News that Attock Cement plans to buy a stake in Al-Abbas Cement has attracted fresh activity in its stock at the local bourse.
Reportedly, the transaction will be executed at around Rs8 per share, which makes it feasible for Attock to acquire the small time cement maker Al-Abbas, rather than investing in a Greenfield project.
Desperate times have made this decision easier as supply glut in the domestic market has made it exceedingly difficult to maintain profit margins. Economies of scale seem to be the obvious motivation for the acquisition move, as Attocks production capacity would be enhanced to 2.7 million tons.
The proposed acquisition will help Attock to include second tier cement in its production mix, which is relatively cheaper than its current product. Likewise, the companys production capacity will also increase by 1.5 times since Attock cement has current production capacity of 6,000 tons per day while that of Al-Abbas stands at 3,000 tons per day.
Large export market is another driving force behind the move, as Attock is placed in the south, which gives it the advantage to access the overseas markets through an inexpensive sea route.
On the back of growth in exports, Attock Cement has performed well in past year and a half in sharp contrast to the industry.
This can be gauged from the fact that the companys ratio of sales revenue from exports grew to 29 percent in FY09, compared to 11 percent in the preceding year, while its earnings jumped to Rs20.69/share from Rs6.03/share during the same period.
"We have established strong brand equity in foreign markets and due to excess demand of our product and limited supply; some times we have to decline our export orders. Now if the acquisition goes successfully, we will be able to meet our foreign clients demands", says Irfan Amanullah, Chief Financial Officer of Attock Cement Limited.
With infrastructural activities picking up across developing economies, this seems to be the right time for Attock cement to invest in an expansion project.
The incentive behind this stance is closely linked to a series of actions previously taken by the industry, for instance, planning by Lucky and DG Khan Cement to expand manufacturing facility abroad, while those located in north were demanding inland freight subsidy.
Industry experts foresee more such acquisitions in the near future as consolidation phase in the sector is expected to stretch further given the shrinking margins and over supply conditions.