Dewan Cement Limited (DCL) was established after Pakland Cement Limited and Saadi Cement Limited were acquired by Yousuf Dewan Group in 2004, and merged in 2007. The Yousuf Dewan group has several companies working in multiple sectors, mainly automotive operations, fibre, sugar and ethanol, textile and trade.
DCL boosts a capacity of 2.89 million tons of cement and 2.76 million tons of clinker with a market share of 6 percent. Tracing back the history, Pakland Cement Ltd was established in 1981 with an initial capacity of 300,000 tons and was fully operational by 1985, producing superior Ordinary Portland Cement. Sulphate Resisting Pakland was introduced in 1987. Subsequently, Pakland Blast Furnace Slag Cement was included in the company's fold. DCL now also produces Pakland Black Diamond, Pakland Lion and Pakland Premium cement variants.
The company has two production facilities; one in southern Pakistan near Karachi at Deh Dhando, Dhabeji, Sindh and the other in northern Pakistan near Kamilpur Hattar Industrial Estate, District Hattar Khyber Pakhtunkhwa.
The northern plant being close to the GT road covers Punjab, KPK, Azad Kashmir in the local market and Afghanistan and India in the export market, while the southern plant covers Sindh and Balochistan in the local market, and proximity to the ports at Karachi facilitate export to markets of Sri Lanka, Africa and the Middle East.
Other than India and Afghanistan, other export markets for the company include, Sri Lanka, UAE, Qatar, Kuwait, Iraq, Yemen, Sudan, Djibouti, Tanzania, Kenya, Madagascar, Mozambique and other African countries. The company is seeking out markets in South Africa.
Dewan Muhammad Yousuf Farooqi is the Chairman of the company. In an announcement in April 2015, DCL proposed to convert an outstanding loan provided by the Chairman to 45 million ordinary shares (at Rs10 per share) in his name totalling Rs450 million. The debt was converted in June 2015, bringing total holding of Mr. Dewan from 24.4 percent to 32.25 percent.
Other majority shares are held by associated companies within the Yousuf Dewan Group: Dewan Motors (4.18 percent), Dewan Mushtaq Motors Company (4.18 percent), Dewan Development (6.91 percent), Dewan Farooq Motors (6.44 percent) and Dewan Automotive Engineering (8.62 percent).
Financial and operational performance FY10- FY15
While DCL has a considerable share in the market in terms of capacity, it has shown marked underutilization over the years. Idle capacity stood at 68 percent in FY10 and while capacity utilization has increased, the company was still operating at only 55 percent of the capacity in 2015 and 50 percent in 2014 even though cement demand has been continuously increasing.
Production of clinker went from 835,000 tons in FY10 to 1.56 million tons in FY15, while cement production grew by 87 percent between these years going from 918,000 to 1.7 million tons. Total dispatches grew by 82 percent from 937,000 tons to 1.7 million tons. Overall exports for the sector have decreased owing to a fall of demand from Afghanistan where Dewan's cement exports fell by 21 percent between FY14 and FY15. Export share to total dispatches also went down from 20 percent in FY14 to 14 percent in FY15.
Net sales for the company has kept pace with other cement players tripling between FY10 and FY15 reaching Rs11 million from Rs3.5 million, while after tax profit reached Rs710 million in FY15 against a loss of Rs623 million in FY10. The company incurred a loss in FY 11 as well but gained a profit of Rs383 million in FY12.
Gross margins recovered from negative nine percent in FY10 to 12 percent in FY12, up to 14 percent in FY15. However, despite continued growth in the top line, these gross margins have remained laggard compared to major as well as smaller players in the sector; industry average moving towards 42 percent.
Cherat Cement, which is also a smaller firm and had similar revenues as Dewan in FY10, registering almost half the revenues of Dewan in FY15 had double Dewan's margins (30 percent against 14 percent).
While DCL has strong production capacity and a solid market presence, lower margins are owing to company's high cost of sales contributed by obsolete production methods. Outdated technology of the plants has affected production efficiency significantly.
Cost of sales was 89 percent of revenues in FY13 and FY14 coming down to 86 percent in FY15. In fact, high fuel and power cost burden was 61 percent of sales in FY14 compared to industry average of 41 percent. Whereas most cement players have moved toward energy and cost efficiency by using alternative fuels and own methods of energy generation, DCL is far behind the pack in these areas.
<B>Stock performance and financial standing in 9MFY16 and 3QFY16</B>
"DCL's stock has fluctuated considerably against the benchmark indices of KSE-100 as well as BR cement index throughout the year but showed cautious resilience. The stock price has not budged in any significant way and has stood firm around Rs15 along the year, reaching its highest in September 2015 at Rs18 and lowest at Rs10 in February 2016. Against its peers, there is nothing in DCL's stock price movement to write home about. However, DCL is the highest stock traded in the cement sector indicating investor excitement."
Nine months' performance ending March 2016 showed an upward trend in the top and bottom lines. Net sales grew by 11 percent in year-on-year growth between 9MFY16 and 9MFY15 while after tax profit grew by 19 percent. However, higher operational costs led to a fall in gross margins from 15 percent in 9MFY15 to 13 percent in 9MFY16. Quarterly margins were equally disappointing: 14 percent in Q3 FY16 against 16 percent in Q3 FY15. This would continue to remain a problem for the firm's bottom lines in the future.
Outlook- opportunities and threats
DCL is in the process of commissioning a 6 MW Waste Heat Recovery Plant for Karachi and may also be working on adding Captive Power Generation Plant and alternate fuel energies though no formal announcements have been made as to the timeline of these plants.
Local cement demand is expected to increase by 15 percent per annum in the next few years with higher government development spending and the CPEC infrastructure projects kicking in. In light of these demand movements, cement players are fast expanding their capacities, adding on alternative power generation features to further reduce costs. This would bolster their already high margins currently ranging between 30 percent to 45 percent across different players, but may not be great news for DCL.
With DCL's compressed margins (ranging 11 percent to 14 percent) owing to low cost efficiency compared to other players, and underutilization of the existing capacity by almost 50 percent over the years, the company might be in for a tough competition.
Reduction in company's liabilities with the conversion of debt into equity is a positive sign. The WHR would reduce electricity costs by 25 percent, which would definitely reduce pressure on profitability. The company also enjoys geographical advantage since it has production lines in both the south and north regions with the ability to tap both local and foreign markets but substantial investment in improving the existing technologies and bringing energy efficiency to its other plants would go a long way, specially keeping in view the increasing demand.
In essence, DCL's future in the competitive cement sector hinges on its future plans that should be focused on bringing energy efficiency in its production chain and increasing current capacity utilisation.