Bouncing back from a torrid patch, DG Khan Cement’s profits for fiscal 2012 jumped from the millions, to billions – back in familiar territory. The company’s full-year results for fiscal 2012 clocked in better than market expectations, but analysts say the hefty gains may, in part, be attributable to a one-off tax reversal – which generally arises when tax relief is provided in advance of an expense.
Other factors that improved the cement maker’s earnings were higher sales, improved gross margins, huge ‘other income’ and lower financial charges, said Sarfraz Abbasi, analyst at Summit Capital.
Profits for the country’s second-largest cement manufacturer swelled twentyfold (2,317%) to Rs4.1 billion for financial year 2012, from Rs171 million a year earlier, according to unconsolidated results sent to the Karachi Stock Exchange on Monday.
Revenues for the company surged 24% to Rs22.95 billion in fiscal 2012, against sales of Rs18.58 billion in the corresponding period of the previous year. The company has also announced a dividend of Rs1.5 per share along with its full-year results – its first dividend in five years.
Similarly, gross margin improved 33% in the period under review, on account of a nominal dip in coal prices, increased use of alternate fuels, and cost-saving from an energy-efficient Waste Heat Recovery and Refuse Derived Fuel plant installed by the company, according to a BMA Capital research report.
However, critical analysis shows that margins declined 200 basis points in the last quarter [of fiscal 2012] from the preceding quarter, due to a decrease in exports to Afghanistan and India, according to Shajar Capital analyst Yawaruz Zaman.
Meanwhile, ‘other income’ contributed 29% to total earnings, increasing 5% over the previous year to Rs1.19b, owing to hefty dividend income which the company realised from associate companies; including MCB Bank, Nishat Mills and Nishat Chunian.
Additionally, growth in profits was also helped by strongly elevated average export retention prices, which surged 19% to Rs445 per bag; and a 24% decrease in interest expenses – from Rs2.1 billion in the corresponding period of the previous year, to Rs1.7 billion in fiscal 2012.
The entire industry ran into a bad patch in fiscal 2010 and 2011, amid nationwide flooding and a slowdown in construction activity. The sector recovered on the back of higher prices, after the sale price of a bag of cement increased 25% to Rs425 in fiscal 2012, against Rs339 in the same period of the preceding year.
The year ahead
Higher sales due to ongoing work on the Diamer Bhasha dam, reconstruction activities in flood affected areas, higher retention prices and lower interest rates have remained the key factors driving stronger earnings for cement producers. However, going forward, analysts predict a slowdown in growth in sales or profits, as prices are forecasted to rise exceptionally higher – putting adverse pressure on local demand. However, utilisation of the country’s coal resources in powering cement plants remains a strong factor which can ensure stability in earnings, in case of further pressure on prices in the international market.
Published in The Express Tribune, September 11th, 2012.
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