Cement manufacturer: Timely investments bring Al-Abbas back to profitability
By Farhan Zaheer
Published: November 18, 2012
The company has increased its production capacity by 20% to 900,000 tons annually by investing in a vertical cement-grinding mill. PHOTO: FILE
It is one of the smallest cement manufacturers in the country, but Al-Abbas Cement is determined to become one of Pakistan’s most efficient, investing in new machinery and increasing its capacity utilisation to well-above the market average, a strategy that is already beginning to pay off for the company.
At 900,000 tons, the installed annual production capacity of Al-Abbas Cement is a tiny fraction of the nearly 45-million-ton installed capacity of the cement industry as a whole, according to the All Pakistan Cement Manufacturers Association, a lobbying group. Yet the company appears to be determined to make the best of its capacity utilisation.
“We are currently at between 80% and 85% utilisation rates of our total capacity,” said Kashif Habib, CEO of Al-Abbas Cement, and son of Arif Habib, the chairman of the Arif Habib Corporation, the conglomerate that owns about 75% of the company.
The company appears to have benefited from timely investments in machinery, investing in a vertical cement-grinding mill, which caused production capacity to increase by about 20%, from 750,000 tons annually to around 900,000 tons annually. “The new investment will make it easier for the company to produce finished cement,” said Habib.
That expansion allowed Al-Abbas to capitalise on a revival in local demand. Revenues jumped by nearly 32% during the financial year ending June 30, 2012 to reach just over Rs2.9 billion. That increase was enough to drag the company out of a Rs927 million loss in 2011 to a Rs153 million profit.
Although the company derives about 30% of its revenues from exports, Habib did not seem particularly keen on tapping foreign demand for growth. “Small cement companies do not have much attraction in export markets owing to low profit. Export markets are more attractive to bigger cement companies of Pakistan,” he said. “The export market is very competitive right now. Supply outpaces demand so it is a buyer’s market internationally.”
The situation in the domestic market seems to be the inverse. A sharp surge in demand has resulted in local cement prices going up by close to 35% over the past year, which the company attributes as one of the major reasons its revenues increases in 2012. And demand is only expected to go up over the next few months, as the government increases spending on construction and development projects ahead of an election.
While the cement sector is largely seen as an export-driven sector, the market appears to like Al-Abbas’ domestic-focused strategy. The stock closed at Rs6.00 in trading on the Karachi Stock Exchange on Friday, up 140% since the beginning of the calendar year.
“A company that has capacity utilisation of 85%, which is significantly higher than the industry average of 70-72%, will see its stock price rise in the stock market,” said Atif Zafar, a research analyst at JS Global Capital, an investment bank.
Part of the reason for the domestic focus may be Arif Habib Corporation’s recent moves into real estate development. The group, along with the AKD Group, has started Naya Nazimabad, a 1,200-acre middle-class residential development in the heart of Karachi as well as several other real estate projects, all of which, Habib said, will be using cement from Al-Abbas.
The successful turnaround of Al-Abbas Cement must come as a relief to the Arif Habib Corporation, which previously had to sell off its 80% stake in another, smaller cement company – Thatta Cement – in 2009 after the company began losing money. Thatta Cement only had a capacity to produce about 450,000 tons of cement per year.
That previous bitter experience in the cement sector explains the group’s cautious approach with Al-Abbas. Despite the turnaround, the company will not be going for ambitious rounds of expansion. “We now want to reduce our long-term liabilities,” said Habib.
The company owes about Rs1.7 billion in long-term debt and another Rs1.1 billion in short-term debt, a burden that weighs down Al-Abbas’ profitability. In 2012, the firm paid nearly Rs402 million in just interest costs, which comes to about 58% of Al-Abbas’ operating profits for the year.
As a result, Habib said that the company will not be paying out any dividends in the near future and focus on reducing its debts.