The leader in the cement manufacturing industry, Fauji Cement Company, was sponsored by Fauji Foundation and incorporated in Rawalpindi in 1992. It has a cement plant located in Jhang Bathar, Punjab. The cement plant operating of the company has an annual production capacity of 1.165 million tons of cement.
High quality 'Portland' cement produced at this plant is preferred in the construction of highways, bridges, commercial and industrial complexes, residential homes, and myriad other structures; fundamental to Pakistan's economic vitality. A new plant with a production capacity of 7200 tons per day (TPD) started production in May 2011. The plant is equipped with state-of-the-art equipment and is considered a great value addition for the local cement industry.
The Company has installed the country's first ever refuse derived fuel (RDF) processing plant at a cost of Rs 320 million. RDF is not only providing cheap fuel to the company, but is also contributing towards solving the problem of municipal garbage disposal by lifting 300-400 tons of garbage from each garbage dump located in Rawalpindi and Islamabad. The plant also has other benefits including reduced use of fossil fuels, lower green house gas emissions to the atmosphere and providing compost fertiliser as a by-product.
FINANCIAL ANALYSIS OF FAUJI CEMENT COMPANY LIMITED
Profitability Sales revenue increased in FY09 compared to FY08 because of an increase of 47.5 percent in cement exports by the company. However, in FY10, sales fell by 28.3 percent year-on-year to Rs 3 billion, as international sales slowed down in the region.
Cost of sales has continued to increase over the years. It increased by 14 percent in FY10 as compared to the previous fiscal, mostly on account of rising costs of fuel and other utilities. At the end of the third quarter of FY11, the cost of sales faced by the company stood at Rs 1 billion, compared with Rs 836 million in the same period, last year.
The company's profit after tax amounted to Rs 1,007 million in FY09 as compared to the previous year's profit of Rs 414 million. Cement prices and efficient capacity utilisation by the company were responsible for this phenomenal improvement in profitability in FY09.
Over the same period, the profit from operations increased from Rs 602 million to Rs 1,646 million, depicting an increase of 173 percent owing to increases in cement prices. A decline in cement prices along with higher costs of sales and inputs affected the profit from operations in FY10, which fell by 78 percent compared to last year.
The decline in the profitability of the company can be seen by the falling EBIT and ROE ratios, which declined from 30.98 percent in FY09 to 9.61 in FY10, and 10.4 percent in FY09 to 2.6 percent in FY10, respectively.
Liquidity The company was in the expansion phase since 2008 which led to a decline in the short term liquidity of the company. There was a decrease in the current ratio from 2.16 in FY08 to 0.81 in FY09. Now that the investment phase is complete and the project is operational, the liquidity position till the third quarter of FY11 has improved to 0.76, as compared to 0.66 during the same period, last year.
Debt Management Expansion plans of the company have been the main reason for the increase in its long term debt, which mushroomed from just Rs 325 million in FY08 to a mammoth tally of Rs 11 billion in FY10. The company expects this debt to reduce as the new plant continues its operations.
On the other hand, the company has been successful in controlling its interest expenses which fell from Rs 224 million in FY09 to Rs 41 million in FY10. This owes to the company's ability to pay off its debt liability for existing projects. However, interest rates for the first half of FY11 showed a significant increase of Rs 10 million compared with the same period, last year. The cause of this increase is the debt the company took on for the expansion projects.
Operational Efficiency With huge investment in its expansion plans; the company has been able to increase its asset holding. These new plants have added to the total assets of the company but their revenues have not materialised as yet. This has caused the total asset turnover ratio of the company to fall from 0.28 in FY08 to 0.25 in FY09 and 0.14 in FY10. Over time, as and when the newly installed plants add to the company's revenues, an increase in the ratio is expected.
Market Value Improved profitability reflected in the earnings per share of the company in FY09, which increased to Rs 1.43 per share. However, the consequent reduction in the company's profits in FY10, drove EPS down to Rs 0.31 per share. This fall, however, seems only temporary considering the fact that the company has completed its expansion plans and expects improved profits in the coming years.
Prospects In coming months, while the international price of fuel is expected to remain range-bound, any increases in rates may hurt the company's bottom line. Additionally, the cost of other utilities will also likely continue to increase in the near future. But with the onset of the summer season, both domestic dispatches and cement prices are likely to improve. These developments may give a boost to the company's earnings and profitability in the last quarter of the current fiscal.
COURTESY: Economics and Finance Department, Institute of Business Administration, Karachi, prepared this analytical report for Business Recorder.
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