Cherat Cement Company Limited (CHCC)

Cherat Cement Company Limited (KSE: CHCC) was established in 1981 with its plant located near the district of Nowshera. CHCC is engaged in the manufacturing, marketing and sale of Ordinary Portland Cement. The company started with production of 1,100 tons per day in 1985 which was increased to 3,300 tons per day in 2005 after subsequent up gradations earlier.

The company today has an installed cement production capacity of 1 million tons of clinker, and 1.1 million tons of cement making it one of the smaller cement players in the industry with 2 percent market share. However, the company plans on installing another cement line at the same location with an annual clinker capacity of more than 1.3 million tons (4,200 tons per day), which would bring market share for Cherat up.

The company commissioned its first Waste Heat Recovery (WHR) for power generation in 2010, a Tyre Derived Fuel Processing Plant in 2012 and a Refuse Derived Fuel Processing Plant in 2013 to boost energy efficiency by using alternative fuel, generating one-third of its electricity free of cost.

Cherat Cement is a Ghulam Faruque Group (GFG) Company that held 20 percent of its shares as at June 2015.

Work on the expansion of second production capacity is in progress and the new line is expected to be commissioned by early 2017. The Company has also placed an order for a WHR plant (worth Rs1 billion) that would be functional for the second line.

The company’s supplies cement to the northern block; Punjab, KP, FATA and adjoining areas and exports its cement to Afghanistan and Indian Punjab. The company enjoys the benefit of a strategic location which is about 52 kilometers away from Peshawar, near the Pak Afghan border and this proximity to the border allows for lower distribution costs than its competitors.  

Six year financial and operational performance

Production vs. dispatches

Production of both clinker and cement has fluctuated in the past six years with clinker production falling from 946,000 tons to 936,000 tons and cement production coming down by 4 percent from 1 million tons to 971,360 tons between FY2010 and FY2015.

Dispatches have also been falling since FY2010 and fell by 4 percent between then and FY2015; going from 1 million tons to 971,595 tons. Exports have fallen by 36 percent reaching Rs0.2 million tons in FY2015 whereas local dispatches fell by 20 percent to Rs0.69 million tons. Exports share in total dispatches has fallen from 43 percent in FY2010 to 29 percent in FY2015.

Profitability

Despite a fall in number of dispatches, the company’s revenues have almost doubled between 2010 and 2015, reaching Rs6.5 billion from Rs3.5 billion in 2010. The company incurred a loss of Rs14 million in 2010 but recovered the successive years; profit growing by six times between 2011 and 2012, and three times between 2012 and 2013, reaching its highest Rs1.3 billion in 2014 and coming down to Rs1.288 billion in 2015.

Quite like other cement firms, the company enjoyed margins ranging 30 percent to 35 percent in the past three years, going up from 3 percent in 2010. The company resurfaced from such lows really fast by becoming more cost efficient.  

The Company issued right shares in FY2015 to cater to the financing needs of the plant expansion. Return on equity declined significantly from 27 percent to 16 percent on account of increase in shareholders’ equity because of issuance of right shares and increase in capital work in progress for the second production line. The company projects the RoE would improve once the second line is commissioned.

Capacity utilization for the company stood at 88 percent in FY15, down from 90 percent in FY13—the shortfall in production the company claims is due to industry demand. Capacity utilization was also lower together with lower top line due to the shutdown of plant earlier in the year.

Final cash dividend of Rs3.00/- per share was given in FY2015 versus Rs2.00/- per share in FY 2014.

Quarterly review: A snapshot

Net sales went up by 10 percent in 9MFY16 year-on-year to Rs5 billion. In Q3, net sales earned Rs1.73 billion, a 22 percent increase in Q3 FY16 from Q3FY15. Profits before tax went up by 26 percent between 9MFY16 and 9MFY15 while the same was a 45 percent jump in Q3FY16 from Q3FY15. At these same growth rates, end of year revenue would surpass Rs7 billion and before tax profits to about Rs2 billion. Better performance than FY15 but not still behind other fast moving firms in the industry.

Stock performance

CHCC’s market performance has shown a strong rally against the benchmark index in the past year going up by 54 percent between Junes of 2015 and 2016 against a 10 percent jump in KSE-100. CHCC reached its peak of Rs.125.22 on June 17, 2016, a jump of 56 percent from Rs80.30 in December 2015 outperforming the KSE index by 34 percentage points. Cement is a big gainer on the exchange having been enjoying high stock performance for the most part of the year owing to the sector’s positive outlook.

Even though its share prices are not as high as some of the bigger firms, it has maintained a strong upward trend which speaks to investor confidence.

Future outlook: Opportunities and threats

All signs indicate toward continued growth. On the supply side, the company has become fuel efficient through its WHR, RDF and TDFs which will save significant expenses on grid electricity. The company was a trend setter in announcing its expansion plans. The commissioning of the new plant which would potentially take the total capacity from 1.1 million tons to 2.4-2.5 million tons would also bring the company’s positioning in the industry up albeit not greatly since other cement firms are also adding capacity.

Though revenues for the company have had a big run in the past six years, compared to other smaller firms such as Pioneer and Deewan, net sales have been much lower. The plant shutdown in early FY15 led to lower net revenues than in FY14 that trickled down to a leaner bottom line.

While the company still depends largely on the grid for electricity, continued reliance would erode margins. However, it does show promise in that it has still managed to retain high margins due to its efforts in becoming cost effective. This would go a long way in maintaining company’s sustainability as it has its priorities in place. A shift to captive power generation would go a long way.

There might be some price competition given most cement producers are expanding capacity and channelling their resources toward power generation which in the long run would mean higher cost competitiveness. A struggle on prices could be in the offing.

On the local demand side, the fruits of CPEC investments; government’s increased efforts to launch more infrastructure and development projects budgeting Rs100 Billion higher for FY17; the opportunities are enormous. Construction and real estate sectors will witness a massive boom and cement demand is expected to increase by 15-16 percent or more annually.

Exports to Afghanistan have been falling continuously owing to cheaper Iranian cement reaching that market eroding Pakistan’s market share. Since Afghanistan is the key market for CHCC, a marketing focus toward other regional economies where cement demand is growing is recommended. Most likely, cement firms are relying heavily on local demand. CHCC should reach out to other local markets to expand its current reach and increase utilization of its current and expanding capacity.

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Cherat Cement Company Limited (CHCC)


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Rs (bn)             9MFY15    9MFY16   Chg 9M   Q3FY15   Q3FY16   Chg Q3


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Sales                 4.73      5.22      10%     1.42     1.73      22%


Gross profit          1.37      1.87      37%     0.40     0.68      68%


Gross margin           29%       36%               28%      39%


Profit Before tax     1.16      1.46      26%     0.37     0.53      45%


Profit After tax      0.94      1.04      11%     0.30     0.37      23%


EPS (Rs)              6.04      5.91      -2%     1.92     2.08       8%


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Shareholders Holding 5% Or More                       Shares           %


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Faruque (Private) Limited                         35,648,485       20.18


CDC - Trustee National Investment (Unit) Trust    14,521,858        8.22


CDC - Trustee PICIC Growth Fund                    8,945,000        5.06


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