Cement: MAPLE LEAF CEMENT FACTORY LIMITED - Analysis of Financial Statements Financial Year 2003 - Financial Year 2008
Maple Leaf Cement is part of the KMLG (Kohinoor Maple Leaf Group). This company came into being on 1st July 1992 when three cement firms namely: Maple Leaf Company Limited, White Cement Industries Limited and Pak Cement Company Limited were privatised and sold to the Kohinoor Group.
MLCF is listed on all the three stock exchanges of the country. It is the third largest cement manufacturer in the country with a capacity of 3.69mtpa of cement, which forms 10.5% of the total cement manufacturing capacity of the sector.
MLCFL produces and sells grey and white cement. The company has three production lines for grey and three production lines for white cement manufacturing. The plants are located at Daudkhel, District. Mianwali. The clinker capacity of grey cement has risen to 2.84 million tons while the capacity of white cement increased to 180,000 tons during FY08. Like other companies in the cement sector, MCLF has also undertaken ambitious expansion and up-gradation plans. The company increased the capacity of its dry process plant to 4,000 tpd from 3,300 tpd through debottlenecking and upgrading the plant equipments in 2005. In 2007, the company started an expansion project of 6,700 tpd clinker capacity. It started commercial production on 1st November 2007.
MLCFL has modernised its operations by shifting from the wet process line to the dry process line. In 2006, a project to convert the then existing wet process line to a fuel efficient dry process white cement line started commercial production. As a result of expansion, the production of grey cement increased by 75%, while the white cement production went up by 52% in FY08. The sales increased especially the sale of grey cement increased by 87%. 63% more white cement was sold during FY08 as compared to FY07. MLCFL showed an impressive growth in production and sale of cement, however disappointing economic indicators and rising costs affected the company.
This year, the ratio of GDP growth was 5.8% against the target fixed by the government of 7.2%. This slowdown in GDP growth decreased the growth of per capita cement consumption from 22.2% in FY07 to 2.9% in FY08. Cement consumption is correlated to GDP growth. In past years, Pakistan's cement sector witnessed a robust growth due to the country's strong economic growth. However, in FY08, lower GDP growth has affected the construction activities in the country and thus affected the cement demand in the local market.
This is why there was only a 6.5% growth in the local cement dispatches in FY08. Local cement dispatches increased slightly from 21.03m tons in FY07 to 22.40m tons in FY08. The cement sector's sales were strongly boosted by a growth of 140% in exports. Exports were over 3.19m tons in FY07 and increased to 7.72m tons by FY08. Thus the overall dispatches of the cement sector increased from 24.22m tons in FY07 to 30.11m tons in FY08, depicting a healthy growth of 24.3%.
The local cement manufacturers have benefited immensely from shortage of cement in the regional markets. Pakistani companies are actively exporting to Afghanistan and India. Cement demand in Afghanistan is expected to be 1.5m-2.0m tpa for the next four years at least and local companies can be expected to export 3.0m-4.0m tpa over the next few years. Also rising construction activities in the Middle East and Africa have made them lucrative markets that our companies can tap to earn higher profits. MLCFL performed well in the local and export markets. Its gross domestic sales increased by 51% while its exports increased manifold, from Rs 101 million in FY07 to Rs 2,357 million in FY08. It exported to Afghanistan, India and the Middle East.
This also raised the share of exports in MLCFL's total sales. In FY07, exports contributed only 2% while local sales were 98% of the total cement sales. The company's share of local sales however, went down to 78% as exports contributed 22% of the total sales in FY08. This was in line with the industry trend as the export market share in total cement sales of the sector increased to 24.5% during the first 11 months of 2008 from 12.7% in the same period last year.
PROFITABILITY
Despite the strong growth in the total cement dispatches of the sector, the profitability has declined substantially. During the first three quarters of FY08, the profitability of the sector fell by 73.6%. Similar is the case with MLCFL as its total cement dispatches (grey cement and white cement) increased 86% in FY08. In fact the company's growth in sales outperformed the industry sales growth. Its gross sales almost doubled as it increased tremendously in FY08, from Rs 5.5 billion to Rs 10.5 billion. But despite such stellar sales performance, MLCFL like many other companies of the sector, experienced a loss after taxation. MLCFL posted a loss of Rs 676 million in FY08.
Before FY07, the company was registered a strong growth in its profits. In FY07, the profits of MLCFL declined drastically because of an excess supply situation in the industry and falling of net retention prices. Many cement companies in the sector carried out huge expansion plans and debottlenecking in an attempt to increase their capacities and production.
As the supply increased the cement manufacturers resorted to price wars and this led to a fall in prices. The decline in the net retention prices hampered the earnings of MLCFL and the entire cement industry. This situation continued in FY08 and the average cement prices decreased further during the Jul-Mar FY08 to Rs 128.3 per bag from Rs 133.6 per bag in the same period of FY07. As the cement companies were hit badly by price war, they ended it and towards the end of FY08 the prices started to improve.
Rising costs also affected the profitability of the cement sector. Imposition of higher Federal and Provincial taxes increased the woes of the cement sector. MLCFL had to pay higher excise duty and sales tax. Also cost of sales for the company almost doubled from Rs 3 billion in FY07 to Rs 6.5 billion in FY08. Crude oil prices shot up during FY08 and had its impact on prices of coal and natural gas. Fuel costs caused the export expenses to be higher. Also higher electricity tariffs added to the rising cost of production of the company.
Fuel and power costs together form the largest portion of MLCFL's production costs in FY08 and had the greatest impact on the profitability of the company. As the global demand for coal increased and China limited its supply of coal, the coal prices increased tremendously. MLCFL relies heavily on coal for energy because furnace oil is a much expensive alternative for calcining process. Prices of natural gas also increased during the year.
Depreciation expense almost doubled during FY08 because of the addition of the 6,700 tpd production line to the operating assets of the company. Financial charges, which formed 20% of production costs, increased by 96% because of the increased interest rates in the economy. MLCFL obtained a syndicated term finance facility during FY07 to prepay the outstanding long-term debts of the company. In FY08, additional interest was paid on loan from related parties, redeemable capital, and liabilities against assets subject to finance lease. MLCFL was also affected by loss from exchange fluctuations.
A tremendous increase in the costs has deeply impacted the profitability of MLCFL and this is reflected in the profitability ratios. Gross profit margin and net profit margin declined substantially in FY07. Gross profit margin improved in FY08, helped by an increase in the net sales of the company. Gross profit improved by 327% in FY08 as compared to FY07. However, the effect of rising costs is evident from the fall in the net profit margin in FY07. The decline in the return to assets ratio of MLCFL has resulted from its low earnings during FY07 and FY08 and high interest costs occurring from higher debt.
LIQUIDITY
The firm's liquidity had improved in FY07 because the current assets increased more in proportion to the increase in current liabilities. However, in FY08, the current liabilities increased by 96% while the current assets rose only by 48%. Some of its liabilities (syndicated term finances and finance lease liabilities) are close to maturity and that shows an increase in the figure of current liabilities. The dividend liabilities on preference shares have accumulated and short term finances increased in FY08. MLCFL has short term finance facilities from various commercial banks and this amounted to Rs 3.750 billion in FY08.
ASSET MANAGEMENTThe inventory turnover ratio of MLCFL increased showing that it took lesser days for the company to sell its stock trade. However, the company's average collection period of accounts receivable increased and so did is operating cycle. One reason could be the increase of 282% in the company's trade debts. As the accounts receivable, grew in FY08, the collection period also increased ie it took longer to recover receivables.
The total asset turnover ratio of MLCFL, on the other hand improved in FY08, indicating that the company was able to generate sufficient sales volume given it total assets investments. The net sales of the company increased overall by 110% while total assets of the company increased by 11.6%.
DEBT MANAGEMENTLeveraged firm's profitability declines when economy takes a downturn and in tight monetary situations. As interest rates were steadily increased in FY08, the cost of borrowing for the firm has increased. The graph shows an increased proportion of debt relative to assets and equity. As the company suffered a pre-tax loss in two successive years, the TIE ratio has declined. The company cannot pay for its expenses through earnings and will have to raise extra capital or debt to pay its obligations.
However, the company re-profiled its debts. This was to provide the company with substantial savings in its financial cost in future along with easing out its immediate debt burden. MLCF was paying a high interest charge of 11.3%-12.9% in FY07, which came down to 11.5%-11.9% after the debt restructuring. But higher interest rates in the economy increased the overall financial costs of the company. It carried on its policy of restructuring its finance structure in FY08. MLCFL replaced conventional debts with Shariah Compliant Financing and this repaid premature long term loans and finances through Redeemable Capital and Syndicated Term Finances.
The share price has fallen in response to the fall in profitability of the MLCFL and it depicts lower investor expectations about its future earnings.
FUTURE OUTLOOK
Cement dispatches of the sector are expected to continue grow in the future as the cement demand may increase in response to construction activities in the private sector. Also, in the budget FY09, the government has allocated Rs 550 billion to PSDP. Despite this local cement dispatches may be depressed due to slowdown in the economy-led construction activities and inflation. But exports are expected to maintain strong growth and support the total cement dispatches.
In the budget FY09 the central excise duty on cement was increased to Rs 900 per ton from current Rs 750 per ton. On each bag the CED increased by Rs 7.50 per bag (from Rs 37.5 per bag to Rs 45 per bag). But this increase would not impact the profits of the cement sector because this increment in CED will be passed on to the consumers. However, the rise in the GST by 1% will increase the local cement prices and may dampen the demand of cement.
Expenses are expected to increase for cement manufacturers due to a rise in coal prices and high interest rates. This will negatively impact the gross margins of the cement sector. During the past, our cement manufacturers shifted their production from oil to coal or gas. Pakistan has huge reserves of coal but manufacturers need to import coal due to high sulphur content.
Coal prices more than doubled during FY08 with average coal prices being around US $176/ton during the fiscal year. Rising coal prices coupled with a depreciating rupee will increase the cost of production for the cement companies and hit their gross margins hard.
From a wider perspective, the cement consumption in the domestic market may fall due to deteriorating economic condition of the country. The declining GDP and volatile economic situation may curtail the construction activities in the country and may hit the demand of cement.
However, there is hope for cement sector on the international front. Presently, Pakistan is exporting to Afghanistan and India. Regional shortage of cement has presented a favourable opportunity for our cement manufacturers. Cement manufacturers have growing opportunities in Middle East and African countries. New export markets like Russia and European countries have been identified. Growth in export sales may boost the margins of the industry and reduce the negative impact of rising costs on its profitability.
MLCFL has demand from international markets and in order to meet this demand from exports, it is endeavouring to operate its plants at full capacity. Electricity shortages and irregular power supply can act as a hindrance to the company's goal of improving its capacity utilization. MLCFL has taken step to solve the energy problem by starting a waste heat recovery plant (producing 15 MW of electric power) which is expected to reduce energy costs and to start in 2010.
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MAPLE LEAF-FINANCIALS
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Rs '000'
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Income Statement FY'03 FY'04 FY'05 FY'06 FY'07 FY'08
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Net Sales 2,404,807 3,375,799 4,290,734 5,709,792 3,711,081 7,815,829
Cost of Goods Sold 2,043,257 2,227,571 2,962,802 3,561,212 3,401,188 6,491,999
Gross Profit 361,550 1,148,228 1,327,932 2,148,580 309,893 1,323,830
General & Administrative Expenses 48,648 46,804 40,287 60,474 67,291 121,326
Selling & Distribution Expenses 10,658 12,973 20,961 69,021 834,849
Operating Profit (EBIT) 334,947 1,101,899 1,292,769 1,975,792 198,434 448,563
Financial Charges 427,863 310,839 205,677 340,978 338,453 1,812,807
Net Income Before Taxes -92,916 751,507 1,087,092 1,634,814 (140,019) (1,364,244)
Net Income After Taxes 150,103 487,472 727,450 1,059,240 42,047 (676,135)
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Balance Sheet FY'03 FY'04 FY'05 FY'06 FY'07 FY'08
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Store, Spares & Loose Materials 565,361 941,544 1,100,967 1,847,926 2014580 3,325,744
Stock-in-trade 98,223 100,145 183,217 200,946 369,709 433,952
Trade Debts 93,227 87,104 92,597 163,459 194,587 743,366
Cash & Bank Balances 130,945 223,271 369,802 100,938 123,359 118,894
Other Current Assets 663,578 1,046,577 193,476 2,383,268 1,349,722 1372940
Total Current Assets 1,551,334 1,499,266 1,940,059 2,664,462 4,051,957 5,994,896
Total Non-Current Assets 5,770,094 5,588,342 8,488,914 16,480,436 19,385,017 20,156,665
Total Assets 7,321,428 7,087,608 10,428,973 19,144,898 23,436,974 26,151,561
Total Current Liabilities 1,156,620 1,188,435 1,595,499 2,649,519 3,756,487 7,382,464
Total Long Term Debt 2,186,687 2,199,356 7,881,174 8,844,697 241,539
Total Non Current Liabilities 2,954,736 2,201,629 2,543,012 8,939,675 10,687,450 10,408,208
Total Liabilities 4,111,356 3,390,064 4,138,511 11,589,194 14,443,937 17,790,672
Total Equity 3,210,072 3,697,544 6,290,462 7,555,704 8,993,037 8,360,889
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PROFITABILITY FY'03 FY'04 FY'05 FY'06 FY'07 FY'08
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Gross profit margin 15.03% 34.01% 30.95% 37.63% 8.35% 16.94%
Profit margin 6.24% 14.44% 16.95% 18.55% 1.13% -8.65%
Return on Asset 2.05% 6.88% 6.98% 5.53% 0.18% -2.59%
Return on Equity 4.68% 13.18% 11.56% 14.02% 0.47% -8.09%
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LIQUIDITY RATIO FY'03 FY'04 FY'05 FY'06 FY'07 FY'08
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Current Ratio 1.34 1.26 1.22 1.01 1.08 0.81
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ASSET MANAGEMENT FY'03 FY'04 FY'05 FY'06 FY'07 FY'08
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Inventory Turnover Rate 20.80 22.24 16.17 17.72 9.20 14.96
Days to sell inventory (Days) 17.31 16.18 22.26 20.31 39.13 24.06
Day Sales Outstanding (Days) 13.96 9.29 7.77 10.31 18.88 34.24
Operating cycle (Days) 31.26 25.47 30.03 30.62 58.01 58.30
Total Asset turnover 0.33 0.48 0.41 0.30 0.16 0.30
Sales/Equity 0.75 0.91 0.68 0.76 0.41 0.93
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DEBT MANAGEMENT FY'03 FY'04 FY'05 FY'06 FY'07 FY'08
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Debt to Asset 0.56 0.48 0.40 0.61 0.62 0.68
Debt/Equity (Times) 1.28 0.92 0.66 1.53 1.61 2.13
Times Interest Earned (Times) 0.78 3.54 6.29 5.79 0.59 0.25
Long Term Debt to Equity 0.00 0.59 0.35 1.04 0.98 0.03
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PER SHARE FY'03 FY'04 FY'05 FY'06 FY'07 FY'08
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Earning per share 0.83 2.70 3.26 3.38 -0.03 -1.96
Price earning ratio 0.05 0.07 0.15 0.13 (333.33) (5.10)
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COURTESY: Economics and Finance Department, Institute of Business Administration, Karachi, prepared this analytical report for Business Recorder.
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