Cement:- ATTOCK CEMENT PAKISTAN LIMITED - Analysis of Financial Statements
Attock Cement Pakistan Limited (ACPL) was incorporated in 1981 as a public limited company. It is listed on Karachi Stock Exchange since June 2002. Main business of the company is manufacturing and sales of cement.
ACPL is part of the Pharaon Group, which in addition to investment in cement industry has diversified stakes in Pakistan mainly in the oil and gas sector. The cement plant of the company started commercial production on June 1, 1988. The project is a Pak Saudi joint venture and involved initial capital outlay of around Rs 1.5 billion with foreign exchange component of around US $45 million. This made it one of the largest enterprises in the private sector. Pharaon Commercial Investment Company Limited holds 84.06% shares of the company while the general public has 15.94% shares.
Last year, the company completed its expansion plan, which increased its cement manufacturing capacity by 135.5% to 1.79m tpa from 0.76m tpa with a cost of Rs 3.33 billion, of which 70.0% was financed through internal cash generation and the remaining in the form of debt financing.
RECENT RESULTS (1HFY08):
The cement sector of Pakistan has witnessed a healthy growth due to rising construction activities in the country. Rising domestic demand, in addition to a sizeable rise in exports has resulted in a 38.5% increase in cement demand during HY'08, compared to the same period last year. This growth can be traced back to a 9% growth in domestic sales and a massive rise of 148% in exports. The construction activities in Afghanistan and the UAE as well as exports to other regional markets like Iraq, Kuwait and Sri Lanka contributed significantly to the demand.
At the same time, the cement industry is also plagued by declining profitability due to highly volatile cement retention prices. In HY08, cement sector suffered a massive decline in its profitability of 87.9% as average retention prices declined by 13.2% during the six-month period, compared to HY07. The overall sales revenue grew by 20.3% during the period. However, despite double-digit top line growth, gross margins of the sector declined to 12.6% in HY08 compared to 21.4% in the same period last year because of reduced cement prices.
ACPL managed to cash in on a small portion of the increased demand, recording a volumetric growth of 11% during the period under review. However it could not perform up to the average of industry growth level, mainly because of lower production from the new line in the first quarter of FY08, which not only forced the company to restrict its local sales but also affected its strategy to explore export markets more aggressively.
In spite of the modest increase in sales volume, the profitability has suffered a significant setback, as the bottom line declined to Rs 241 million in HY08 compared to Rs 499 million in HY07, depicting a 52% plunge during the six months. The drop in profitability may be attributed to a number of factors. The reduction in cement retention prices was one of the main factors which severely hit its bottom line. The company experienced a reduction of Rs 484 in net overall retention during the period.
In addition, the rising coal prices and cost of other input material, which have resulted in an increase in costs of production, and the depreciation charged on the new line also contributed to the fading profitability of the company. At the end, the production constraints due to the new line also restricted the company from achieving the desired volumetric growth, limiting its profitability growth.
The stock performance of ACPL dropped during the second quarter of FY08, falling below the KSE 100 Index. However, the stock survived the drastic decline in KSE 100 Index, apparent in the graph during the first quarter of FY08.
==========================================
July-Dec. July-Dec.
2007 2006
Tonnes
==========================================
Clinker Production 671,587 627,419
Cement Production 591,667 535,225
Cement Despatch -Local 544,603 494,618
-Export 32,030 26,100
576,633 520,718
Clinker Sales -Local - 25,000
-Export - 68,,926
- 93,926
==========================================
The liquidity, as depicted by current ratio shows an increase after a dip in FY06. Main increase is due to an increase in the cash balances, and stores, and inventory balances. The current assets have almost doubled as compared to the last year, while the current liabilities have increased by nearly 50%. The increase in current liabilities is due to advance payments from customers, and in lieu of a payment to be made to a cement research institute in China.
The asset management figures show a decline, because of a slower than expected increase in sales. The sales/equity figures show a slight increase in line with the increase in sales as no significant change has been observed in the equity figures. The company carries very low trade debts, so the DSO figure is very small. However, it can be estimated that as soon as the repairs are done, the company shall be able to achieve volumetric growth.
The margins have gone down, due to the fact that the company could not achieve targeted volumetric sales, and also because of a decline in the retention prices of cement in FY07. Attock Cement has the advantage of its "Falcon Brand" which is perceived as a premium brand, and the effect of reduction in retention prices is not as much as for other players. During 9mths'07, average retention price of cement in the industry declined 32.3% to Rs 128 per bag from Rs 189 per bag in the corresponding period last year. However, in the case of Attock Cement, retention prices declined just 11.0% to Rs 175 per bag in 9mths'07 as compared to Rs 196 per bag.
This situation will only improve once the retention prices increase. Similarly, ROA has been declining because of an increase in assets because of the expansion. The profits need to increase at a faster pace to pull up the ratio. The net profit margin has also been showing a declining trend due to an increase in depreciation charges as well as financial charges as a consequence of capacity expansion. Also, the raw material costs along with energy costs have been showing an increase further depressing the profitability figures.
Attock Cement has diversified its investment portfolio by investing in ARL, POL, APL and NRL to the extent of not more than 2.5% of paid up capital of the investee company and the total amount not being more than Rs 2500 million. This decision has diversified the sources of earnings for the company, and will protect it from fluctuations in the prices of cement. The affect of this decision shall manifest itself in the next financial year. With the increasing oil prices, it is expected that Attock cement shall greatly benefit from the decision.
The above ratio trend of TIE, Debt/Asset, and long term debt to equity reflects that since 2005, the long term debts have increased. Although most of the expansion was financed through internal sources, some debt was also taken to cover-up the shortfalls. Due to this, the D/A ratio has increased, while the TIE ratio has decreased showing an increase in the financial charges as compared to the declining ability of the company to finance them due to lower than expected sales. The long term financing has been taken through Murabaha financing arrangement from a syndicate. The current Murabaha arrangement will get paid off in 5 years time.
The company stands to gain from its location in a coastal city of Balochistan. It can therefore tap export markets which give a better return as compared to the local market because of higher prices in the ME region because of a shortage situation there.
=============================================
2007 2006
=============================================
(Metric tons)
=============================================
CAPACITY AND PRODUCTION
---------------------------------------------
Production capacity
---------------------------------------------
-Clinker 1,620,00 720,000
-Cement 1,701,000 756,000
---------------------------------------------
Actual production
---------------------------------------------
-Clinker 1,314,666 780,014
-Ccement 1,234,878 842,296
=============================================
Future outlook:
The outlook for the company witnessed an improvement, on the back of recent developments in the local and regional markets. Firstly, after the prolonged period of depressed cement prices, the prices are now showing a positive trend. During the last three months, cement producers have increased cement prices by five times, within the range of Rs 5-Rs 15 per bag, from an average price of Rs 225 per bag in January-08. This has resulted in an increase of Rs 1,043 per ton (Rs 52 per bag) at the retention level, which will improve gross margins.
The company is making efforts to overcome the production constraints posed by the new line. The problem had been caused by a major breakdown in the raw mill gear box due to which the plant operations of Line-2 had to shut down partially. However, with the installation of new gear box, the line-2 operations have become relatively smooth and the company is striving to attain its production targets in order to take the advantage of economies of scale. The smooth operations of the new line will also allow the company to produce sufficient surplus clinker and cement for exports. In this regard, the company is following a strategy to aggressively explore export markets.
In addition, the company's application for the approval of certification with Bureau of Indian Standards is at final stages for approval. India is a major market for local producers, characterised by an excess demand of 8-19m tons. The Federal Minister for Commerce has discussions with India, and the country is set to export 0.1 million tons of cement to India on a monthly basis. However this opportunity for the local industry may not last very long, as capacity expansion takes place in India. It is expected that the supply demand situation will be balanced by this year.
With its massive construction activities, Dubai also carries enormous potential as an export market by the local manufacturers. An increase in cement prices have been registered in the region due to the unprecedented rise in construction activities that has accompanied the overall economic boom in UAE and the region. Recently, the UAE government has removed the 5% customs duty on cement to support the rapidly growing construction activity in Dubai. This will further increase the demand for cement in the region, placing local producers in an advantageous position.
Consequently, it is expected that exports from Pakistan will reach 6m tons by the end of the current year, depicting an impressive growth of 88% over the last year. Hence the ability of a company to exploit the market potential will determine its profitability and future performance.
===============================================================================
Attock Cement - Consolidated Ratios
===============================================================================
Jun'02 Jun'03 Jun'04 Jun'05 Jun'06 Jun'07
-------------------------------------------------------------------------------
LIQUIDITY
-------------------------------------------------------------------------------
Current Ratio 1.99 2.43 1.93 1.72 0.71 1.27
-------------------------------------------------------------------------------
ASSET MANAGEMENT
-------------------------------------------------------------------------------
Inventory Turnover 102.07 93.50 80.59 74.05 44.13 49.35
Days Sales Outstanding 4.13 4.04 1.16 0.55 2.40 0.79
Operating Cycle 106.20 97.55 81.75 74.60 46.52 50.13
Total Asset Turnover 0.96 0.97 1.02 0.76 0.71 0.79
Sales/Equity 1.33 1.32 1.47 1.22 1.18 1.34
-------------------------------------------------------------------------------
DEBT MANAGEMENT
-------------------------------------------------------------------------------
Debt to Asset Ratio 27.87 26.77 30.80 37.72 39.38 41.30
Debt to Equity Ratio 0.39 0.37 0.45 0.61 0.65 0.70
Long Term Debt to Equity 12.61 14.47 15.50 34.45 38.78 40.54
Times Interest Earned 9.73 25.96 55.58 109.35 59.95 12.69
-------------------------------------------------------------------------------
PROFITABILITY
-------------------------------------------------------------------------------
Gross Profit Margin 19.14 17.69 32.58 39.71 47.95 34.09
Profit Margin 7.00 9.16 14.89 33.30 26.17 17.46
Return on Assets 6.71 8.87 15.15 25.29 18.65 13.77
Return on Equity 9.31 12.12 21.89 40.61 30.77 23.45
===============================================================================
COURTESY: Economics and Finance Department, Institute of Business Administration, Karachi, prepared this analytical report for Business Recorder.
DISCLAIMER: No reliance should be placed on the [above information] by any one for making any financial, investment and business decision. The [above information] is general in nature and has not been prepared for any specific decision making process. [The newspaper] has not independently verified all of the [above information] and has relied on sources that have been deemed reliable in the past. Accordingly, the newspaper or any its staff or sources of information do not bear any liability or responsibility of any consequences for decisions or actions based on the [above information].