Dera Ghazi Khan Cement (DGKC) is one of the powerhouses in the Pakistani cement industry. With commercial production beginning in 1986 at 2,000 tonnes per day, the Company has continually grown over the past 26 years to become one of the biggest players in the industry, boasting a production capacity of 14,000 tonnes per day.
Despite being located in the north zone of the country and away from the port, it has a strong export base. The Company is owned by Nishat Companies, a profitable and diversified group with roots in industries such as textiles, power generation and banking.
PROFITABILITY DGKC saw a turnaround half on the heels of a recent surge in cement prices and reduced taxes. A decrease in Sales Tax and Federal Excise Duty of 1 percent (FED) along with a complete removal of the 2.5 percent Special Excise Duty (SED) within the government's budget 2011-2012 had reduced the burden on the manufacturers.
Though initially expected by analysts to pass this tax exemption to consumers, still the cement producers chose not to augment their bottom lines further.
Net sales increased by 31 percent compared to 1HFY11 whereas cost of sales increased by a relatively lower 11 percent compared to the previous period. This had a direct effect in augmenting gross profit by 106 percent.
Gross margins for the half also increased by nearly 12 percentage points, from 20.6 percent in 1HFY11 to 32.5 percent in 1HFY12.
Operating expenses also increased across the board due to the increase in exports and the transportation costs associated with them. However, the relative effect of the increased expenses was nominal, as operating profit increased over the previous period by 92 percent.
Operating margins also improved significantly from 16.1 percent in 1HFY11 to 23.6 percent in 1HFY12. Finance costs saw a fortunate decrease by 13% over the previous period, signalling better management of leverage. The net effect speaks for itself: net profit after taxation surged by 566 percent year on year and net margin improved from 2.4 percent to 12 percent.
OPERATIONS
The operational performance of Dera Ghazi Khan Cement stands in stark contrast to that of the cement industry. For the cement industry, domestic volumes increased by 4 percent across all segments and export volumes decreased by 5 percent. On the other hand, the volumes for DGKC in the domestic sector declined while the export volumes surged by nearly 12 percent.
The declining volumes in the domestic sector could be attributed to slow developmental and reconstruction activities in the wake of the floods, and the government not following through with a number of public sector development projects. According to the Company, political instability has detracted the government's focus from these projects to other priorities.
The soaring exports could be attributed to greater demand for cement in foreign markets such as Djibouti and Afghanistan. The export portfolio of DGKC has consistently grown in recent years. From exports amounting to less than 1% of cement sales in 2006, the Company saw more than 30% of sales in FY11 as exports. In addition to East Africa and Southeast Asia, the Company also looked towards markets in South Africa to expand operations.
This signals a trend of diversifying outside domestic markets, possibly to hedge risks against volatilities in the domestic setting. In an industry that is currently performing at 70% of its capacity, such a move may be of strategic importance in the long run.
LEVERAGE DG Khan Cement saw a reduction in its debt to equity ratio from 39 percent to 33 percent. This shows the Company is trying to reduce leverage and the finance costs that accompany it. Finance costs as a percentage of net sales decreased significantly from 12 percent in 1HFY11 to 8 percent in 1HFY12. Additionally, there has been a trend in recent years of the systematic reduction in finance costs.
Though better off in this regard than other players in the industry such as Kohat and Maple Leaf, DGKC still has room to improve its leverage. Firms such as Lucky, Fauji and Attock have finance costs that amount to less than 2 percent of their respective net sales.
LIQUIDITY The liquidity of DG Khan Cement worsened between 2010 and 2011, but only just. Cash flows have been burdened on account of the repayment of long-term loans; the current ratio decreased from 1.45 to 1.19. However, the Company is still better off than others in the industry, many of whom have Current Ratios below 1.
LOOKING FORWARD The cement industry has been reaping the benefits of increased cement prices in the first half of this fiscal year. What is required now is planning to maintain profitability should prices stabilise in the future. DG Khan Cement has pursued a cautious tone in its recent report, underscoring an active effort not to overplay the profits.
Rather, the Company has chosen to invest in alternative power sources such as Tire-Derived Fuels and Refuse Derived Fuels. Such measures will definitely ease the burden of increased power prices to firms in the future. Additionally, the prices of coal, arguably the most significant raw material in the production of cement, have been periodically decreasing over the last year. This may help cement companies strengthen margins and look towards better bottom lines in the coming months.
==========================================================================
DG Khan Cement
==========================================================================
(Rs mn) FY11 FY10 chg 1HFY12 1HFY11 chg
==========================================================================
Net sales 18,577 16,275 14% 10,701 8,175 31%
Cost of sales 14,192 13,570 5% 7,225 6,489 11%
Gross profit 4,385 2,705 62% 3,477 1,686 106%
Distribution costs 2,471 994 148% 1,238 769 61%
Other operating income 1,107 912 21% 650 546 19%
Operating profit 2,653 2,261 17% 2,529 1,315 92%
Finance cost 2,052 1,903 8% 886 1,016 -13%
PAT 171 233 -27% 1,279 192 566%
==========================================================================
Source: Company accounts
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].