Kohat on thick ice

Kohat Cement (PSX: KOHC) is one of those rare companies that are small in size but can still fare a storm when it hits them with aplomb. Despite operating in the north zone of the country, in its nine months ending FY19, the company’s total dispatches grew by 3 percent while total industry sales remained stagnant. The 3 percent volumetric growth translated to an 18 percent increase in revenues in 9MFY19. The full-year growth number of 16 percent implies the company remained on solid ground the rest of the three months fetching substantially higher retention prices (9MFY19: up 15%) for its cement bags, than some of its peers.

In fact, its growth of the top-line is something that some of the more senior players could not achieve, especially in the north zone where domestic markets were particularly slowing down as austerity hit the economy. Government spending and private sector investment dissipated which vanquished a lot of the cement demand in key markets. Kohat managed to keep afloat, growing in both domestic and exporting markets.

The company did see costs increase higher relative to the revenue streams due to higher average fuel prices, though coal commodity in the international market averaged lower at $87 per ton during FY19 compared to $93 per ton during FY18.

However, despite lower coal prices, margins reduced due to expensive electricity and fuel prices while rupee depreciation also put pressure on the cost of imports.

Despite all that, the company was able to shield the drop in profits by demonstrably keeping all indirect expenditures at the same level as last year (5% of revenues), while finance costs actually reduced from 1 percent of revenue to a negligible number. The company has taken out long term finance facilities to finance the import, installation and civil works of additional grey cement line which is under progress. The loan facilities are at 3M Kibor+0.65 percent premium.

Because of controlled expenditure side, and a decent increase in revenue, the company’s before-tax profit fell by only 7 percent (after tax: 17%). Compared to bigger players like DGKC and MapleLeaf, both located in the north, Kohat’s margins decline to 27 percent from 32 percent is testament to its savvy financial management.

With coal prices heading south, some reprieve expected on development expenditure side (perhaps, with the launch of Naya Pakistan Housing Scheme), Kohat is not in any major danger.