PAKISTAN: Bestway Cement

Bestway Cement Limited is the subsidiary company of Bestway group based in United Kingdom. Bestway is the perfect example of a group having a diversified operations and revenue base. The group has cement manufacturing, global banking, wholesale cash & carry business, a string of retail outlets, real estate investment, ethnic food and beverage import and distribution and rice milling businesses within its folds. 

In Pakistan, the group is the joint owner of the third largest Pakistani bank, United Bank Limited. The group has also recently launched its power generation project in Pakistan, thus further enhancing its dynamism. Bestway Cement initiated its operations in Pakistan in late 1992 in Hattar, Haripur in the KPK province with the initial capacity of one million tons per annum. In 2004, the company took a strategic decision of growing its operations through the setting up of another 1.8 million tons per annum plant near Village Tatral of District Chakwal, Punjab. In 2005, company's bid for Mustehkam Cement Limited was accepted which further enhanced its presence in the Pakistani cement sector. Over the years, the company has more than quadrupled its annual production capacity which now clocks at around six million tons. 

FINANCIAL PERFORMANCE FY12 During FY12 under review, the company was able to operate at more than 66 percent of its capacity and its sales grew up by 33.4 percent, standing at Rs 17.78 billion. Despite a vivid sales growth of 33.4 percent, the company was able to maintain its COGS, giving a 95 percent boom to its GP. Thanks to the equity injection at the end of FY11 and lower cost of financing which enabled the company to reduce its financial charges by 23 percent resulting in a PBT of Rs 3.93 billion as opposed to a Rs 424.14 million in the previous year. 

In FY12, the company was able to attain the highest EPS since 2008, standing at Rs 5.29. Despite fierce competition in the industry, Bestway managed to retain its market share in the northern zone and its position as one of the foremost exporters of the country. 

A GLIMPSE OF PERFORMANCE OVER THE YEARS By and large, company shows an escalating sales pattern since FY03 except that it dwindled in FY10 and remained almost constant in FY11. In FY10, although sales volume grew significantly, the plunge in sales was merely caused by extensively low prices due to fierce competition prevailing in the industry. 

In FY11, overall dispatches of the industry shrunk by 8.19 percent owing to severe flooding. Thus, corresponding with the industry trend, Bestway's sales' volumes also plummeted by more than 24 percent. Nevertheless, company was able to record a net turnover of Rs 13,332 million compared to Rs 13,333 million for the preceding year primarily due to increase in selling prices during the last quarter of the year. 

GP shows the lowest number in FY08 although sales surged by 32.5 percent, mainly due to low retentions and high energy cost. Operating profit also shows the worst depiction in FY10 with OP margin standing at just 2.48 percent. However, it recovered in FY11 owing to a dip in distribution cost by almost 67 percent on the back of industry exports contraction by 11.68 percent and local market shrink by 6.61 percent. Operating income over the years is also greatly propped up by the dividend income from the associated company, UBL. 

Financial cost has been a stumbling block in company's performance over the years and resulted in negative bottom line in FY10. Financial cost climbed the highest of Rs 2.489 billion in FY11 primarily due to rising mark-up rates. During the year, the company issued right shares of Rs 3.79 billion which boosted its capital and reserves by 56.5 percent and the company was able to discharge its obligations on all types of loans in time. 

LIQUIDITY Bestway has been showing up a negative working capital and a current ratio of less than one, which reveals the cash strapped position of the company. This dull liquidity position is due to the debt oriented capital structure of the company where debt accounts for more than 100 percent of equity in all the years. However, it has been observed that in FY11, Bestway has been able to significantly improve its capital structure by the issuance of right shares as a result D/E ratio dipped by 44 percent to 1.68. Notwithstanding considerable improvement, a D/E ratio of 1.68 still portrays an alarming situation. 

Despite having scanty liquidity position, the company claims to be able to meet its obligations in a timely manner might be due to having favourable terms with the creditors or by issuing shares, as it did in FY11. Further, with decline in 350bps in interest rate in last one year and further easing in discount rate in upcoming monetary policy will reduce annual financial expenses. 

OUTLOOK Given remarkable improvement in PSDP expenditures and upcoming elections which is likely to give a boost to infrastructure development and house construction activities, the local dispatches of the cement industry is sure to perk up. Moreover, cement prices are expected to uphold at current levels amid low coal costs. On the export frontage, Bestway has acquired certification from South African Bureau of Standardisation enabling it to seek export opportunities to South Africa. 

Recent developments in Saudi Arabia and Qatar also open a window of opportunity for Pakistani cement companies. Bestway is already a leading brand in India and Afghanistan and anticipates growing its market share in those markets. Other markets like Iraq and Sri Lanka and Central Asia are also expected to create significant demand for Pakistan cement sector.