Kohat Cement

Background

Kohat Cement (PSX: KOHC) is one of the mid-tier cement manufacturers within the industry and has been in the business of manufacturing cement since 1980 when it was first incorporated. The company was incorporated as State Cement Company of Pakistan with a capacity of 1000 tons per day (approximately 30,000 tons annually) but later in 1992, the government privatized it along with a handful of other cement companies and the company was bought by private investors. The company went public in 1994.
Subsequent to privatization, Kohat went through a series of expansions. The first of which took the 1,000 tons per day to 1,800 tons per day. In 2005, a cement line for white cement was brought in with a capacity of 450 tons per day. Two years later, the company added a new cement line with a capacity of 6,700 tons per day which comes around to 2 million tons annually. Later a standby power plant of 22.4 MW capacity was also established to meet electricity needs of the plants
In the outgoing year FY17, Kohat dispatched around 2.08 million tons of cement (FY16: 2.09 million tons) including exports of 0.119 million tons (FY16: 0.203 million tons). This put the company's grey capacity utilization to 76.25 percent (FY16: 75.58%) given the annual capacity of 2.8 million tons of grey cement and 150,000 tons of white cement. While the company does export to markets like Afghanistan, the company's primary markets are local northern regions in the country. With current capacity, the company had about 6 percent of the market share prior to the four new expansions that have shown up over the past few months in the industry. However, Kohat itself is also not behind and is planning an expansion in capacity of its own.
Ownership and expansions
Kohat Cement is currently owned by a private company called ANS Capital (Private) Limited that has controlling 55 percent of the company's total paid-up share capital. As at June 2017, more than 16 percent of the shares were held by Mrs. Hijab Tariq and nearly 12 percent were held by the general public. Banks, insurance companies, mutual funds also hold nominal shares in the company. The shareholding structure has not changed a lot over the years.
As mentioned above, the company is expanding its grey cement production line of 7800 tons per day (approximately 2.3 million tons annually). Along with the new capacity, Kohat is also installing a waste heat recovery plant to meet some of the energy needs of the company while a cement mill was also added. In fact, the same has already been bought by German engineering company, Loesche expected to produce 105 tons per hour of Portland cement. According to a PSX notice, the plant has already started commercial production in April 2018.
Operational and financial performance
Kohat may be one of the lesser known companies in the cement industry where DG Khan, Lucky and Bestway take the lead but the company boasts the most growth over the years, expanding capacities and improving the efficiency of the plants as it went. It is also one of the few plants in the country that manufacture white cement.
The company has moved seamlessly with the demand. As cement demand grew, the company captured a greater market share as it went. Its capacity utilization in fact, improved from 50-60 percent to over 75 percent. The company saw a 77 percent utilization during FY16 and FY17. With demand improving, it has also managed to improve capacity utilization, going from 50-60 percent to upwards of 75 percent. The highest capacity utilization came in during FY16 and FY17 at 77 percent. The company associates some of its earlier lower capacity utilization to underperformance of mills or underutilization during maintenance but that seems to have been dealt with quite well over the years. In fact, in the latest nine month financials, Kohat has a capacity utilization of 83 percent against 76 percent in 9MFY17. This is not to say the company did incredibly well during the period, but more of that in the section below.
Because of quick revision in prices by cement manufacturers in times of high demand, the company has taken strides in terms of its top-line having grown from a Rs 3.6 billion company to Rs 14 billion company in FY16. Sales per unit for Kohat doubled between FY10 and FY17. A good control over its costs of production has allowed Kohat to bypass some of its peers by taking margins up to 46 percent during FY16 similar to the likes of market leader Lucky. The company saw more efficiency over time and better management of its capacity. A waste heat recovery plant with a capacity of 15MW went online in April 2016 that has all contributed to a slash in costs.
However, in a lot of ways, FY17 was a tricky year for all cement manufacturers involved.
While demand was growing, international coal prices were also growing. Meanwhile, due to fast reclining exports, total sales may have been slightly less during the previous year. Exports to Afghanistan had slowed down as Iran took over some of the market share with its cheaper cement while South Africa had imposed an anti- dumping duty that led to a fall in demand in that market as well for the Pakistani cement industry.
For Kohat in fact, the export share in total sales fell from the peak of 35 percent during FY11 down to 6 percent during FY17. While domestic demand allowed sales to continue growing, and let the sector reach its highest utilization yet, exports declining between FY16 and FY17 did slightly hurt Kohat's revenue streams. The worse, however was yet to come.
Outlook on cement industry and Kohat cement
The current fiscal year's performance so far for Kohat witnessed a dramatic fall in margins. The bottom-line took a massive hit as well between 9MFY18 and the period the prior year. Multiple factors contributed to this performance but it is evident that Kohat wasn't the only one. The storm hit all the cement manufacturers, some perhaps more than others.
Kohat saw a growth in cement dispatches by 9 percent-this translated to a revenue decrease of 3 percent, primarily due to the fluctuating retention prices. As Cherat's expansion came through, and exporting demand slowed down, retention prices in the north slid down as well. Companies had to fight to retain market share and started selling their cement at discounted prices to clear excess volumes. Any time, the industry will supply more than demand, prices will fall.
The fall in margins however was even more troublesome. Margins fell from 45 percent to 34 percent between 9MFY18 and 9MFY17. During the period, international prices for coal which is a major raw material grew by 9 percent. The devaluation of rupee against dollar in 9MFY18 was 6 percent year on year. Expensive imports together with lower selling price led to shrinking margins. The company did double down on its indirect costs that fell a bit-from 5.3 percent of revenues to 4.8 percent in 9MFY18. Net profits however, fell by 26 percent.
There is no doubt that housing construction and infrastructure demand in local markets is tremendous. Currently, the industry is selling at a growth of 15 percent year on year, counting the fact that exports had been falling in the better part of the fiscal year. Recently, they have started to see some improvement but the verdict is still out on whether exporting markets will actually recover for a longer period. That said, local demand can for the time being still offset any decline in exports.
The sector is expanding fast-and is expected to reach 72 million tons by FY20, from the current 45 million tons. In the past few months, Lucky, DG Khan Cement, Attock and Bestway have already announced the operations of their new plants; and a handful of others are yet to come, of which Kohat is one. In that sense, Kohat's market share is secure. It just has to keep selling the way it is.
However, when capacity becomes idle with demand unable to keep up with the expansions, prices will take a tumble.
The industry will have an uncertain next 2-3 years as this is a transition period the sector has to adjust to. Rupee depreciation that is continuing its downward spiral and coal prices escalation will continue to hurt margins going forward. On the demand side, Kohat is well-placed to ride the wave of construction growth. Some additional efforts to reach out to exporting markets that remain unexplored could be an exercise that will pay dividends in the future.

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Pattern of Shareholding (as on July 30, 2017)
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Categories of Shareholders                          Share
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Directors and their spouse(s) and minor children    0.26%
Associated Companies                                55.1%
ANS Capital (Pvt.) Limited                         55.00%
Kohat Cement Educational Trust                      0.08%
NIT & ICP                                           0.12%
Shareholder holding 5% and more (other than abov   16.74%
Mrs. Hijab Tariq                                   16.74%
Modarabas                                           0.00%
Mutual Funds                                        7.53%
Insurance Companies                                 4.24%
Others                                              1.64%
Banks, development finance institutions,            2.60%
non-banking finance companies etc
General Public                                     11.79%
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Total                                                100%
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Source: Company accounts

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Kohat Cement Nine Months 9MFY18
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                               9MFY18      9MFY17     YoY
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Sales                       10,384.65   10,657.62     -3%
Cost of Sales                6,869.83    5,841.92     18%
Gross Profit                 3,514.82    4,815.70    -27%
Administrative                  94.70      102.42     -8%
Distribution costs             150.75      120.84     25%
Other operating expenses       254.68      336.99    -24%
Finance cost                   267.41      302.56    -12%
Other income                    49.93       66.91    -25%
Profit before tax            3,232.17    4,491.10    -28%
Taxation                       936.15    1,369.75    -32%
Net profit for the period    2,296.02    3,121.35    -26%
Earnings per share (Rs)         14.86       20.20    -26%
GP margin                         34%         45%    -25%
NP margin                         22%         29%    -25%
Production (million tons)        1.74        1.61      9%
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Source: Company accounts