Fauji Cement Company Limited

Incorporated in 1992, Fauji Cement Company ranks as one of the prominent names in the cement industry of Pakistan. The company is headquartered in Rawalpindi and operates cement plants at Jhang Bahtar, Tehsil Fateh Jang, District Attock in the province of Punjab. Fauji Cement runs two lines of cement plants, one for FLS Denmark and the other for POLYSIUS Germany.
These plants have a total annual capacity of producing 3.3 million tons of cement. The company has also initiated a Waste Heat Recovery Plant that is aimed at achieving 12MW power, that is expected to bring the power costs down and hence leading to improvement in margins.
Industry Performance (July-November 2014): Industry's dispatches have been on a growing trend. During July-November 2014, total cement dispatches clocked in at 13.9 million tons - a decent rise of 6 percent year-on-year. Growing dispatches is the outcome of strong cement demand in domestic market. Thanks to private sector housing schemes and an increase in PSDP utilisation levels. During the period, local dispatches grew by 9 percent year-on-year.
On the flipside, the export situation is bleak. During 5MFY15, exports contracted by 2 percent year-on-year. Subdued demand from Afghanistan and the influx of low-cost Iranian cement are known to be the reasons behind muted exports growth. Here, the report on dumping of Pakistani cement in South Africa has sparked negative sentiments among industry players. This carry the risk of hampering Pakistani exports further.
Financial Performance FY14: Fauji's performance has gained significant strength over time and the improvement in financials is written all over its books. In FY14, profitability and sales touched the highest levels of Rs 2.6 billion and Rs 17.5 billion respectively. Dispatches during the year stood at 2,479,178 MT, depicting a decline of 0.85 percent compared to the preceding year. Hence, increase in cement prices seems to have perked top line growth which grew by 9.8 percent year-on-year in FY14. Though, this remains the lowest growth levels over the past four years.
Cost side seems to be in control as gross margins surged by 300bps to 35 percent during the year. This is particularly the outcome of sliding international coal prices - the key raw material for cement production. Capacity utilisation inched down a tad from 72.8 percent in FY13 to 72.2 in FY14.
With improvement in profitability, increased cash flows have enabled the firm to reduce its debt burden. This is evident as the debt to equity ratio that touched its peak of 0.57 in FY10, dropped significantly to 0.33 in FY14. With declining levels of debt, diminishing financial charges have just been the payback. In FY14, financial charges dropped heavily by Rs 470 billion - a decline of 31 percent year-on-year. Moreover, the recent monetary easing has become a silver lining for leveraged cement companies like Fauji Cement. In this context, financial charges in coming years are likely to stay on the lower side, thus comforting the bottom line further. Consequently, bottom line clocked in at Rs 2.6 billion, up by a healthy 25 percent year-on-year in FY14. By the same token, net margin also improved by 200 bps to 15 percent during the year.
Financial Performance 1QFY15: During the quarter ended September 2014, top line grew by a decent 8 percent year-on-year as it clocked in at Rs 4.17 billion. This growth is attributable to strong local dispatches coupled with expansion in retention prices, where local dispatches rose by nearly 5 percent, exports sank by 10.9 percent against the backdrop of subdued cement demand from Afghanistan.
Fall in international coal prices couldn't save Fauji Cement's gross margin this time which dropped 100 bps during the quarter. Referring to company's director report, higher prices of fuel, electricity and packaging remained the primary culprits of hampering the margins. Capacity utilisation during the quarter stood at 68 percent as compared to 67 percent in the corresponding period last year. Owing to lower debt burden, financial charges continued its downward trajectory during the period. Hence profitability posted a modest growth of 3 percent year-on-year to Rs 602 million in 1QFY15.
Going ahead: For now, all looks well for Fauji Cement. The analyst community anticipates PSDP utilisation levels to rise further. This coupled with the progress on scheduled construction projects is likely to boost local demand for cement.
With the firm's capacity utilisation standing at 68 percent as of September 2014, the company seems well adjusted to capitalise on rising local demand. Besides, cost efficiencies and better margins are likely as the work on installation of waste heat recovery plant comes to an end. By way of strong cash flows, debt burden may go down further thus boosting its profitability. SBP's monetary easy stance has also come as an added perk for the company. The only blot for an otherwise clean fate for FCCL at this stage seems to be the pressure on exports owing to dampened demand from Afghanistan. Here, exploring other export markets to reduce reliance on Afghanistan seems imperative.

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Fauji Cement Company Limited

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Rs (mn)                     FY13         FY14      1QFY15

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Sales                     15,967       17,532       4,174

Cost of Sales            (10,887)     (11,448)    (2,842)

Gross Profit               5,080        6,084       1,332

Distribution expenses       (144)        (125)       (35)

Administrative expenses     (205)        (226)       (67)

Other operating expenses    (228)        (333)       (65)

Finance cost              (1,512)      (1,042)      (330)

Other income                  95          152          45

Profit before taxation     3,086        4,510         880

Taxation                    (988)      (1,883)      (278)

Profit after taxation      2,098        2,627         602

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