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Dera Ghazi Khan Cement: Financial And Operational Performance

OVERVIEW

The company was established in Dera Ghazi Khan under the control of State Cement Corporation of Pakistan Limited (SCCP) in 1978, started operations in 1986 with a production capacity of 2,000 tons per day, about 600,000 tons annually.

The company was acquired by Nishat Group in 1992 after the government’s privatization scheme, where many other cement companies were deregulated and privatized. The company became the larger of two cement producers at that time. More capacity was added through the years in order to increase capacity from 2,000 tons per day to 6,700 tons per day (approximately 2 million tons). It then added a new plant in Khairpur with a capacity of 6,700 tons per day. Combined, the two plants have a capacity of 4.22 million tons annually of clinker.

The company went public after privatization and caters to the northern market usually, but also exports to Afghanistan, India, Kenya and other African countries with majority of exports going to India by road. The company’s highest numbers of shares are held by Nishat Mills-31.4 percent in fiscal year 2017 where Mian Umer Mansha and Hassan Mansha together have over 12 percent of the company’s share giving them voting rights in DGKC.

FINANCIAL AND CAPACITY PERFORMANCE

Without changing much of its production since fiscal year 2010, the company has grown its pre-tax earnings from Rs 36 million to Rs12 billion in fiscal year 2016 and a subsequent cut-down on its costs of production. The company’s revenues have grown from Rs16 billion to Rs30 billion between fiscal year 2010 and fiscal year 2016.

Even though dispatches have grown over the years, share of exports has fallen from 31 percent in fiscal year 2011 and fiscal 2012 to 13 percent in fiscal year 2017, which is an alarming decline if local dispatches were not there to balance it out.

The company has installed captive power generating units in its facilities using two fuels; gas and furnace oil that reduces reliance on single fuel. Another coal based captive power plant is installed at the D. G. Khan site, while the company also has 1MW solar project underway. A wind project is also under study. The captive power generation in both factories has a combined capacity of over 100MW where each factory has Waste Heat Recovery with a combined capacity of 19MW.

In fiscal year 2017, the company used 88 percent of electricity from internal sources, while the rest was bought from WAPDA (Water and Power Development Authority). In the outgoing fiscal, this share grew to 94 percent. With this, the company has significantly reduced reliance on external sources for power.

Cement companies’ margins are often an interesting point of discussion as more and more companies have taken to adopting own-power generation measures to reduce dependence on the grid as well as cut down costs. DGKC’s margins have moved up from 17 percent to 43 percent in fiscal year2016; and down to 39 percent in fiscal year 2017.

The company used a number of alternate fuels including rice husk, poultry waste, corn cob, corn stick, cotton dust and cotton sticks.

Net profit margin’s increase from one percent to 30 percent between fiscal year 2010 and fiscal year 2015 is a sign of growth. EBIDTA margin grew from 22 percent to 49 percent during this time period, which is a strong indicator of how far the company has come. Interest costs are likely to go up as the company finances its two expansions projects, which are in the works.

DGKC in fiscal year 2017 and beyond DGKC remained among the top of the pack during fiscal year 2017 despite a less than exciting year in terms of earnings and margins. Since total dispatches for the industry grew by less than 4 percent, the slowdown was witnessed across all the big and small companies some more than others.

Earnings of the cement giant trotted downwards by 9 percent year-on-year due to no revenue augmentation, and decreasing margins.

 

Gross margin declined from 43 percent to 39 percent in fiscal year 2017, which came from higher cost of sales that largely emanated from higher coal prices in the fourth quarter particularly.

Another factor for decrease in profitability was supply of LNG instead of system gas that is comparatively expensive. Profit margins lowered likely due to high finance costs as the company is undergoing expansions.

Within the industry expansions of 30 million tons, DGKC is adding nearly 5 million tons of cement to its existing annual capacity with a brownfield plant in DG Khan and a Greenfield plant in Hub, Balochistan. The company’s project with Loesche GmbH, a Danish company is underway, and the expected launch of the expansion is end of fiscal year 2018. After the planned expansions, the firm will have nearly 12 percent share in the market in terms of capacity.

Local demand within the sector remains fundamentally sound as the government continues its focus on infrastructure and energy diversification projects; with a real boost upcoming in the housing and real estate sectors.

The 2.8 million tons of capacity in Hub Balochistan will give DGKC a logistically and geographical advantage to reach exporting markets through the port nearby.

This, along with some expenditure on marketing to potential exporting locations would bode well for DGKC as exports fall.

FOCUS ON INDIAN MARKET

Right now, DGKC’s focus has been the Indian market but many different markets via sea remain unexplored. The company’s margins are expected to bounce back during fiscal year 2018 as coal prices normalize, but finance costs will put a dent to the bottom line. The local demand in the north is growing fast. DGKC is in the right position to grab a bigger chunk as demand expands.

But as is the case for other companies in the sector, exports will remain a cause of concern as their share in total sales mix is dangerously low.

One cannot substitute the gains a company can make by competing in global markets and constantly investing back into the business to maintain the best quality and remaining the most efficient.

Though businesses are there to make a profit, and local demand is where the margins are the highest, diversifying sales mix has strong merits.

UPCOMING PLANT

D. G. Khan Cement’s latest manufacturing plant, which would be Pakistan’s largest in terms of installed capacity, will officially begin production by December 2017. Owned by Mian Mansha’s D. G. Khan Cement, is being constructed at an estimated cost of $300 million.

Shajar Capital stated in its report that the plant may not result in a major price war or eat up a significant market share of competitors since it would largely cater to the rising demand of cement in Gwadar-related mega projects and housing schemes in the southern region (Balochistan and Sindh). Shajar Capital said it along with its clients paid a visit to the construction site to assess the process of its much-awaited green field expansion at Gaddani, Hub which “as per the project management is expected to come online by the end of calendar year 2017.”

The company has set the target to complete its civil work by September 2017 and move into the testing phase in order to ensure project commissioning by December 2017, it said.

The brokerage house added “the new line having a clinker capacity of 9,000 ton per day is the largest single facility (being) set up in Pakistan,” the house added in a brief to its clients. “Development of Gwadar, initiation of HUBCO coal based power plant and revival of Parco’s refinery plant at Khalifa Point are anticipated to spur cement demand going forward in the region and also bring further development along this area,” it said.

CONSOLIDATED NET PROFIT OF RS2.73 BILLION IN Q1 OF 2017-18

D. G. Khan Cement posted a consolidated net profit of Rs2.73 billion in the first quarter of fiscal year 2017-18, up 58 percent compared to Rs1.73 billion in the same period of previous year, according to a company notice sent to the Pakistan Stock Exchange (PSX).

Earnings per share (EPS) jumped to Rs6.24 in July-September fiscal year 2018 compared with EPS of Rs3.94 in the corresponding quarter of fiscal year 2017.

Topline Securities commented that the better-than-expected result was due to consolidated sales were up 14 percent year-on-year in Jul-Sep fiscal year 2018 due to 18 percent volumetric growth in high-margin local cement sales.

G. Khan Cement’s new plant at Hub in Balochistan will officially start production by December 2017. The 9000t/day plant is scheduled to complete civil engineering work by September 2017 and then start commissioning by the end of the year. The new plant is expected to support infrastructure development near Gwadar and support residential schemes in Balochistan and Sindh.

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