Pioneer Cement Limited

Pioneer Cement Limited (PIOC) was incorporated in 1986 and since has established itself as a mid-tier cement player in the industry. It is located in the Chenki district near Sargodha, Punjab supplying cement primarily to the northern zone of the country. The company was initially part of the Noon Group of Companies, a prominent business group with subsidiaries including Nurpur Foods, Noon Sugar Mills and Noon Pakistan but in 2009, it was sold out to Vision Holdings Middle East Limited (VHMEL).The latter bought 24.6 percent (49.1 million shares) of the company’s shares.

VHMEL now holds 47 percent of Pioneer’s shares as at June 2019. The rest of the shares are distributed amongst banks, DFIs, Modrabas, Mutual Funds, Insurance Companies and others. The public held nearly 22 percent of the company’s share.

The company commissioned its first production line in 1992 with a production capacity of 0.6 million tons annually later expanding it to 0.7 million tons annually in 2005. A second production line was added in 2006 with a capacity of 1.3 million tons annually. As at June 2019, the company had a production capacity of 1.995 million tons. With its new Greenfield plant in Jamshoro Sindh, Pioneer will add 10,000 tons per day of capacity to its existing capacity which would increase its market share. The plant is in the commissioning stage. This will provide the company much needed market access in markets in the south, as well as overseas.

Operational and financial performance

Pioneer has maintained nearly 2 million tons of capacity for the past several years, with a market share of 2-4 percent depending on demand. Its capacity utilization has grown from 51 percent to 78 percent between 2015 and 2017, keeping at that level of utilization until 2019 when utilization fell due to demand slowdown. The company’s utilization was also lower due to old plant and machineries which were upgraded during 2017 when the company introduced a new cement mill for its existing plants. Being in the north, nearly all of its cement is targeted to markets in that region. During peak domestic demand times when the government was in expansion mode and infrastructure spending was growing—the latest example of which is the 2016-2018 period—capacity utilization and market share grew accordingly.

Volumetric growth is also testament to this growing demand, however revenues are a function of pricing and how cooperative cement companies are in keeping prices stable. When expansions in the north starting coming during FY17, competition grew as companies were making excess cement and were racing to the market. This brought prices down. Over the past two years, prices have remained in fluctuation and this volatility has led to varying revenue growth. From FY15-16, revenue growth was 11 percent, which grew further to 13 percent between FY16 and FY17 but later had a downward trend. In FY18 and FY19, revenues fell by 5 percent and 4 percent respectively.

Meanwhile, input costs which are predominantly fuel related play a prominent role in how margins settle. Global coal prices, exchange rate and domestic fuel prices can have dramatic influence on costs. Gross margins grew to a phenomenal 43 percent in FY16, on the back of sold revenues and lower costs (rupee was at a higher place, coal prices were down). The company also installed a waste heat recovery unit that year which shielded it from rising power and energy costs and reduced dependence on expensive fuel. However, the tide turned after FY17. Margins came down from 42 percent in FY17 to 28 percent in FY18 as rupee started to weaken and coal prices headed north.

During FY19, margins worsened further to 22 percent. Production costs became too hot to handle as devaluation of the rupee hit the market hard making imported inputs expensive while local inflation ensured that all other inputs (such as paper and packing materials) were more expensive. The company also saw finance costs grow from 1 percent of revenue to 3 percent of revenue due to the interest rate hike.

Outlook

Despite challenges, Pioneer is in for the long haul. Its expansion is soon coming through, and with it, the company will have greater access to markets in the south zone—where competition is not that intense—and where the company can reach exporting markets overseas. Right now, Pioneer is limited to exporting markets cross border—Afghanistan and India—the latter of which has shut down all trade with Pakistan, and the former has become particularly jittery given it is sourcing Iranian cement for its growing construction needs.

However, the economy is in stabilization mode, which means government expenditure is low, business confidence is down and demand is under compression. Interest rates are high which has raised cost of borrowing while inflationary pressures and higher tax incidences have suppressed purchasing power. These factors do not bode well for construction demand. However, recent approvals of construction projects may recover demand a little. Meanwhile, once expansion comes in, Pioneer will be able to grow its exports. Though, it should be noted that exporting markets fetch lower margins for local cement suppliers due to competitive markets.

While coal prices are internationally at their lowest, rupee depreciation may balance out that advantage. Any further devaluation and continued inflationary pressures may insistently keep costs high. The company should focus on effective inventory management while expanding its access to greater markets as it hopes to grow market share going forward.