Cement: FAUJI CEMENT COMPANY LIMITED - Analysis of Financial Statements Jun'03-1Q'09
OVERVIEW (February 18 2010): Sponsored by Fauji Foundation, the Fauji Cement Company was incorporated in Rawalpindi in 1992. Fauji Cement Company, headquartered in Islamabad, operates a cement plant at Jhang Bahtar, Tehsil Fateh Jang, District Attock in Punjab. The cement plant has an annual production capacity of 1.165 million tons.
FCCL is one of the last players to engage in an expansionary project. The new plant that is scheduled to commence operations in 2H10, is of European technology and has a capacity of 2.16m MT, and will increase FCCL's total capacity to 3.27m MT.
Symbol : FCCL
Nature of the Business : Cement
Current Rate : Rs 7.08
Turnover : Rs 18228
Outstanding Shares : 693289500
Market Capitalization : Rs 4908489660
EPS( 1Q'09) : Rs 0.21
Price/Earnings (1Q'09) : 36.50
During the quarter under review, FCCL capacity utilization remained at 83% as compared to 95% in the corresponding quarter of the last year due to effects of Ramazan and Eid holidays. FCCL exported 56,320 tons as compared to 86,435 tons in the same quarter of the last year depicting a decrease of 35%. Local despatches stood at 185,955 tons as compared to
191,893 tons during the corresponding quarter of the last year, depicting a decrease of 3%.
The highlights of the performance of the company vis-à-vis the industry are as under:-
2008-09 2007-08 Difference (%)
(1) Domestic Despatches (tons) 891,250 899,405 -0.91
(2) Exports (tons) 275,340 278,095 -0.99
(3) Total Despatches (tons) 1,166,590 1,177,500 -0.93
(4) Capacity Utilization (%) 100.09 101.03 -0.93
2008-09 2007-08 Difference (%)
(1) Domestic Despatches (tons) 19,394,024 22,395,522 -13.40
(2) Exports (tons) 11,380,830 7,716,620 47.48
(3) Total Despatches (tons) 30,774,854 30,112,142 2.20
(4) Capacity Utilization (%) 73.69 81.04 -9.07
Sales of the company grew by a slight 2.39% during FY08 as against the sales figure of FY07. The main reason behind this lower growth rate was the decline in domestic sales during 2007-08. Domestic dispatches fell by around 6.39%. Although exports grew by an impressive 82.63% but the increase in absolute terms was way too small to have a strong impact on the overall growth rate. Reasons for lower domestic sales during FY08 included rise in steel prices, deteriorating economic conditions, lower spending in the public sector, and higher cost of construction due to inflationary pressures.
Sale in FY09 increased by 49.88% compared to a marginal increase in FY08 of a 2.39%. The main reason attributing to the increase is, increase in exports experienced by the cement industries in the FY09 period. This led to sales growth comparatively high. 1Q09 sales are still on the rise, however the concerns over electricity charges, and gas bill hike has added to the cost of production constraining the cost advantage of the company.
The company earned a profit after tax of Rs 414 million compared to the last year's profit after tax of Rs 646 million. The profit from operations decreased from Rs 995 million to Rs 602 million, this represents a decline of 39% owing to reduction in cement prices and higher manufacturing cost due to increase in prices of fuel, power and packing material. Gross profit margin fell from 31.52% in FY07 to 18.56% in FY08. This was because cost of sales rose by around 22% where as sales only registered a growth of around 2.39%. Return on equity fell from 17.30% to 4.45% on a YoY basis not only because of lower profits but also because of increase in equity. Total equity increased by about 149%. This was due to the rise in the number of shares outstanding, which rose from 374,473,000 shares in FY07 to 489,456,000 shares in FY08.
Fixed assets increased by around 62% during the year because of the expenditure on capital in progress. This expenditure is mainly on the future expansion projects of the company.
Fauji Cement posted after tax profit of Rs 1007623 million in FY09 as compared with the figures of FY08 of Rs 413598 million.
In FY09 gross profit ratio increased from 18.96% change in FY08 to 31.75%. Similarly the net profit margin too showed a considerable increase of 18.56% in FY09, owing to better operational efficiencies and controlling other expenses to reduce the operational costs.
The increasing trend was passed on to ROA and ROE, where the ROA increased by a 4.70% in FY09 compared to 3.32% in FY08. On the other hand ROE showed a better increase to the ratio as it increased from 4.45% in FY08 to 10.40 in FY09.
The liquidity of the company was stronger at the end of FY08. The current ratio rose to 2.16 in FY08 from 1.35 in FY07. This was because cash and bank balances rose by 794% during FY08 as against Rs 423.133 million in FY07. On the current liabilities side, short-term borrowings rose by around 267% in FY08 on a YoY (year on year) basis.
The liquidity condition was severely under constrained, as the current ratio fell to 0.63x in FY09 from a healthy 2.65x in FY08. The two main reasons for the major decline was first, the cash bank balance reduced by 95% in FY09, owing to the decline in the deposit accounts of the company which was used up in the period.
Secondly, the trade and other payables also showed 192% increase in FY09 compared to FY08. This again is brought down to an increase of the current portion of the cross currency swap and amount of Rs 50mn payable to the Fauji Foundation Group, which led to high increase.
FY'2009 FY'2008 change
Cash and bank balances 175,947 3,783,909 -(3,607,962)
FY'2009 FY'2008 change
Trade and other payables 1,441,825 493,210 948,615
Stores, spares, and stock in trade rose by around 74.5% in FY08 as against the figure of FY07. This increase caused the inventory turnover to increase from 67.78 days in FY07 to 115.5 days in FY08. This further resulted in the increase in operating cycle to 118.27 days, which was quite constant for the past five years. Total asset turnover fell to 0.28 in 2007-08 from 0.54 in FY07 because of the phenomenal increase in assets during FY08 owing to future expansion projects.
The company improved its asset management in the FY09 and also in 1Q09 as the figures improved. The inventory turnover reduced to 79.63 days in FY'09 however the 1Q'09 showed a lagging approach as the inventory turnover increased to 347.5 days.
Another improvement is seen in the Operating cycle in FY09, which reduced to 83.40 days showing the operational efficiency by the company of converting assets into cash.
Lastly the total asset turnover marginally increased to 1.28 in FY09 compared to 0.28 in FY08, owing to the fact, the company was able to increase its turnover with respect to the assets employed. For 1Q09 it improved to 2.28x.
Total liabilities increased by 18.95% during FY08 as against the total liabilities of FY07. This increase was small when compared with the increases in equity and assets. Both increased by about 149% and 94.6% respectively during FY08 on a YoY basis. This was a major reason for the declining trends in the debt ratio.
The gearing ratio of the company deteriorated in FY09 and 1Q09. The company had taken leverages to finance the upcoming projects. The debt to equity ratio saw a decline to 0.40 in FY09 and 1.17 in 1Q09. The long-term debt to equity showed a similar trend as the ratio deteriorated from 0.03 in FY08 to 0.64 in FY09 and further decline to 1.08x in 1Q09. This again points out that the company is planning a project.
Total Liabilities increased to Rs 11,755,812 in FY09 as against to Rs 3,170,512 in FY09, showing an increase of 270.79% compared to FY08. Earnings per share fell from 1.73 in FY07 to 0.85 in FY08. This was again due to lower profits and higher number of common shares issued in FY08 as compared with the number of common shares in FY07. Book value per share increased from Rs 8.66 in FY07 to Rs 17.97 in FY08 due to increases in common equity.
EPS has been on a volatile since FY08. In FY09, it increased to Rs 1.45 mainly due to the increase in the net profit after tax of the company mentioned above as the outstanding shares remained constant for the period. Secondly the price earning multiple showed a huge decline in FY09, but a sharp rise in 1Q09.
The ratio declined to 4.45 because of the market value of the shares declined from Rs 16.60 to Rs 6.60, showing the loss of confidence of the investors in the company, however a sudden increase of P/E ratio was because of the increase in the value of the share as the investors thinking of the increased expansion project would lead to more profitability in the future for the company.
Future outlook With capacity expansions set to bring the total capacity up to 51m MT by FY10, the sector has been exposed to huge financial leverage in the recent years. The long-term debt usually carries a floating interest rate pegged to the 6-month KIBOR. With the industry debt-asset ratio averaging around 60%, and long term debt to assets varying around 38%, the volatility in interest rates is likely to affect the financial charges and hence erode the cement manufacturer's bottom-lines.
However the discount rate was reduced to 12% decreasing the financial charges of cement manufacturers. Apart from these financial issues the sector faces severe gas shortages. As many sectors including the cement sector has been affected as SNGPL (Sui Northern Gas Pipeline Limited) has curtailed gas supplies.
Huge fiscal deficit has forced the government to cut down on physical infrastructure expenditure, which would impact the domestic sales negatively. Secondly rising costs of constructing a house and tower have lowered the demand of both domestic customer and businessmen.
On the export front, depreciation of rupee has rendered Pakistani cement as a highly attractive option. The exports primarily increased due the demand coming from Afghanistan that accounts for 28 percent of the exports (36 percent in FY08). However with economic recovery and the cement industry proportion to the increase of the GDP, the cement industry might be benefiting not only domestically but also internationally. The major threat to the sector only comes in the shape of higher cost of sales, which in turn, are caused by higher fuel costs, higher material/packing costs, and labour costs.
COURTESY: Economics and Finance Department, Institute of Business Administration, Karachi