Cherat Cement Company Limited November 13, 2013 RECORDER REPORT 0 CommentsE-mailPrintPDF INTRODUCTION: Cherat Cement was incorporated as public limited company in 1981. It is engaged in the business of manufacturing, marketing and sale of cement. The Company is part of the Ghulam Faruque Group, and is listed on Karachi, Lahore and Islamabad Stock Exchanges. The Company is a leading supplier of cement in the northern Punjab and Khyber-Pakhtunkhwa regions. Its manufacturing plant is located in Nowshera district, bordering the Cherat Hills--Companys source of high quality limestone. The Company claims to have created for itself a strong brand image in the export market through supply to Afghanistan. GHULAM FARUQUE GROUP (GFG) GFG has been a prominent business house of the country, ever since its inception in 1964. The Group has diverse business interests in the country, ranging from air-conditioning, cement, CNG, power, packaging, sugar processing to software development. Companies managed under the GFG name include, Unicol Limited, Madian Hydro Power, Faruque (Pvt) Limited, Cherat Cement Company, Cherat Packaging, Mirpurkhas Sugar Mills, Greaves Pakistan, Greaves Air-conditioning, Greaves CNG and Zensoft (Pvt) Limited. INDUSTRY REVIEW FY13 proved to be an excellent year for the cement sector, with total industry cement dispatches growing by nearly three percent. This was despite the two percent decline in cement export, which dropped due to lower demand for bagged cement. However, domestic sales proved to be the saving grace for the sector, which saw growth by more than 1.11 million tons, making up for the lost export volumes. For several years, exports have stood at around a quarter of total cement dispatches for the industry. During the year, Cherat cements cumulative share in the export market was 4.3 percent, a decline of 30 basis points since last year. Cherat share in the export market has progressively declined over the years, from 5.6 percent in FY08, a cumulative decline of four and a half percent. In the domestic market, Cherats share remained intact at 2.5 percent on a year-on-year basis. However, this was only a fraction of the domestic market share of industry leaders Lucky and DGKC, with share of 15 and 11 percent, respectively. Overall, Cherats market share was 3.0 percent of total industry off-take. While the number seems insignificant, its plant did, however, operate near full-capacity with capacity utilisation for clinker standing at 91.3 percent and that for cement at 90.11 percent. (Clinker and cement operational capacity are 1.05mn tons and 1.10mn tons per annum, respectively). PERFORMANCE BRIEF FY13 As for the rest of the industry, FY13 was a good year for the company as local sales rose by four percent on the back of growing domestic demand. According to the Company report, the catalysts for this demand was higher government spending on infrastructure during an election year, coupled with increased private spending on new construction driven by growth in remittances from expatriate Pakistanis. Growth in local sales was in line with the industry, growing by four percent. Over the years, the Company has worked to develop a market for its product in Afghanistan. However, exports for the Company continued to decline for third year in a row, this time chiefly due to influx of cheaper Iranian cement in the target market. For FY13, the share of exports in the total sales mix stood at 25 percent. The number has seen a steady decline from FY09, when exports stood at 32 percent of the total sales for the Company. Growth rate in local sales, however, has underperformed the industry for last couple of years, indicating that the lost share in export market has not entirely been made up for by increasing reliance on domestic market. FINANCIAL PERFORMANCE FY13 Cement prices remained stable during the year, allowing turnover to grow by 15.34 percent compared to last year. Cost of input such as electricity saw an escalation over the year but the Company effectively overcame the challenge by employing alternate sources of fuel. Coal prices also remain under control, while the Company resorted to a cost-effective packaging solution that is purportedly also more durable. Put together, the combined effect of these factors allowed the cost of sales to decline as percentage over net turnover to 65 percent from 79 percent last year. Distribution and administrative cost grew with inflation but remained stable as a percentage of sales. Other operating expenses, however, grew from Rs 34mn to Rs 230mn, on account of investment in the Madian Hydro-Power project by the Company. Decline in discount rate by the central bank also helped trim finance costs for the Company during the year, which declined by 65 percent on a year-on-year basis. Other operating income remained insignificant. PROFITABILITY Stable product prices along with efficiencies in resource utilisation allowed gross margin to grow phenomenally during the year. Gross margin stood at nearly 35 percent, up from just 21 percent last year. Investment in the hydro-power project dented the operating margin only nominally, allowing the Company to sustain the growth in gross margin. Operating margin hence also grew by ten percentage points, unmatched by growth in previous years. Lower finance cost allowed Company to bag a fat bottom line, with profit after tax growing by nearly 200 percent, from Rs 437mn last year to 1,224mn in FY13. Earnings per share stood Rs 12.81, with net margin improving from 8 to 19.4 percent. OUTLOOK Going forward, cement sector in general as well as Cherat is expected to see growth in FY14 on the back of higher budget allocations towards PSDP by the new Federal Government. However, inflationary macroeconomic outlook for FY14 and devaluation of Pak rupee may prove to be the sectors undoing. A successive rise in discount rate by the central bank could increase the finance cost for the firm. On the other hand, currency depreciation could increase the cost of inputs, eroding the ground gained by gross margins. Political and security uncertainty in the region makes export to Afghanistan and India an unstable demand factor. The cement sector in general and Cherat in particular not only needs to look inward but also expand its export market from traditional Middle Eastern to potential markets in emerging African economies. Going forward, Cherat cement has plans to incorporate cost reduction processes in production, including use of alternate fuels and reduction in reliance on coal and furnace oil in order to overcome price volatility of these commodities. The Company is also looking into expanding its plant capacity, due to improved demand prospects going forward, as well as the strategic geographical location of its facility, nearing the Afghan border.
Posted on: Wed, 13 Nov 2013 02:11:48 +0000
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