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DGKC was established in 1978 under the management control of the State Cement Corporation of Pakistan (SCCP) and commenced production in April 1986. The company belongs to Nishat Group and is the largest cement manufacturing unit in Pakistan. It is listed on all the three stock exchanges of Pakistan.
The company manufactures two types of cement: Ordinary Portland Cement (ORC) and Sulphate Resistant Cement (SRC). The Ordinary Portland Cement is marketed under the DG brand and Elephant brand Ordinary Portland Cement. SRC is marketed as the DG brand Sulphate Resistant Cement.
The company was started Greenfield cement plant in FY04 in Khairpur, which has completed in FY07 and started clinker production on trial basis in May 2007. Its commercial production commenced on 27th June 2007. The plant has a capacity of 2.1m tpa. The total capacity of the company has been enhanced to 4.21m tpa from 2.11m tpa.
Currently, the work is in progress in new vertical cement grinding mill at DG Khan site. The shipments from plant supplier have started and the cement grinding mill is expected to start operation in the last quarter of FY08. After the completion of this project, the excess clinker produced would be ground and sold, leading to greater efficiency.
Simultaneously, the company is evaluating another expansion plan of 6,700-12,000 tpd clinker ie 2.11-3.78m tpa in Hub, near Karachi. The expansion would be completed in 24 months and it would increase the total capacity to 6.32-7.99m tpa from 4.21m tpa with a projected cost of Rs 14.0-15.0 billion for 6,700. tpd clinker plant or Rs 20 billion for 12,000 tpd clinker capacity plant. The project would be financed with debt/equity ratio of 60:40.
RECENT RESULTS 1Q'08: Profits of the cement sector remained depressed during the first quarter of the current fiscal year. The sector's profitability declined by a massive 86.6% during the period compared to the corresponding period last year. This was due to an average of 26.8% decline at retention level cement prices. Consequently, the prices averaged Rs 123 per bag in 1Q'08 as compared to Rs 168 per bag in the 1Q'07.
The three months period witnessed a 34.6% increase in cement dispatches, which grew to 7.28m tons in 1Q'08 as compared to 5.41m tons in the corresponding period last year. Within this, the local dispatches grew 20.9% to stand at 5.74m tons in 1Q'08 as compared to 4.75m tons in 1Q'07. Exports also showed tremendous growth of 137%, swelling to 1.54m tons during the period under review from 0.66m tons last year due to construction activity in Afghanistan and UAE.
In the backdrop of decline in profitability of the sector, the profits of DGKC also plunged 44.6% below the 1Q'07 level. The company posted a profit after tax of Rs 268 million (EPS: Rs 1.06) for 1Q'08 as against Rs 484 million (EPS: Rs 1.91) in the same period last year.
During the 3mths'08, the cement sales showed a 65.7% growth, however, the depressed retention prices allowed a sales revenue growth of only 20.7%, pulling it up to Rs 2,233 million in 1Q'08 from Rs 1,850 million in 1Q'07. Consequently, the gross margins have also dropped to 16.7% in the 1Q'08, compared to a gross margin of 44.2% last year.
The 65.7% increase in sales comes from a 60% increase in domestic sales from 0.52m tons last year to 0.83m tons. Exports stood at 0.10m tons in 1Q'08 from 0.04m tons in the same period last year, depicting an impressive growth of 131.9%.
During the first quarter of current fiscal, the gross profit of DGKC dropped by 54.3% compared to the corresponding period last year. In addition to the low retention prices, this was caused by an 80% hike in cost of production of the company.
Moreover, the financial charges also rose sharply on back of the borrowing cost of loans obtained for Khairpur cement plant which is now been charged to income after start of the commercial production in Jun'07. As a result, the financial charges stood at Rs 373m in 1Q'08 compared to Rs 133m last year, depicting an increase of 181%.
Other income has displayed tremendous growth for the three months, rising to Rs 198m in 1Q'08 from Rs 6m last year, owing to higher dividend income. During the period under review, company received Rs 195m as dividend income. The contribution of the other income on the company's earning per share was Rs 0.78 in 1Q'08 as compared to Rs 0.03 in the same period last year.
The FY07 was characterized by cascading profitability for the cement industry as the combined profits of the sector declined by 56% from Rs 12.3 billion in FY06 to Rs 5.3 billion in FY07. At the same the total cement dispatches grew by an impressive 31.8% compared to FY06 from 18.4m tons to 24.3m tons.
DGKC managed to obtain a 30.4% share in total industry profits, a position second only to Lucky Cement. The local sales volume rose by 22% during the year, but capacity constraints restricted further growth, so that the sales growth of the company was lower than that of the industry growth of 24%. Export sales, however, declined by 7.4%. Moreover, the growth in sales volume was not accompanied by a growth in sales revenue, which suffered a decline of 19%.
The clinker and cement production of the company grew nominally during the year, at the rate of 4.2% and 12.3% respectively. The production from the four days of commercial production from the Khairpur plant further augmented production. Capacity utilization stood at 113% in FY07, only slightly higher than the 112% utilization in FY06.
The gross profit margin of DGKC declined from 49.81% in FY06 to 31.65% in FY07 accompanied by a decline in net profit margin from 30.4% to 25.27% for the same period. The decline in profitability of the company and the industry was caused by a number of factors.
Low retention price was one of the major reasons for the drop in profitability. Sales prices suffered a 37% decline in FY07 compared to the previous year. This situation arose as the expanded capacities of the various companies came online, leading to a supply overhang. This resulted in downward pressure on prices and gross profit.
Secondly, the rising fuel price resulted in a 37% hike in cost of sales. Moreover, the hand rate of Kraft paper has also grown steadily, with a 16% rise in cost of paper bags on average. These factors severely hit the gross and net profits of the company. Subsequently, the profit margins also declined.
Other income showed a positive trend, with a significant growth of 63%. This was mainly a result of higher dividend income. The growth in other income helped ease the pressure in profits, contributing positively to the bottom-line.
The performance of DGKC in terms of asset management was weak during the FY07. During the year, the inventory turnover (days) of the company more than doubled compared to the FY06 when the management of inventory seemed most efficient (evident from the lowest inventory turnover in days).
This can be traced back to lower sales revenue for the period, coupled with a higher stock of inventory. At the same time, the average time taken by the company to recover cash from sales has also increased. The increase in inventory turnover in days and days sales outstanding (DSO) have prolonged the operating cycle of the company significantly.
Besides this the sales to equity and total asset turnover of the company have declined. An increase in the paid up capital of the company was one factor behind this trend. The capacity utilization has, however, improved nominally over the previous year. Hence overall, the efficiency of DGKC in the field of asset management has deteriorated significantly. However the company's performance in the area may improve in the following periods as full-scale production from the newly inaugurated Khairpur plant augments sales.
The debt management ratios of DGKC have shown a positive trend during FY07. The debt to asset and equity ratios as well as the long term debt ratio has all receded during the period. This reflects a reduction in the company's dependence on debt financing.
Hence the leverage of the company has declined. Despite this decline, however, the TIE has cascaded for the same period, against a previously positive trend. The financial charges of the company rose by 3.9%. This increase in financial charges, together with a 51% decline in EBIT has brought about the reduction in interest coverage.
DGKC's liquidity stance has been strengthening since the past few years and FY07 saw a continuation of this trend. The increase in current assets that brought about this change comprised of a 98% increase in short term investments. The cash and bank balances have also risen considerably. The liquidity position of the company therefore seems safe.
The low cement retention price and high cost of sales during the year have severely hit the EPS of DGKC, bringing it down to Rs 6.40 from as high as R 13.11 in FY'06. But despite the decline in profitability, the company has declared a dividend of Rs 1.5 per share.
As illustrated in the graph below, the company's stock has fluctuated generally in line with the KSE 100 and KSE 30 Indices. However compared to the Indices, the stock performance has not been impressive, remaining below the indices for the larger part of the nine months period starting January 2007.
FUTURE OUTLOOK: In light of the rising coal prices in the international market and hike in inland freight due to increase in petroleum prices in the country, the DGKC has decided to use gas for heating the kiln. To start with gas firing equipment for plant 2 at DG Khan has been procured and about 60% of the coal has been replaced with gas. This change is expected to reduce energy cost during FY 2008.
The Federal Budget 2008 has announced a PSDP of Rs 520 billion, which is 20% higher than last year. Moreover, this PSDP is largely infrastructural centric hence the cement industry is likely to attain a significant portion of this amount.
Moreover, the cement industry has been demanding a cut in Central Excise Duty (CED) which is one of the major reasons for high cement prices. Although the government has promised to reduce the duty gradually, but no such measures were announced in the Budget 2008. On the contrary, an additional special excise duty at the rate of 1% has been imposed on manufacturing activity. In the presence of these duties and with the imposition of the additional duty, the profitability of the sector will be threatened.
With the industry wide expansions of capacity, the industry is now in a position to export a sizeable portion of its produce. However, the incentive announced in trade policy of FY 2006-07 for the construction of bulk handling and storage facilities of cement and clinker has not materialized, which is a serious impediment in smooth export activities.
In addition, the industry is also seeking approval for the export of cement to India. The allowance of the export of cement by land route, if granted but the government, will benefit DGKC since its Khairpur plant is located at a short distance from the Wagah border. Export of cement from northern border has also started from Khairpur plant.
These conditions present enormous potential for the country's cement sector; however a continuation of the price war like conditions in the industry will undermine any benefits accruing to the cement manufacturers. The current pricing situation poses serious threats to the financial position of the cement sector.
Moreover, the cement sector is expected to show depressed result in the second quarter also on the back of comparatively reduced cement dispatches in winter, increased input cost and fluctuating cement prices.