Cement: ATTOCK CEMENT PAKISTAN LIMITED - Analysis of Financial Statements Financial Year 2002-3Q'09
Attock Cement Pakistan Limited (ACPL) was incorporated in 1981 as a public limited company. It is listed on the Karachi Stock Exchange. The Attock Cement project was a Pak-Saudi venture. The project was completed and the plant started commercial production on 1st June 1988.
It is a part of Pharaon Group as the Pharaon Commercial Investment Company Limited has a majority stake of 84.06% in ACPL. As at June 30, 2008, Pharaon Investment Group Limited (Holding) S.A.L., Lebanon and its nominees held 60,662,866 ordinary shares of Rs 10 each in the company. The general public holds 15.94% shares of the company.
Attock Cement introduced the pre-calcination/pre-heating dry process technology in Pakistan. ACPL manufactures three types of cement: Ordinary Portland Cement which is used in general construction, Sulphate Resistant Cement is suitable for construction in sea or near coastal areas and Portland Blast Furnace Slag Cement for massive constructions eg dams and canals.
The company also produces specially formulated mixes of cement to meet the different customer requirements. It markets its cement under the brand name of 'Falcon Cement.' The company focuses on meeting the Pakistan and international quality standards and in 2002 it achieved the ISO 9001: 2000 certification. Attock Cement Pakistan Limited sells cement locally and internationally.
It has been involved in numerous projects such as Gwadar Port Housing Project and Pearl Continental in Gwadar; KWSB Project III in Pipri and Gharo; Forty-Man Water Park Super Highway, KPT Project OP-II Karachi and Creek City Housing Project in Karachi. ACPL was the first to export clinker to the UAE and Qatar, along with cement exports to Iraq.
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Name of Company Attock Cement
Pakistan Limited
Ticker ACPL
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Assets (March 2009) Rs 6,800,105,000
Share Capital Rs 721,629,000
Sales Revenue (Jul 08-March 09) Rs 6,358,546,000
PAT (March 2009) Rs 1,038,309,000
Market Share Price (5th June 2009) Rs 61.91
Market Capitalization (5th June 2009) Rs 4,467,605,139
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The cement sector had shown an impressive growth of 24.3% in the cement dispatches during FY08, owing to a strong demand in the local market and supply deficits in the regional markets. The major boost had come from the export sales (a growth of 142%) while local cement dispatches had grown nominally by 6.5%. However the sector could not maintain this strong performance during FY09.
RECENT DISPATCHES
During 1QFY09, the total cement dispatches of the sector increased only by 0.7% (to 7.33m tons as compared to 7.28m tons in 1QFY08). The local dispatches fell by 15.4% from 5.72m tons in 1Q08 to 4.83m tons in 1Q09. Unfavourable economic conditions in the country caused the construction activity to slow down and resulted in lower local demand for cement.
Exports however, increased by almost 60% to 2.50m tons in 1Q09 from 1.57m tons in 1Q08 due to demand in the regional countries. However, the export growth was lower as compared to 140% growth experienced during the previous fiscal year as the global economic turmoil started to affect Pakistan's cement exports.
During the HY09 local cement dispatches declined by 15% to 9.256 million tons due to slow economic activity and the cut in PSDP expenditure. However, exports of clinker and cement showed a growth of 54%. Thus the growth in exports boosted the overall sales of the sector during HY09. Due to low demand, cement production increased only by 4.7% during Jul-Mar FY09, the lowest growth in the last six years.
Overall, the sector's cement dispatches were 0.4% lower during Jul-Mar FY09 as compared to the cement dispatches in Jul-Mar FY08. Exports constituted 36% of total cement dispatches. ACPL depicted a better performance as compared to overall trend in the sector. The company was able to overcome the previously experienced problems in production and achieved 31.6% growth in the cement sales.
The company's local sales increased by 2.12% while exports grew by 519% from 55,419 tons in the first nine months of FY08 to 343,017 tons in the same period of FY09. The share of exports in total cement dispatches of ACPL increased from 5.7% during Jul-Mar FY08 to 27% during Jul-Mar FY09.
PROFITABILITY
After experiencing declining profitability during FY08, the cement sector came back strongly to post a growth of 833% in profits during the first nine months (Jul-Sep) of fiscal year 2009. The total profits of listed cement companies increased from Rs 395 million in nine months of FY08 to Rs 3.7 billion in the nine months of FY09.
The profits increased despite a decline of 0.4% in the cement dispatches during Jul-Mar FY09. This growth was mainly due to higher net retention prices which increased by 64% to Rs 230 per bag. It is believed that the profits of cement companies increased due to an arrangement among them to keep prices high in the local market.
Also, the depreciation of rupee against dollar made Pakistani cement exports cheaper and resulted in better export based revenues for the companies. The net sales of the cement sector in the period Jul-Mar FY09 was 74% higher than the net sales generated during the corresponding period of FY08.
Coal prices that had peaked in FY08 fell sharply during the first nine months of FY09 and reduced the cost of sales. Gross profits of the cement companies increased, by 287%, during the first nine months of FY09. However, 96% increase in financial charges (due to higher KIBOR rates during the period) reduced the profits of the cement sector to a certain extent. Likewise, the profitability of ACPL grew by 198% during Jul-Mar FY09 as compared to Jul-Mar FY08.
The company posted a profit after taxation of Rs 1,038 million during nine months of FY09 as compared to Rs 348 million during nine months of FY08. The net sales of the company increased by 83% while cost of sales increased by 65%, resulting in a gross profit growth of 138.66%. Cost of sales may have increased due to higher electricity charges and packaging material costs.
The administrative expenses rose by 37% while selling and distribution expenses increased substantially by 277% (from Rs 76 million in Jul-Mar FY08 to Rs 290 million in Jul-Mar FY09). Selling and distribution costs maybe higher due to higher export sales and the transportation costs associated with it. Financial charges increased only by 2.7% while other operating expenses of the company increased substantially by 175%.
LIQUIDITY
Since FY06, the liquidity position of the ACPL has had an increasing trend and during the first nine months of FY09, the liquidity position improved further. This is because the current assets increased overall by 71% while current liabilities increased by 20% during the fiscal year.
The current liabilities increased due to 29% in accounts payable of the company and Rs 24.7 million of tax payable. The current assets of ACPL were boosted mainly due to manifold increase in the investments of the company. At June 2008, the company's investments stood at Rs 20 billion and by March 2009 the investments increased to Rs 517.8 million.
The interest receivable of the company also increased by 295% while trade debts increased by 12%. The cash and bank balances also increased by 340%. This depicts that the company has a favorable liquidity position. In FY08 the liquidity of the company had increased due to a decrease in current liabilities and increase in current assets.
The current liabilities of the company had decreased mainly due to 90% reduction in the current maturity of liabilities against assets subject to lease. Trade and other payables also reduced by 8%. There was a major decline in the worker's profit participation and welfare fund (by Rs 37.7 million altogether) and also retention money (decrease by Rs 138 million).
However, there was a 13% increase in the total current liabilities due to short term borrowings for murahaba and running finance of the company. This could have been the reason for the higher finance costs for FY08. The facilities for short term loan and export refinance available amounted to Rs 1.3 billion in FY08. The rate of mark-up was three months KIBOR plus 1% and 1% above the SBP Export Refinance rate per annum respectively.
The facilities for short term running finance available amounted to Rs 800 million and the rates of mark-up ranged from one month KIBOR plus 0.85% to three months KIBOR plus 0.9% per annum. Current assets of the company had increased mainly due to substantial rise in trade debts (150%) and deposits and short term prepayments in FY08.
Also 79% increase in stores, spares and loose tools and 48% increase in the stocks also led to a rise in current assets. However, there was a 58% decline in the most liquid asset - cash and bank balances of the company during FY08. Stores, spares and loose tools form 42% while the company's stocks form 28% of its total current assets. As compared to that trade debts are 3% while cash and bank balances constitute only 7% of current assets.
ASSET MANAGEMENT
The average length of time it took ACPL to convert its sales into cash reduced since FY03. However, the days sales outstanding increased to 4 days during FY08 from 2 days in FY07. The reason that it took longer for ACPL to collect its receivables could be attributed to a substantial increase (150%) in the company's trade debt (receivables) from Rs 19 million in FY07 to Rs 49.8 million in FY08.
Inventory forms a large part of the current assets of ACPL. The liquidity of inventory improved continuously since FY04 as the inventory turnover rate improved. The average number of days to sell inventory fell ie it took ACPL lesser time to sell its stocks. In FY07, the average number of days to sell inventory, decreased to 96 days and during FY08 the liquidity of inventory improved further as the average number of days to sell inventory went down to 91 days. Likewise, the operating cycle of ACPL also became decreased from 98 days in FY07 to 95 days in FY08. This means the quality of the company's assets has been improving.
DEBT MANAGEMENT The debt to assets ratio depicts how ACPL is financed. Each year the company has been using more debt (long term debt and current liabilities) to finance its activities. This is reflected in the rising trend of the debt to asset ratio. During FY08, ACPL's total debt decreased by 2% whereas its assets increased by 1%. Both the long term debt and current liabilities of the company decreased in FY08.
The rising debt to equity ratio indicates that ACPL has been financing its growth increasingly by debt. In FY04 the debt to equity rose drastically and during the same fiscal year the profit before tax of the company also surged. Earnings have increased more than the cost of debt (interest) and the shareholders seem to have benefited from this.
However, the finance charges increased immensely during FY07 and it contributed partly in the decline in the profits that fiscal year. The economy has been experiencing rising interest rates and this could affect the finance costs and future earnings of the company.
MARKET VALUE The book value of the company has been increasing as the net assets underlying each share increased. The market/book ratio has also increased over the years indicating that investors regarded ACPL favorably. However, the market/book ratio fell during Jul-Mar FY08 because of a fall in the average share price. According to the latest data, ACPL's share price has been continuously falling during HY'09 but started improving during the 3QFY09. The average share price during the period 11 months (Jul08-3rd Jun09) was Rs 54.6.
FUTURE OUTLOOK 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). This increase was not expected to impact the profits of the cement sector because this increment in CED was expected to be passed on to the consumers.
However, the rise in the GST by 1% was anticipated to cause an increase in the local cement prices and dampen the demand for cement. Local cement dispatches are expected to remain depressed due to slow down in economy led construction activity in the country and also due to inflation.
In the budget FY09, the government had announced that Rs 550 billion will be allocated to PSDP in the country, however owing to budgetary deficit the government later decided to cut PSDP expenditure. Cement consumption is correlated to GDP growth and as the economic condition now stands, we can predict a slow down in the GDP growth of the country. Thus the per capita cement consumption will also fall during FY'09. As demand for cement is expected to go down further, the net retention prices are also expected to fall from their current level.
Exports have so far shown strong growth and supported the total cement dispatches. Cement manufacturers have been focusing on the international markets to achieve growth in sales. Pakistan has been exporting to Afghanistan. Regional shortage of cement had presented a favorable opportunity for our cement manufacturers. Cement demand in Afghanistan is expected to be 1.5m-2.0m tons per annum for the next few years.
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. However, the effects of global recession have started to impact international demand for cement.
Indian market, which was a window of opportunity for Pakistani cement manufacturers, had been closed as India banned import of cement from Pakistan due to escalating tensions between the two countries. Also more capacities are expected to come online in the Middle East, India and Iran and thus, export outlook does not appear encouraging in the future.
Expenses are expected to increase for cement manufacturers. This will negatively impact the gross margins of the cement sector. During the past, our cement manufacturers shifted production from oil to coal or gas. Pakistan has huge reserves of coal but manufacturers need to import coal because the local coal has high sulphur content.
The coal prices in the international market have fallen during the 3rd quarter of FY09 and will result in lower cost of production in the future. However, the full positive effect of lower coal prices may not be achieved because of the depreciation of Pakistani rupee which will neutralize the impact of decreasing international coal prices.
Also the government has raised the power tariff by nearly 50% with variable rates for peak and off peak hours. The gas prices have also risen. This will increase the cement manufacturers' cost of production and impact their profitability in FY09. The recent cut of 100 basis points in the discount rate by SBP is expected to lead to further expansionary monetary policy. Interest rates may go down and result in lower financial costs of debt for the company.
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Attock Cement Pakistan Limited
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LIQUIDITY Jun-02 Jun-03 Jun-04 Jun-05 Jun-06 Jun-07 Jun-08
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Current Ratio 1.99 2.43 1.93 1.72 0.77 1.27 1.51
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ASSET MANAGEMENT Jun-02 Jun-03 Jun-04 Jun-05 Jun-06 Jun-07 Jun-08
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Inventory Turnover (times) 2.90 2.98 2.66 3.26 3.44 3.73 3.94
Average No of days to sell inventor 124 121 135 111 105 96 91
Days Sales Outstanding 4 4 1 1 2 2 4
Operating Cycle 128 125 136 111 107 98 95
Total Asset Turnover 0.96 0.97 1.02 0.76 0.71 0.79 0.85
Sales/Equity 1.33 1.32 1.47 1.22 1.18 1.34 1.41
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DEBT MANAGEMENT Jun-02 Jun-03 Jun-04 Jun-05 Jun-06 Jun-07 Jun-08
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Debt to Asset Ratio 0.28 0.27 0.31 0.38 0.39 0.41 0.40
Debt to Equity Ratio 0.39 0.37 0.45 0.61 0.65 0.70 0.66
Long Term Debt to Equity 0.13 0.14 0.15 0.34 0.40 0.41 0.38
Times Interest Earned 9.73 25.96 55.58 109.35 59.95 13.56 5.74
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PROFITABILITY Jun-02 Jun-03 Jun-04 Jun-05 Jun-06 Jun-07 Jun-08
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Gross Profit Margin 19.14% 17.69% 32.58% 39.71% 47.95% 34.09% 22.12%
Profit Margin 7.00% 9.16% 14.89% 33.30% 26.17% 17.46% 8.72%
Return on Assets 6.71% 8.87% 15.15% 25.29% 18.65% 13.77% 7.41%
Return on Equity 9.31% 12.12% 21.89% 40.61% 30.77% 23.45% 12.32%
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MARKET VALUE Jun-02 Jun-03 Jun-04 Jun-05 Jun-06 Jun-07 Jun-08
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Book Value 14.28 15.11 17.74 29.41 40.92 47.06 48.94
Market/ Book Ratio 0.81 1.11 2.05 2.05 2.14 2.17 1.87
EPS 1.33 1.83 3.88 11.94 12.59 11.04 6.03
Average Market Price 11.5 16.72 36.35 60.24 87.63 102.13 91.53
Price/Earnings 8.65 9.13 9.36 5.04 6.96 9.25 15.18
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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.
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