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Saturday, 12 March 2011 11:45

Highlights - Corporate News

OVERVIEW : DG Khan Cement Company Limited (DGKC) is a unit of Nishat Group. It is a

producer and seller of ordinary portland and sulphate-resistant cement. DGKC was established in
1978 under the management control of State Cement Corporation of Pakistan Limited (SCCP).

The company started its commercial production on April 1986 with 2000 tons per day (TPD)
clinker based on dry process technology. In 1992, DGKC was acquired by Nishat Group under
the privatisation programme of the government. Since its privatisation, DGKC has undergone
intensive capacity expansion. As a result, DGKC is presently the second largest cement producer
of the sector (first is Lucky Cement). DGKC had a market share of 17% in the local cement
industry in FY10, largest in the cement industry.

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Name of Company D. G Khan Cement Company Limited

Ticker DGKC

Assets (June2010) Rs 47,046,043,000

Share Capital Rs 3,650,993,000 (365,099,266 ordinary shares

of Rs 10 each)

Sales Revenue (June 2010) Rs 16,275,354,000

PAT (June 2010) Rs 233,022,000

Market Share Price (30 June 2010) Rs 23. 62

DGKC has two plants at Dera Ghazi Khan and a new Greenfield cement plant at Khairpur,
which was started in FY04 and began commercial production in June 2007. The plant has a
capacity of 2. 1mtpa. Commencement of production at the new plant and effective and efficient
operations management led to 70% and 66% increase in the volume of clinker and cement
production respectively. The company has its own power generation plant along with Wapda
supply. A dual fuel power generation plant at Khairpur cement plant also started its commercial
operations successfully in FY08.

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The sale of cement in the country registered a decline of over 8% compared with the
corresponding period. The sales of cement in the local market were 10. 108 million tons against
11. 022 million tons during the same period last year. Cement sales in the country plunged by
nearly 28% during the first half of FY 2011 compared with the corresponding period. Whereas
during the 2nd quarter, the local sales declined by 29%. The decline is attributed to poor
construction activities both in housing sector as well as in public sector.

Export of cement during the period also declined significantly. Total export of cement during the
period under review is 4. 629 million tons against 5. 579 million tons during the corresponding
period. The decline of 17% during the period attributed to declining rates of cement in the
international markets along with sluggish demand. In addition, the rising cost of production in
the country also made it less competitive for the industry to compete in the international markets.

Cement production of DG Khan Cement during the first six months of the current financial year
declined by 14% on account of less cement demand both in the country and in export markets,
whereas, the cement production during the 2nd quarter declined by 6%. Sales revenue during the
first half of the current period improved slightly due to better retention prices of cement in the
local market, despite sizable decline in sales volume. But the gross profit during the period under
report declined by nearly 3% on account of rising input costs. The coal prices in the international
market went up sharply and hovering above US $140/ton. In addition, the rising tariff for
electricity and gas also adversely affected the results. Selling expenses were also higher due to
higher export sales, while the administrative expenses increased in line with inflationary
pressures.

DG Khan earned a dividend income of Rs 505. 931 million against Rs 346. 646 million on its
investment during the same period last year. However, financial charges were higher at Rs 1,016
million as compared to Rs 955 million in the same period last year. It earned a PAT of Rs 192.
136 million as compared to Rs 469 million in the same period last year.

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The cement sales in the company witnessed a growth of 15% in FY10 whereas DGKC witnessed
a growth of 27% of sales volume. It also comprised of a 17% market share in local sales.

DGKC has a gross margin and profit margin, which is almost similar to the industry average of
15. 15% and 1. 4% respectively.

However, its current ratio is 1. 19:1 whereas the industry average is of 0. 71:1. This means that
DGKC is in a good position to meet its short-term debt. The current liabilities decreased mainly
as the provision of tax reduced as profits fell and also export sales fell. Current assets increased
mainly due to increase in short-term investments.

The company is reasonably leveraged with a debt to asset ratio of 44% compared to the industry
average of 50%. This can be owed to its repayment of long-term loans. Return on assets of 0. 5%
is marginally lower than the industry average of 1% mainly due to reduced sales revenue.
Owing to such factors, its Earnings per share is also Rs 0. 72 as compared to an average of Rs 2
which results in lower investor confidence.

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During FY09, the demand for DG Khan Cement and clinker had fallen from FY08 by 8% and
7% respectively due to the economic recession plus low developmental expenditure by the
government. However due to increased spending in the private sector and higher agricultural
support prices provided by the government to the rural sector the overall capacity utilisation of
the cement plants increased to 76% in FY10 from 74% in FY09.

This led to an increase of 27% in DG Khan Cement s production from FY09 to FY10 as
4,908,593m tons.

 

The cement sector posted a reasonable growth of 9. 4% as the total sales volume increased by 2.
94 million tons to reach 34. 22 million tons by June 2010 from 31. 28 million tons. Although
DGKC s volumetric sales grew by 28%, the sales revenue fell by 10% from FY09 to FY10 as Rs
16,275 million in FY10 from Rs 18,038 million. This was mainly due to lower selling prices
internationally plus the tough competition within the cement manufacturers leading to price
wars.

However, despite the decrease in sales revenue, the sales volume of the company increased
locally by 45% from FY09 to FY10 due to increased private sector spending and higher support
prices for agricultural products by the government whereas the export sales decreased by 20%
mainly due to a fall in exports to India. Hence an overall increase of 28% in FY10.

The total cement and clinker sales of DGKC had increased in FY10 as higher production enabled
it to largely tap the local market. Cement sales rose by 28% but clinker sales fell by 60%.

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DGKC posted PAT of Rs 233. 022 million in FY10 as compared to Rs 525. 581 million in FY09.
This decline was mainly due to lower prices and reduced exports. The net sales revenue of the
cement sector in FY10 was 10% lower than the net sales revenue generated in FY09. Although
the sales volume increased by 28%- 45% increase in local sales and 20% decrease in export
sales, the revenue fell down mainly due to lower selling prices.

Costs of sales increased by 9. 8% from FY09 to FY10. The increase was due to increasing coal
prices to US$115/ton increased the fuel costs. Also a rise in gas and electricity tariffs increased
costs of production too. Also the costs of packing material increased in FY10. This resulted in a
decline of 9. 8% in the gross profit from the last year; reporting to Rs 2,705. 36 million from Rs
5,679. 73 million.

The operating expense decreased by 56% on the whole in FY10 mainly because of large decline
in selling and distribution expenses as when export reduced, freight charges reduced. Also there
was a 27% decline in the financing costs as the company paid off its long-term loans. Yet the
PAT declined by 56% in FY10. Therefore the earnings per share (EPS) also fell from Rs 1. 63 to
Rs 0. 72 in FY10.

The profitability ratios of the company have shown a declining trend after FY05. The gross profit
margin increased in FY06 only to fall in FY07 and FY08. The profit margin of the company has
decreased continuously along with return on assets (ROA) and return on equity (ROE). The
profit after taxation had declined by 33% in FY07 due to lower net retention prices caused by a
supply overhang in the overall industry. Also the problem of rising input costs had begun in
FY07. This rise in cost of production and raw material had continued into FY08. However in
FY09, the boost in export sales lead to an increase in the PAT and the profit margin was 2. 91%.
The operating expenses had also increased due to higher selling and distribution expenses but the
increased sales revenue contributed to an increase in PAT.

Increased production facilitated higher sales volume, which in turn translated into almost
doubling of sales revenue in FY08. The company had earned the highest sales revenue of Rs 12.
445 billion in FY08. However, despite this, the gross profit of DGKC in FY08 (amounting to Rs
1. 9 billion) was around 6% lower than the gross profit posted in FY07 (Rs 2. 0 billion). The
reason for lower gross profit was a 140% increase in the cost of sales during the fiscal year.

However in FY09, major distribution costs increased when exports increased. Also finance
charges rose due to higher interest rates and increased long-term borrowing. But the sales
revenue had increased by 45% improving the profitability of DGKC and resulted in a profit after
taxation of Rs 525. 581 million in FY09 against a loss after taxation of Rs 53. 23 million in
FY08.

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The liquidity position of DGKC improved in FY10 due to a 24% increase in current assets and a
13% decrease in current liabilities of the company causing a current ratio of 1. 19:1. The current
liabilities of the company decreased mainly due to 55% decrease in provision for taxation as the
profit before tax had reduced in FY10 plus exports also fell and a 35% decrease in outstanding
finances. On the other hand, current assets of the company increased due to 20% increase in
advances and other receivables and 38% increase in short-term investments as they were
revalued, from Rs 7 billion at the end of FY09 to Rs 10 billion at the end of FY10. Thus,
decrease in current assets and a corresponding increase in current liabilities resulted in a less
favorable liquidity position as compared to that in FY08.

DGKC s liquidity stance had been strengthening since FY04 and in FY07 its liquidity position
was the most favorable. The increase in current assets had brought about this change. There was
a 98% increase in short-term investments. Furthermore, the cash and bank balances had also
risen considerably. In FY08 the current assets of the company declined slightly but a 63% rise in
current liabilities caused a decrease in the liquidity of the company. Investments constitute nearly
79% of the company s total current assets and they declined by 11% in FY08. The investments
decreased further from Rs 15 billion at year-end FY08 to Rs 7 billion by end of FY09.
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The performance of DGKC in terms of asset management was weak during FY07. During the
year, the inventory turnover (days) of the company more than doubled compared to FY06 when
the management of inventory seemed most efficient (evident from the lowest inventory turnover
in days). The increase in inventory turnover in days and Days sales outstanding (DSO) prolonged
the operating cycle of the company in FY07. In FY08 the days to convert inventory into sales
became 79. Although the days to convert sales into cash (DSO) increased slightly, the substantial
decrease in ITO (days) led to the shortening of the operating cycle in FY08.

In FY09, the inventory turnover days remained same around 77 days but they increased in FY10
to 90 days indicating a lower inventory turn over ratio. This was due to a 118% of capacity
utilisation of their plant; hence higher production and extreme price competition within cement
sellers. The DSO decreased as trade debt reduced by 41% during FY 10 as against sales. Yet the
operating cycle increased from 87 days to 97 days. Hence the asset management of DGKC
worsened as the company earned sales revenue less in proportion to the increase in inventory.

Besides this the sales to equity and total asset turnover of the company which had a rising trend
till FY09 decreased in FY10. From FY07 to FY09, the sales to equity ratio increased due to
increase in sales revenue from exports sales but it declined in FY10 due to increase in the paid up
capital but a decrease in sales revenue due to lesser selling price. Total asset turnover also
deteriorated in FY10 because of the decrease in sales revenue but increasing asset base.

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The debt management ratios of DGKC rose from FY07 to FY09. During FY08 the debt ratios of
the company rose because the total debt increased in FY08 mainly due to a 63% increase in the
current liabilities however long term debt decreased. The long-term debt to equity increased
because of a decline in the equity base due to fall in reserves.

However in FY10, the debt to equity ratio fell from 104% to 77% and debt to asset ratio fell from
51% to 44% as total debt reduced by 6% mainly due to payment of long term debt and the
reduction of 55% in provision for taxation.

The TIE ratio fell in FY10 from 1. 3 to 1. 19 as although finance charges reduced in the period
by 27%, operating income in FY10 decreased by 33%.

Due to reduced sales revenue and in turn the profitability, DGKC experienced a decrease in its
Earning Per Share (EPS) and Price to Earning (P/E) Ratio. EPS fell from Rs 1. 63 in FY09 to Rs
0. 72 in FY10. The averaged share price fell from Rs 39. 97 in FY09 to Rs 37. This shows that
the lower profits of the company have started reflecting in the low investor confidence and
falling share price. The management did not recommend any dividend for FY10 due to reduced
profitability situation in the period.

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GDP is expected to grow to a target of 4. 5% in the Federal Budget of FY11. This means that
higher per capita cement consumption is expected in the coming years.

The infrastructure redevelopment of flood affected areas is also a potential area for demand of
cement to grow. The government announced to finance every house that was either fully or
partially affected by the flood; again a potential demand for the growth of cement industry. Also
with increased private sector spending, building infrastructure across the country will also aid in
increasing demand of cement. The road networks and dams construction projects are also a
potential source to increase demand of cement. Hence demand of local sales is expected to
increase

Exports have recently reduced due to gulf region capacity and loss of export sales to India due to
political tension in FY09. Yet there is export potential in new export markets like Russia and
some European countries.

DGKC is trying to cut down on costs that have significantly and adversely impacted its profits.
To reduce electricity cost, DGKC has started a project of power generation from waste heat at
DGK Site. The project is expected to generate substantially cheap electricity of about 10. 4MW
without using any fuel. This would help to cut down the cost of production. DGKC has also
decided to use municipal solid waste as fuel for heating purposes. This project will be beneficial
as it would bring down the company s costs of production, help resolve the environmental issues
related with disposal of solid waste and most important, it would save huge foreign exchange
spent on importing fossil fuels. Also if currently, coal is used as a fuel and is imported, in future
local coal can also be used over the cement industry as Lucky Cement has already being supplied
by Oracle Coal Fields.

DGKC is already working on 118% capacity utilisation hence production may increase even
more. Also as local demand is expected to increase, sales volume is also expected to increase.
Yet, to increase its sales revenue, it is only possible if the price wars between the cement
manufacturers.

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Liquidity FY 02 FY 03 FY 04 FY 05 FY 06 FY 07 FY 08 FY 09 FY 10

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Current Ratio: 1. 07 1. 34 1. 21 1. 37 1. 65 2. 60 1. 59 0. 84 1. 19

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Profitability FY 02 FY 03 FY 04 FY 05 FY 06 FY 07 FY 08 FY 09 FY 10

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Gross Profit Margin 28. 35% 22. 65% 35. 68% 36. 91% 49. 81% 31. 65% 15. 39% 31. 49% 16. 62%
Profit Margin on Sales 10. 29% 16. 16% 20. 46% 31. 86% 30. 40% 25. 27% -0. 43% 2. 91% 1. 43%

Return on Assets 3. 23% 5. 08% 6. 78% 9. 34% 7. 05% 3. 14% -0. 10% 1. 23% 0. 50%

Return on Equity 8. 01% 9. 51% 12. 58% 18. 05% 12. 55% 4. 78% -0. 18% 2. 51% 0. 88%

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Asset Management FY 02 FY 03 FY 04 FY 05 FY 06 FY 07 FY 08 FY 09 FY 10

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ITO (Days) 90. 51 102. 85 105. 33 77. 47 48. 07 100. 46 79. 40 76. 55 89. 69

Days Sales Outstanding 3. 76 1. 83 4. 88 5. 20 3. 36 8. 09 10. 59 10. 26 6. 72

Operating Cycle 94. 27 104. 68 110. 21 82. 66 51. 43 108. 55 89. 99 86. 81 96. 41

Sales/Equity 0. 78 0. 59 0. 61 0. 57 0. 41 0. 19 0. 41 0. 86 0. 61

Total Asset Turnover 0. 31 0. 31 0. 33 0. 29 0. 23 0. 12 0. 24 0. 42 0. 35

%"!: Economics and Finance Department, Institute of Business Administration,

Karachi, prepared this analytical report for ]



 .

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