PAKISTAN: Cherat Cement Pakistan Limited

Cherat Cement was incorporated in 1981 and is listed on the Karachi, Lahore and Islamabad stock exchanges. The plant is located about 52 kilometres from Peshawar (NWFP) near Nowshera, while the factory is built on the land bordering the Cherat Hills, the factory's source of high quality limestone. 

Cherat Cement is manufacturing high quality grey portland cement on the most modem and computerised production facilities. It is equipped with the most updated production and quality control systems. It is one of the largest producers and suppliers of cement in the province of NWFP. The production capacity of Cherat Cement is 2,500 tons per day. 

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 

Like any other company in the cement industry of Pakistan, Cherat Cement also shined out in FY12 in terms of profitability. The company's net turnover went up by about 31 percent in 9MFY12 on a year-on-year basis, helped mainly by better domestic prices of cement, though local sales volumes also improved slightly. The company's export sales, however, receded in 9MFY12 relative to 9MFY11, in line with the general industry trend of shrinking export sales in FY12. 

On a year-on-year basis, export sales declined four percent during July-March FY12, while domestic dispatches increased by 11 percent on the same analogy. The company's cost of sales also increased during 9MFY12 because of rising costs of electricity, freight, furnace oil and packaging material, while rupee depreciation also took a toll in terms of cost. 

However, like many peers, Cherat Cement also has a Waste Heat Recovery (WHR) plant, which, together with the use of other alternate fuels, helped ease down cost pressures. Overall, a doubling of the gross profit to nearly Rs 692 million during July-March 2011-12 was witnessed, with gross margins improving by six percentage points on a year-on-year basis in the period under review. 

Distribution costs as a percentage of sales during 9MFY12 improved, though only marginally. Altogether, this cascaded into an improvement in operating margins of about seven percentage points during July-March FY12 versus the same period last year. The company's finance costs as a percentage of sales, however, remain quite high. They were the highest during FY11 in the last three years, owing to a loan taken for the WHR project, and the general high interest rate environment in the country. All in all, a whopping jump was seen in the profit after tax during 9MFY12, which went up by more than 13 times of what it was in 9MFY11. 

Leverage Repayment of loans taken for the WHR plant began in November 2010 and July 2011. But the major increase in long-term liabilities seen in FY11 was due to a fixed assets refinance loan worth Rs 0.5 billion taken up during the year. This also accounted for the increase in the long-term debt to equity ratio in FY11 vis-à-vis FY10. This also raises the finance costs for the company, as mentioned previously. 

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 Cherat Cement. 

The FED reduction and better retention prices of cement locally, combined with the downtrend in global coal prices seen recently, may help Cherat Cement see a further uptick in its turnover and margins. In addition, there are expectations that export prices of cement in Afghanistan may improve by six-to-eight dollars per ton by the end of this fiscal year, promising further positives for northern players like Cherat Cement. 

Investment and valuation The healthy growth in profitability and margins in FY12 have elicited positive comments from research analysts about the company. BMA Capitals mentioned in a synopsis on the cement sector in March this year, "We believe small scrips like Cherat Cement would remain in limelight on account of turnarounds and profit growth."