Kohat Cement Limited (KOHC)

Kohat Cement (PSX: KOHC) is by far one of the strongest cement players in the industry and its consistent growth, strong demand in the market and good management has given the company a leg up.

It was incorporated in 1980 as State Cement Company of Pakistan with a capacity of about 30,000 tons per annum. In 1992, the government privatized it along with several other cement companies. Kohat was bought by private investors and only two years later, it went public. In 2014, it became a subsidiary of ANS Capital.

The holding company owns over 55 percent of the company’s shares and very changes are seen in the rest of the shareholding pattern since the company was acquired. The public holds about 12 percent of the shares while the rest of the shares are spread across modrabas, mutual funds, banks, DFIs, insurance companies etc. as at June 2019.

Kohat has been expanded capacities over the years much like the rest of the industry that has seen several expansion cycles over the years. Its plan has a standby power plant of 22.4 MW capacity that meets some of its electricity needs. Its current capacity is around 2.8 million tons of grey cement and 150,000 tons of white cement which gives it a solid 5-6 percent share in the market in terms of capacity.  Kohat has a capacity of 2.7 million tons of grey and 150,000 tons of white cement capacity. The company has installed a grey cement production Line 4 recently with a production capacity of 7,800 tons per day, which is expected to commence its commercial operations in 2QFY20.

Operational and financial performance

Kohat is operating in the north of the country which has its own set of dynamics in the industry. The zone contributes to the majority of the country dispatches, it exports cross-border mostly and not overseas due to higher costs associated to that, and there is more competition as there are more companies compete for the market share. It only stands to reason that Kohat’s prudence management of finances and operations allows it to operate at relatively higher margins than some of its peers. This is especially true since Kohat is not one of the big players in the industry.

Its capacity utilization has grown consistently—going from 46 percent in FY10 to 77 percent by FY15. In the past two years, the company has predominantly supplied to non-public construction projects as per its annual report. During times of peak domestic demand, exports’ share came down. At their peak in FY11, the company exported 35 percent of all its dispatches which came down to 6 percent during FY17. There are two reasons for this. One is strong demand since FY16 in the domestic markets (until FY19) and the second reason is that all of Kohat’s exports go to Afghanistan. For the past few years, market access into Afghanistan has become smaller as the country is importing Iranian cement. This has reduced Pakistan’s share into the Afghan cement market considerably.

Kohat is one of the few plants in Pakistan that manufacture white cement which makes its products quite diversified, though the capacity for white line is pretty small. With improved capacity utilization, Kohat has maintained its revenue growth throughout with a strong handle over its costs. In fact, it has proved its mantle by boasting 46 percent margins during FY16 which is incomparable to its peers in the same region. That year was a golden time for the cement industry when government spending on infrastructure was plentiful and market confidence was high. Kohat shone.

The company’s retention prices have also witnessed strong growth, also peaking during FY16 when all fundamentals were on a strong upward trajectory. The industry was in fact trailing maximum capacity utilization which led cement players to announce further expansions. Kohat installed a waste heat recovery plant with a capacity of 15MW in April-16 that contributed to a cost cuts.

On the costs side, grid electricity prices, imported furnace oil, coal and gas all are major contributors which form the bulk of cost of production. Movement in oil prices, local fuel prices and imported coal prices all impact costs in addition to rupee-dollar parity. During FY16, costs were low as rupee was strong against dollar, and coal prices were also not rising. This led to cost per ton falling in FY16 to the levels of FY11. However, the next two years, the company, much like other cement manufacturers would suffer at the hands of high costs.  Domestic demand started to shrink, price competition grew as expansions came through, exports markets began to fold down (particularly cross-border) and rupee started to depreciate. While Kohat’s top-line grew, costs grew more which led margins to drop to 43 percent (FY17), 32 percent (FY18) and ultimately down to 27 percent in FY19. Though to its credit, Kohat has still performed better than other cement firms in the boat.

Opportunities and outlook

The year FY19 has been tough for multiple reasons. Domestic demand slowed down as economy went into austerity drive that led to reduced government expenditure and overall shrinking market confidence that pulled out private investments from construction and other sectors. Meanwhile, though coal prices averaged lower than FY18, the rupee devaluated led costs to increase. Furthermore, grid electricity prices in addition to packing material prices also affected the company’s profitability which came down by 17 percent, despite a 16 percent growth in the top-line.

The company’s revenue per ton improved which is incredible given price competition in certain markets. Its exports share in total dispatches remained at 5 percent, which may have been dismal, but the company managed to keep its domestic demand going.

During the year, Kohat also shielded the drop in profits by demonstrably keeping all indirect expenditures at the same level as last year (5% of revenues), while finance costs actually reduced from 1 percent of revenue to a negligible number. Its debt to equity also improved during the year.

Its strong control over its costs and expenditure, and savvy financial management allowed the company to still stay above the fray. Over the next fiscal year, the company will have added a new plant which might shrink capacity utilization since the domestic market is not expected to change too much over the next couple of months. No new demand avenues are visible, as the economy struggles out of its current crises. If private sector investments start coming back into real estate development and housing, demand could improve but price competition may grow further as companies across the board have added capacities. One silver lining is the Naya Pakistan Housing Plan. If the projects kick off soon, and construction begins (and it is expected to begin in the northern region of the country i.e. Punjab and up), it may lead to more contracts and improvement in the top-line. Coal prices are falling in the international market which bodes well for importers, including cement companies. Kohat must manage its inventories well to incur the gains from cheaper coal.