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Fecto Cement Limited (PSX: FECTC) was incorporated in Pakistan as a public limited company in 1981. The company is engaged in the manufacturing and sale of Portland cement.

Pattern of Shareholding

As of June 30, 2023, FECTC has a total of 50.16 million shares outstanding which are held by 1854 shareholders. The company’s directors have 75 percent stake in it followed by local individuals holding 10.97 percent of its shares. Banks, DFIs, NBFIs, Insurance and Modaraba Companies collectively hold 8.5 percent of FECTC’s shares while NIT & ICP account for 2.25 percent of shares. The remaining shares are held by other categories of shareholders.

Financial Performance (2019-23)

Followed by two years of decline in 2019 and 2020, FECTC’s topline took an upward flight thereafter. Conversely, its bottomline and margins continued to plunge until 2020 where FECTC posted net loss. The company couldn’t recover from net loss even in 2021, however, the magnitude of loss considerably lessened. In 2022, FECTC registered net profit only to fall again in the loss pit in 2023. Its margins also followed suit (see the graph of profitability ratios). The detailed performance review of each of the years under consideration is given below.

In 2019, FECTC’s topline plummeted by a marginal 3 percent year-on-year. This was the consequence of curtailed cement dispatches during the year which clocked in 682,612 tons, down 13.76 percent year-on-year. In 2019, the company made over 90 percent of its sales in the local market with export sales constituting only 9.7 percent of the overall sales mix. During the year, both local and export sales volume of the company fell by 14.41 percent and 7.21 percent respectively. This was the result of lower demand on account of sluggish economic activity. Cost of sales inched up by 7 percent year-on-year which was due to steep rise of coal prices in the international market which was further exacerbated by Pak Rupee depreciation. Moreover, high power cost, stevedoring and transportation cost of coal and higher prices of cement bags also drove up the overall cost of production. This culminated into 42 percent year-on-year drop in gross profit in 2019 with GP margin falling from 20.95 percent in 2018 to 12.54 percent in 2019. Despite inflationary pressure, FECTC was able to cut down its administrative expense by 2 percent year-on-year in 2019. This was achieved as the company incurred initial expenditure on new manufacturing plant in the previous year which was significantly reduced in 2019. Distribution expense also posted a marginal 4 percent uptick in 2019 primarily due to higher sales commission and depreciation charges incurred during the year. Other income fell by a massive 58 percent year-on-year in 2019 as the company as FECTC made a gain on the sale of its operating fixed assets in 2018 which it didn’t earn in 2019. Operating profit shrank by 77 percent year-on-year in 2019 with OP margin sliding from 12.3 percent in 2018 to 2.86 percent in 2019. FECTC had a very skimpy debt-to-equity ratio of around 1 percent as of June 2019, hence its finance cost accounted for a mere 0.11 of its topline. FECTC’s finance cost grew by 65 percent year-on-year in 2019 due to higher discount rate. Its bottomline witnessed a drastic 80 percent year-on-year slippage in 2019 to clock in at Rs.88.975 million with EPS of Rs.1.77 versus Rs.8.81 in 2018. NP margin also plummeted from 9.01 percent in 2018 to 1.88 percent in 2019.

In 2020, FECTC’s topline further diminished by 27 percent year-on-year in 2020 as cement dispatches eroded by 6.03 percent year-on-year to clock in at 641,450 tons due to lackluster construction activities and the imposition of lockdown in the latter half of the year on account of COVID-19 . Geographical breakup of sales reveals that local dispatches shrank by 7.5 percent in 2020 to clock in at 571,106 tons. Conversely, export dispatches registered 6.11 percent escalation in 2020 to stand at 70,344 tons – 10.96 percent of the total sales mix. Cost of sales ticked up by 1 percent year-on-year in 2020 due to Pak Rupee depreciation, high power charges, withdrawal of subsidy on industrial consumers, high transportation cost and stevedoring charges. All these factors reversed the positive impact of a retreat of coal prices from its peak due to global slowdown. FECTC registered a gross loss of Rs.715.44 million in 2020. Due to abridged operations on account of the reasons explained above, the company was able to trim down its administrative and distribution expense by 17 percent and 54 percent respectively in 2020. Operating loss was recorded at Rs.1005.67 million in 2020. To add to ado, there was a sweeping 431 percent year-on-year spike in finance cost in 2020. This was because of a significant escalation in company’s short-term borrowings which primarily included running finance and export re-finance. Furthermore, the company also availed SBP Re-finance scheme for the payment of salaries and wages in 2020. This took FECTC’s debt-to-equity ratio to 4 percent in 2020. The company posted a net loss of Rs.770.071 million in 2020 with loss per share of Rs.15.35.

Since 2021, FECTC’s net sales began a journey of growth. In 2021, its net sales rebounded by 43 percent year-on-year on account of 13.97 percent enhancement in its dispatches which stood at 731.069 tons. Moreover, prices which remained depressed in 2020 also recoiled during 2021 on the back of resumption of construction activities as the government initiated various stimulus packages. FECTC’s local sales volume grew by 18.43 percent year-on-year in 2021 to clock in at 676,337 tons. However, export dispatches took a 22.19 percent slide to stand at 54,732 tons in 2021. Cost of sales surged by 12 percent year-on-year in 2021, however, upward revision in pricing resulted in GP margin of 5.8 percent and gross profit of Rs.287.5 million. Administrative and distribution expense also eroded by 5 percent and 7 percent respectively resulting in operating profit of Rs.12.43 million and OP margin of 0.25 percent. Despite monetary easing taking place during the year, FECTC’s finance cost surged by 165 percent year-on-year in 2021 as the company availed SBP finance scheme for renewable energy and also obtained additional running finance. Escalation in company’s outstanding loans is also evident in a steep hike in its debt-to-equity ratio during the year (see the graph of debt-to-equity ratio & finance cost). FECTC posted net loss of Rs.67.287 million in 2021, down 91 percent year-on-year. Loss per share was recorded at Rs.1.34 in 2021.

FECTC’s topline continued to grow in 2022, however, unlike 2021; the topline growth didn’t come on the heels on improved sales volume rather it was the result of upward price revision. In 2022, FECTC’s topline mounted by 37 percent year-on-year despite the fact that its sales volume tumbled by 2.52 percent to clock in at 712,644 tons. While local sales volume posted a marginal 1.44 percent rise to stand at 686,077 tons, export sales volume declined by a massive 51.5 percent due to disturbance at Afghan border and lesser demand from Afghanistan market. Higher cement prices can also be justified by the fact that the company attained 204 percent rise in its gross profit in 2022 with GP margin climbing up to 12.9 percent. Administrative expense spiked by 15 percent year-on-year in 2022 mainly due to higher payroll expense. Conversely, as sales volume fell, distribution expense slumped by 8 percent year-on-year. Scrap sales made during the year coupled with amortization of deferred government grant drove up other income by 88 percent in 2022. As a consequence, operation profit magnified by 4598 percent in 2022 with OP margin flying up to 8.62 percent. Finance cost soared by 105 percent in 2022 due to higher discount rate coupled with increased long-term borrowings as the company availed temporary economic refinance facility (TERF) during the year along with refinance scheme for payment of wages and renewable energy financing scheme. Increased borrowings produced their impact on the debt-to-equity ratio which sky-rocketed to 26 percent in 2022. Elevated finance cost coupled with increased taxation greatly diluted the bottomline growth. However, FECTC was able to record net profit of Rs.286.703 million in 2022 with EPS of Rs.5.72. NP margin stood at 4.23 percent in 2022.

The topline continued to grow in 2023 to the tune of 28 percent. Just like the previous year, the topline growth was the consequence of upward revision in the prices of cement despite the fact that cement dispatches took 9.92 percent slide to clock in at 641,956 tons in 2023. This came on the back of a decline of 9.65 percent and 16.69 percent respectively in the local and export sales volume of the company (see the graph of cement dispatches and net revenue). Economic and political uncertainty in the country as well as devastating floods took its toll on the local demand while low demand from Afghanistan and border nuisances kept export sales in check. Cost of sales hiked by a staggering 42 percent in 2023 on the back of sky-rocketed prices of coal, diesel and electricity coupled with Pak Rupee depreciation. Amid depressed demand, the company couldn’t pass on the impact of cost hike completely to its consumer which resulted in 64 percent erosion of gross profit in 2023 with GP margin dwindling to 3.6 percent. Administrative expense soared by 17 percent year-on-year in 2023 due to higher payroll expense and depreciation. Increased salaries and wages to account for high inflation also drove up the distribution expense by 14 percent year-on-year in 2023. The company sold off its operating assets at a gain in 2023 which resulted in 188 percent rise in its other income in 2023. Yet, it was unable to give any impetus to its operating profit which compressed by 78 percent year-on-year in 2023 with OP margin marching down to 1.5 percent. Finance cost mounted by 95 percent year-on-year in 2023 due to enormous borrowings particularly running finance. FECTC recorded net loss of Rs.133.245 million in 2023 with loss per share of Rs.2.66.

Recent Performance (1QFY24)

After two prolonged years of stressed volumes, local cement industry showed signs of life in 2024 with over 23 percent rise in the industry-wide dispatches in 1QFY24 to clock in at 11.88 million tons. Cement industry local sales stood at 10.13 million tons with 17.81 percent year-on-year growth while export sales stood at 1.75 million tons with 71.85 percent year-on-year growth in 1QFY24. This was due to uptick in construction activities during the period and also low-base effect as the country suffered heavy floods during the same period last year.

In line with the industry trend, FECTC, net sales posted a stunning 48 percent year-on-year growth on the back of 32.64 percent increase in its sales volume. This, however, came on the back of improvement in local sales volume during the period while export sales volume continued to drop in 1QFY24. Cement prices also improved during the period resulting in 276 percent escalation in gross profit and GP margin burgeoning from 5.10 percent in 1QFY23 to 12.94 percent in 1QFY24. Increased production activities as well as improved sales volume also drove the administrative and distortion expense by 31 percent and 23 percent respectively in 1QFY24. Operating profit improved by 1448 percent in 1QFY24 with OP margin rising up from 0.9 percent in 1QFY23 to 9.37 percent in 1QFY24. The company also kept a check on its borrowing during the period resulting in 12 percent rise in finance cost despite multiple rounds of monetary tightening. FECTC was able to post net profit of Rs.89.253 million in 1QFY24 as against net loss of Rs.60.837 million during the same period last year. EPS stood at Rs.1.78 in 1QFY24 versus loss per share of Rs.1.21 in 1QFY23.

Future Outlook

Ease on import restrictions, stability in the commodity prices and strengthening Pak Rupee will bode well for the cement industry. Revival of economic activities will also buttress demand. However, high electricity charges and finance cost will continue to put pressure on margins and profitability.

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