Industry review
FY11 had been a rough year for cement manufacturers because of the Great Floods of 2010 and low PSDP expenditures. Consequently, in FY11, local cement dispatches had fallen by over six percent to 22 million tons versus FY10. At the same time, export demand in FY11 was also lull due to excess capacity and low prices in export markets, in particular the GCC countries. Consequently, export dispatches from Pakistan also decreased by nearly 12 percent to 9.4 million tons versus the previous fiscal year.
However, FY12 saw local cement retention prices going up, lending some price-based support to local cement manufacturers. In addition, post-flood reconstruction activity and greater housing construction in some parts of the country also brought about a volumetric growth in local sales - an eight percent year-on-year improvement in 9MFY12 at 17.4 million tons. Export sales, however, continued to be stifled during the year, clocking in at 6.2 million tons during 9MFY12, eight percent less than the same period last year.
Profitability FY12 started off on a good note for the company. During 9MFY12, revenues rose around 60 percent relative to the levels seen during the same period last year. Overall, gross margins improved by nearly 15 percentage points against 9MFY11, with gross profits more than trebling on a year-on-year basis.
The improvement in revenues can be attributed to an increase in cement prices in the country. In the northern region alone, cement prices have risen about 24 percent during 9MFY11 on a year-on-year basis.
The effect of the healthy turnover was passed on to the company's operating margins too. Kohat Cement's operating profits during July-March FY12 also increased more than three times to Rs 1.7 billion from about Rs 0.5 billion during the same period last year, with operating margins improving about 14 percentage points on the same comparative note.
This further cascaded down into a better net margin for the nine months under review, which improved from a loss in 9MFY11 (net margin of negative 1.5 percentage) to a positive net margin of over 15 percent in 9MFY12. In fact, the strength of the improvement in the company's profitability since the beginning of FY12 can be gauged from the fact that EPS in 3QFY12 at Rs 3.46 per share was higher than the full year EPS in FY11 of Rs 0.49 per share.
Leverage Despite the better margins enjoyed by Kohat, the company's leverage position wasn't very sound previously. At a debt-to-equity ratio of 70:30 in FY11, the company was even more leveraged than Maple Leaf cement - a company known for its leverage problems in Pakistan's cement sector. Like peers, most of this debt has likely been taken up for capacity expansion in anticipation of increased cement demand.
However, improvement in revenues witnessed so far in FY12 lends some hope with regards to the company's ability to pay off its liabilities as they come due. The company has been able to restructure Rs 2.4 billion worth of Sukuk certificates, with a deferment of mark-up uptil 2016.
The company has also repaid PKR 1,329 million up to 31 March 2012, including pre-payments of Rs 750 million. The debt-to-equity ratio uptil March 2012 improved to about 65:35. The company's finance costs as a percentage of sales have also improved, from 13 percent in 9MFY11 to about seven percent in 9MFY11. The interest coverage ratio improved from 0.97 during 9MFY11 to 3.7 during the same period in FY12.
Liquidity In FY11, Kohat Cement's liquidity position improved somewhat as the company repaid a major chunk of its long-term finances. Consequently, from a current ratio of 0.43 in FY10, it inched up to 0.70 in FY11. At 0.70, Kohat's current ratio is a wee bit better than that of several players in the industry, lending some credibility to the company's liquidity.
Investment and valuation Analysts maintain a positive outlook for Kohat Cement, with Topline Securities claiming, "Kohat Cement stood as the best performer in the cement sector universe. The scrip posted a double-digit positive return of 22 percent in 2011 YTD outperforming the benchmark KSE 100 by 28 percent."
The company has not paid out dividends in the form of cash or bonus shares since FY09 and the scrip is currently trading at the local bourse at about Rs 40 per share. In fact, Kohat Cement's price has increased more than four times since the start of January 2012, when it was about Rs 8 per share (see price history).
Going forward, a rise in cement prices is likely to keep Kohat Cement's profitability afloat. At the same time, an improvement in cement demand is also expected in the current fiscal year. Also, the company expects to resume the production of white cement in FY12, which had not been produced in FY11 due to curtailment of Sui gas by SNGPL.