INDIA: Fauji Cement Company Limited

Fauji Cement Company, headquartered in Rawalpindi, has a cement plant at Jhang Bahtar, Tehsil Fateh Jang, district Attock in the province of Punjab. The Company is sponsored by the Fauji Foundation, and was incorporated in Rawalpindi in 1992. The annual production capacity of their cement plant is 1.165 million tons of cement. 

Like many prominent cement manufacturers in the country, Fauji Cement has also installed a Refuse Derived Fuel (RDF) processing plant at a cost of Rs 320 million, for which, a minimum of 300-400 tons of garbage is lifted from each garbage dump located at Rawalpindi and Islamabad. 

PLANT EXPANSION The company commissioned a new production line with a production capacity of 7,560 tons per day. Trial production for the plant started from June 2011. The added capacity is expected to fetch a growth in the company's volumetric sales, while it has also helped Fauji Cement increase its market share in the cement industry. 

However, with the new plant not having achieved full production and operational efficiency, Fauji Cement's capacity utilisation has taken a turn for the south. "Our capacity utilisation remained at 64 percent (based on the enhanced capacity of line-I and line-2) as compared to 92 percent (based on the capacity of line-I only) in the corresponding period last year," said the latest director's report for the company for July-March FY12. 

INDUSTRY REVIEW After a tough FY11 when the country was hit by the Great Floods of 2010, 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 - a nine percent year-on-year improvement in FY12 at 24 million tons. Export sales, however, continued to be stifled during the year, clocking in at 8.6 million tons during FY12, nine percent less than the last year. 

PROFITABILITY The company's net turnover went up by more than twice in 9MFY12 on a year-on-year basis, helped mainly by better domestic prices of cement. The company's cost of sales also increased during 9MFY12 because of rising costs of electricity, and fuel, with the cost of sales almost doubling during July-March FY12 versus the same period last year. 

The net effect on the gross margins was an improvement of about six percentage points in 9MFY12 relative to 9MFY11. Distribution costs as a percentage of sales during 9MFY12 improved, though only marginally. They were 1.6 percent of sales in 9MFY11 and fell to 0.9 percent of sales in the same period in FY12. This is plausibly attributed to a decrease in export sales, which has been a trend faced by the cement industry in general lately. Altogether, this cascaded into an improvement in operating margins of about nine percentage points during July-March FY12 versus the same period last year. 

The company's finance costs as a percentage of sales, however, spiked during the period under review. The management attributes this increase in finance costs to the impact of the debt taken up to finance the capacity expansion mentioned earlier. From 0.6 percent of sales in 9MFY11, finance costs went up to 16.2 percent in 9MFY12. The surge in finance costs was witnessed from the last quarter of FY11, therefore explaining the relatively less finance cost to sales ratio up till 9MFY11. The hefty bill of financial charges took a toll on the profit after tax of the company despite the improvement in operating margins. From Rs 303 million during July-March FY12, the profit after tax fell to Rs 140 million. 

LEVERAGE Having obtained financing for the capacity expansion through an additional production line, Fauji Cement's debt surged magnanimously since FY10. This is evident from the increase in the debt-to-equity ratio after FY09, with the long-term loans of the company having surged to nearly Rs 13 billion in FY10 from almost half the same in FY09. 

The effect on finance costs of the company, as already discussed, has been significant. However, the improved retention prices of cement in the local market, and the consequent effect on gross and operating margins, is expected to lend some support to the company's financial charges. 

"Due to strong volumetric growth coupled with healthy cement price outlooks, we believe that meeting debt servicing of more than Rs 3 billion for next three years may not be a challenging task for the company," said a report by Arif Habib Securities in March this year. 

FUTURE OUTLOOK The cement sector as a whole is poised for a promising FY13, with favourable budgetary policies, such as an enhancement of PSDP expenditures and reduction in FED. FED on cement was reduced by a further Rs 100 per ton for FY13, and the budgeted increase in PSDP is also more than 19 percent of last year's outlays - aspects that bode well for cement players like Fauji Cement. 

The FED reduction and better retention prices of cement locally, combined with the downtrend in global coal prices seen recently, may help Fauji Cement see a further uptick in its turnover and margins. Further, with the anticipated increase in the company's volumetric sales owing to additional production capacity, its profit margins will likely receive further boost, though the heavy leveraging charges will keep earnings subdued in the months to come.