Lucky Cement Limited, a company belonging to the Yunus Brothers Group, is the largest manufacturer and exporter of cement in Pakistan. With two production facilities in the country, one in Karachi and one at Pezu in NWFP, Lucky Cement is also Pakistan's only cement manufacturer to have a loading and storage terminal at the Karachi port.
Thanks to location advantages of being in the South, it is not surprising to know that Lucky accounts for more than one-third of the total cement exports from Pakistan, and caters to the Asian, Middle Eastern and African markets.
PROFITABILITY
Sales and gross margins FY12 commenced on a good note for Lucky. During the first nine months, the company's revenues witnessed a year-on-year increase of about 29 percent, lead primarily by a surge in local sales as opposed to export sales. While local sales volumes registered a 7.5 percent year-on-year growth during the cumulative nine months of FY12, export sales volume decline by five percent. Overall, a marginal volumetric increase in net sales of two percent was seen, including both local and export sales.
As for revenues from sales, local sales fetched a whopping 46.4 percent increase in revenues, thanks to an increase in domestic retention prices of cement, which went up by roughly 21 percent, year-on-year during 9MFY12. As for the export side, though export sales volumes declined vis-à-vis the previous year as discussed, better export prices helped generate 9.3 percent higher export sales revenues during the cumulative nine months of this fiscal year relative to the same period last year.
The cost of sales for 9MFY12 also went up by about 19 percent, led by increases in prices of fuel, packing materials and other input costs. Gas and diesel prices were increased by 17 percent and 10 percent during the third quarter alone. Yet, as a percentage of sales, the cost of sales was 62 percent in 9MFY12 versus 67 percent in 9MFY11, indicating that better prices covered the higher cost of goods well. Overall, gross margins increased by about five percentage points in 9MFY12 against 9MFY11.
Lucky has initiated an alternate fuel facility using used tyres and agricultural and municipal waste called the RDF. The project has been made operational in 3QFY12, and 20 percent fuel replacement has been achieved so far. This initiative will further help reduce Lucky's cost of production in the days to come, and help improve margins further.
Distribution costs On the operating side, distribution costs are a key component because of the nature of the business which warrants distribution across local as well as export markets. Though distribution costs had stayed under 10 percent of sales in FY08 and FY09, they saw an upsurge in FY10, declining marginally in FY11 to 12.4 percent of sales.
For 9MFY12, distribution costs were nearly 11 percent of sales, versus 14 percent during 9MFY11. The decline in distribution costs as a percentage of sales in 9MFY12 against the same period last year is attributable to the volumetric decline in export sales during FY12.
On the whole, operating margins were higher by about eight percentage points in 9MFY12 relative to the same period last year.
Net margins Net profits have grown at a cumulative average growth rate (CAGR) of about 10 percent between FY08 and FY11. In 9MFY12, profit after tax increased by a whopping 89 percent, year-on-year, to Rs 4.7 billion. The improvement in profitability was reflected in an improvement of about six percentage points in net margins for 9MFY12 relative to the first nine months of the previous fiscal year.
LEVERAGE Lucky's debt to equity ratio is relatively stable at a lower proportion of debt relative to equity. In particular, the debt to equity ratio for FY11 was contained at 0.02:1. The debt-to-equity ratio depicted a consistent decline for the past five years, with interest coverage ratio in FY11 also depicting an improvement since FY09.
In 9MFY12, the company's long-term finances increased marginally, from Rs 658 million at the end of the last fiscal year to Rs 725 million at the end of 9MFY12. Current liabilities, on the other hand, decreased by roughly rupees four billion from the end of the previous fiscal year to Rs 6.8 billion at the end of 9MFY12. The company's financial charges declined from 2.2 percent of sales in 9MFY11 to 1.2 percent of sales during 9MFY12.
OPERATIONS Lucky's inventory management dwindled slightly in FY11, with the inventory turnover in days increasing by about 26 percent relative to that in FY10. Similarly, Lucky's accounts payable turnover - which shows how quickly the firm pays its creditors - increased by about 18 percent in FY11 to nearly 75 days against FY10.
INVESTMENT & VALUATION According to JS Research, "Lucky is trading at FY12E and FY13F PE of 6.3x and 6.1x respectively." The house even raised the scrip's target price to Rs 135 from Rs 117.5 previously. Other brokerage houses are also optimistic about the scrip, with AKD securities having raised the target price to Rs 148.4 per share!
ONGOING PROJECTS It's the expansion plans of Lucky Cement which are the company's highlight. The due diligence for establishing the cement project at DR Congo is making encouraging headways, while Lucky has also decided to set up an 870,000 tons Greenfield cement grinding plant in Iraq, estimated to cost dollars 30 million.
The project in Iraq is to be established as a joint venture with a local partner, and is meant to be equity-financed with equal contributions from both partners.
Lucky will also be investing in its newly incorporated associated company by the name 'Yunus Energy Limited'. The project, to be set up in Thatta, will be 50MW wind electricity project costing dollars 143 million, to be financed via debt and equity through a 20:80 ratio.
OUTLOOK As far as local sales are concerned, Lucky's got a promising outlook ahead. While the increase in retention price of cement promises a year-on-year increase in the company's revenues for FY12, a volumetric increase is also expected because of a low-base effect and also due to reconstruction work in flood-affected areas in Sindh, together with an improved PSDP allocation for FY13 because of the run-up to the elections.
On the export side, while volumes have depicted a fall in the first quarter of the current fiscal year, the company is hopeful that exports to Afghanistan will reach the five million ton level in FY12. Cement exports to Afghanistan were 4.7 million tons. Similarly, there are expectations of better exports to India in the wake of improving trade relations with the neighbour. However, exports to other destinations are expected to stay on the ebb.
Overall, the company expects the total sales volume for the current fiscal year to reach a record by exceeding the highest ever domestic sales volume 23.55 million tons which was achieved in FY10.
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