DGKC: Slow but steady?

Suppressed off take for cement company DG Khan Cement (PSX: DGKC) during FY22 was more than offset by improved price retention that led the top-line to a 29 percent growth during the year. But because of sustained overheads, increased costs of production and higher tax incidence, the company’s after-tax earnings declined by 20 percent, thus wrapping the year in single-digit profit margins.

Costs predominantly dependent on international coal prices, as well as energy and power tariffs remained high during the year. The company like other cement players switched to Afghan coal to cushion the blow from skyrocketing coal prices in the global markets. Nevertheless, other fuel and power put inflationary pressure on overall costs. As a result, margins remained at 18 percent.

The company’s administration and distribution together with other expenses remained at 6 percent of revenue along with finance costs at 6 percent of revenue. The company incurred a higher exchange loss on the import of coal due to currency devaluation which causes higher other expenses. All these put further pressure on earnings. Meanwhile, the company earned a substantial income from other sources—with “other income” component at 45 percent of before-tax earnings during FY22. This allowed before-tax earnings to grow 26 percent during the year. However, the effective tax rate after the imposition of super tax in Q4 at 51 percent of earnings (for full fiscal year) led to the decline in earnings from last year post-tax.

On the demand side, DGKC is exporting clinker overseas of which the company has stockpiles lying around from last year. Exports cross-border has been affected due to the slowdown in the Afghan market in the aftermath of US troops exit. Importers are struggling to make dollar payments for their imports.

Domestic demand for cement makers has been down due to high construction costs and an overall reduction in consumption of construction materials as commercial and home buyers have taken a step back. Development expenditure is also scarce. Building materials such as cement and steel have become expensive for new constructions to take-off fast. However, the rehabilitation of infrastructure, homes and communities after floods may inject new demand for cement in key areas. A large portion of this—and the extent of it—would depend on government’s ability to spend from its ever-tightening pockets. Nevertheless, DGKC is well-positioned to tap this demand from different regions as it has plants in two locations, one in the north in Chakwal and the other in the south in Hub.