 14 percent shares are held in mutual funds, followed by nearly 11 percent shares held by the local general public. The remaining roughly 3 percent shares are with the rest of the shareholder categories.

Kohat has been expanded capacities now operating with four production lines at a combined capacity of 135,000 tons of white clinker and 4.8 million tons of grey clinker.In FY21, the company contributed about 7 percent to the industry sales which was made possible with the fourth production line becoming fully operational. The company has reach into the international market but exports—given present circumstances—have been pushed into the backburner.

Financial and operational performance

Kohat is one of the few plants in Pakistan that manufactures white cement which gives Kohat an opportunity to enter new diversified markets, though the capacity for the plant is limited and has thus far been underutilized.In grey cement; Kohat’s growth has been consistent with dispatches growing steadily along with capacity. Capacity utilization grew from a little over 50 percent during FY11 to 76 percent in FY16 and then 85 percent in FY19, falling below 70 percent after the new capacity came online. In actual, the company sold more that year and performed tremendously in terms of revenues and margins.

The revenue growth can be attributed to strong domestic demand and growing average retention. Exports have taken a supportive role in keeping utilization at optimum levels. Since prices are better in the domestic market, exports are only used as a sales mix tool to optimize margins. When domestic demand is very robust, there isn’t much need to export. Kohat cement is located in the north and primarily caters to the domestic markets up north and cross-border to Afghanistan. Lack of proximity to the port makes Kohat’s export potential largely limited. As a result, Kohat’s exports depend on how accessible the Afghan market is to Pakistan, and Kohat’s cement.

Exports share has been falling over the last couple of years, not only because of improving domestic demand but the expanding competition in the Afghan market for cement. There are cheaper alternatives available to Afghan builders and constructors such as Iranian cement. Pakistan has been losing market share in the Afghan market in cement much because of Iran’s cheaper commodity sent to buyers by road.

The company’s margins depend heavily on international prices for coal, and other fuels, freight rates and rupee’s parity with dollar. Naturally, when rupee depreciates against the greenback, imported inputs such as coal which are used in ample quantities become affected affecting margins. If the market’s demand is low, there is more price competition which further lowers margins.

Kohat’s margins grew to 46 percent by FY16 making it a worthy contender within the industry, given its fairly medium-sized plant and little presence in exporting markets. Domestic market that year was extremely excitable, costs were low, rupee was stronger against dollar and Kohat grasped onto the opportunities it was dealt. Costs per ton for FY16 were the lowest ever for Kohat that maximized the gap between revenue and costs (per ton) the widest yet. That is what took margins at near 50 percent.

Next year, domestic demand began to shrink, many capacity expansions came through that led to greater supply than demand leading to price competition, all the while experiencing the depreciation of the rupee.Costs such as electricity prices, packing material prices together with devaluation was knocking down on margins. Kohat’s topline continued to grow but so did the costs that led to margins slipping.

FY20 was perhaps one of the worst years for the company (as well as the industry) in recent history where topline tanked, prices were sticking downwards as the world was hit with the pandemic and pandemic related restrictions. That year, much like the industry, the company incurred negative earnings for the first time since FY10. During FY21, revenues improved as government induced demand in the construction industry through the construction amnesty and PSDP spendings. Hydropower plants under CPEC were also going into construction during the year which boosted demand. Earnings were back with a bang! It was running a new production line and demand was better and improved which reflected in the decent surge in dispatches despite exports share dropping to a mere 5 percent.

The company has minimal overheads along with finance costs. By FY21, combined indirect expenses were at about 5 percent. Even though, finance costs are a function of interest rates and its movement, the company has been able to keep finance costs to 2 percent of revenue during 9MFY22.

Future outlook

FY22 thus far has been a mixed bag of emotions. On the one hand, demand has been healthy against all odds. Rising inflation and costs of construction was turning off a large number of builders and constructors away from the market but domestic demand for cement has persevered. Exports have fallen given the political upheaval unfolding in the neighboring land. Meanwhile, coal prices in the international markets have been rivalling with their historic peaks in the after math of covid restrictions lifting and Russia-Ukraine war hitting the world like a pile of bricks.

Together with depreciation of rupee, imported coal became too expensive to bear. However, Kohat and the industry like it were able to turn out a profit this fiscal year even as prices grew dramatically for end-users. This was possible through shifting to more affordable Afghan coal shielding the company’s financial stability by shifting to a cheaper source. FY22 therefore was unique in that its earnings were driven almost entirely by optimizing on costs and growing average retention amid somber growth in dispatches. In 9M, the company saw only 1 percent growth in domestic sales and a drop of 97 percent in export sales. Even then, Kohat’s earnings expanded 83 percent compared to 9MFY20. Yes, FY20 was a poor performing year but the turnaround given present circumstances has been promising, even if the same pattern follows the rest of the industry too.

The outlook on the industry in general during FY23 looks bleak as demand is expected to remain low in both domestic and foreign markets and rupee will remain under pressure as well. The only saving grace is coal coming from across the border which is also slowly becoming more expensive. Kohat is undergoing a new expansion in Khushab that will be a Greenfield facility and expand the company’s capacity even further which will be beneficial once tough times are past.