Attock Cement Pakistan Limited (ACPL) was incorporated in 1981 as a public limited company. The project was a Pak-Saudi venture. The project was completed and the plant started commercial production on June 1, 1988. ACPL is part of the Pharaon Group as the Pharaon Commercial Investment Company Limited has a total stake of 84.06% in ACPL. It has been listed on the Karachi Stock Exchange since June 2002 and the general public holds 15.94% shares of the company.

Attock Cement introduced the pre-calcination/pre-heating dry process technology in Pakistan. ACPL manufactures three types of cement: Ordinary Portland Cement which is used in general construction, Sulphate Resistant Cement which is suitable for construction in sea or near coastal areas and Portland Blast Furnace Slag Cement for massive constructions eg dams and canals.

The company also produces specially formulated mixes of cement to meet the different customer requirements. ACPL markets its cement under the brand name 'Falcon Cement.' ACPL focuses to meet the Pakistani and international quality standards and in 2002, it achieved the ISO 9001-2000 certification from Lloyds Register Quality Assurance.

The company sells cement locally and internationally. It has been involved in numerous projects such as Gwadar Port Housing Project and Pearl Continental in Gwadar; KWSB Project III in Pipri and Gharo; Forty-Man Water Park, Super Highway, KPT Project OP-II, Karachi and Creek City Housing Project, Karachi. ACPL was the first to export clinker to the UAE and Qatar and cement exports to Iraq. The cement sector of Pakistan witnessed a strong growth of 24.3% in total cement dispatches in FY08, which was 30.11m tons as compared to 24.22m tons in FY07. In FY08, the exports formed 25% while local dispatches were 75% of the total sales.

Pakistan's cement sector has benefited from the boom in the domestic construction industry and huge cement shortage in the regional countries. There was a rising cement demand from the housing and government sponsored development projects in Pakistan resulting in a 6.5% growth in the local dispatches.

However, the impressive growth of 142% in cement exports in FY08 was the main contributor of growth in overall cement dispatches. The construction activities in Afghanistan and UAE, as well as exports to other regional markets like Iraq, Kuwait and Sri Lanka increased the cement demand. The overall capacity utilisation improved to 85.8% in FY08 from 83.2% in FY07.

There was a 12% growth in the cement dispatches of Attock Cement Pakistan Limited during the first 9 months of FY08. The growth in sales was restricted due to certain production constraints. The production and commercial activities had to be ceased on many occasions due to electric pylon damages in the area of Hub. Local cement dispatches were 94% while exports formed 6% of the total cement dispatches of ACPL during the 9 months of FY08. During the same period in FY07, local dispatches were 97% and exports were 3%.

PROFITABILITY

Despite an impressive growth in cement dispatches, the profitability of the cement sector fell by 73.6% to Rs 562 million during 9 months of FY08 from Rs 2,133 million in the corresponding period of FY07 due to reduced prices. The average cement price during Jul-Mar FY08 was Rs 128.3 per bag as compared to Rs 133.6 per bag in the same period of FY07.

Another reason for the fall in the cement sector's profitability was the 44.8% rise in the finance charges faced by companies. Finance charges rose due to higher interest rates. Higher input costs, increased coal prices and higher depreciation also hampered the cement sector's profitability.

The profitability of ACPL also fell during Jul-Mar FY'08 due to similar reasons. The company had earned profit before taxation of Rs 613 million during Jul-Mar FY07 while during the same period in FY08 ACPL posted a 43% lower profit of Rs 349 million.

The net sales for the period Jul-Mar 2008 was only 3.5% higher than the net sales generated during the corresponding period of FY07. Certain production constraints restricted the growth of sales volume during the period under review.

There has been an excess supply situation in the domestic market, which put a downward pressure on cement prices and the overall net retention reduced by Rs 171 during Jul-Mar FY08. Reduced prices and higher sales tax and excise duty affected the net sales of the company.

Cost of goods sold was also 27% higher during Jul-Mar FY08 vis-a-vis Jul-Mar FY07. This was because of higher depreciation charges and input costs especially due to increased coal prices. Increased royalty rates by provincial government also increased the expenses for the company. The gross profit of the ACPL during Jul-Mar FY08 was 35% lower as compared to the same period last year.

Other operating income, including income from its financial and real assets, increased by 83% over the period Jul-Mar FY08 as compared to the same period in FY07. Despite the operating profit of the company was Rs 413.5 million lower than that earned during the same period in FY07.

Distribution costs and administration expenses increased by 6% and 15.8% respectively during the Jul-Mar FY08 compared to the same period in FY07. Finance costs of the company increased substantially by 41% due to higher interest charges. However, other operating expenses, which include Workers' Profits Participation Fund and Workers' Welfare Fund, reduced by 47%.

LIQUIDITY

The liquidity position of the ACPL improved further during the first nine months of FY08. This is because the current assets increased more in proportion to current liabilities. Current assets increased by 27% while current liabilities of the company increased by 19% during Jul-Mar FY08. Current assets increased mainly due to substantial increases in the company's trade debts and deposits and short term prepayments of the company were 7 times higher compared to Jun-FY07.

Also, 69% increase in stores, spares and loose tools and 44% increase in the stocks led to a rise in current assets. However, there was only a 2% increase in the most liquid asset - cash and bank balances of the company during the time period under review.

The current liabilities of the company either decreased or increased only slightly. However, there was an addition in the total current liabilities of Rs 197 million in the form of short term borrowings for murabaha and running finance of the company. This could have been the reason for the higher finance costs for the current period.

ASSET MANAGEMENT

The average length of time took ACPL to convert its sales into cash reduced since FY03. However, the days sales outstanding increased to 9 days during Jul-Mar FY08 from 2 days in FY07. The reason that it took longer for ACPL to collect its receivables could be attributed to a substantial increase (319%) in the company's trade debt (receivables) from Rs 19 million in FY07 to Rs 83 million in Jul-Mar FY08.

Inventory forms a large part of the current assets of ACPL (60% during Jul-Mar FY08). The liquidity of inventory improved continuously since FY04 as the inventory turnover rate improved. The average number of days to sell inventory fell ie it took ACPL lesser time to sell its stocks. In FY07, the average number of days to sell inventory, decreased to 96 days.

However, during the first nine months of FY08 the liquidity of inventory went down considerably as the average number of days to sell inventory went up to 133 days. It took longer for ACPL to sell its stocks during Jul-Mar FY08. Likewise, the operating cycle of ACPL also became longer, from 98 days in FY07 to 142 days in Jul-Mar FY08. Thus the quality of the company's liquid assets went down during the period under review.

DEBT MANAGEMENTThe debt to assets ratio depicts how ACPL is financed. Each year the company has been using more debt (long term debt and current liabilities) to finance its activities. This is reflected in the rising trend of the debt to asset ratio. During the first nine months of FY08, ACPL's total debt increased by 10% whereas its assets increased by 5%.

The rising debt to equity ratio indicates that ACPL has been financing its growth increasingly by debt. In FY04 the debt to equity rose drastically and during the same fiscal year the profit before tax of the company also surged. Earnings have increased more than the cost of debt (interest) and the shareholders seem to have benefited from this. However, the finance charges increased immensely during FY07 and it contributed partly in the decline in the profits that fiscal year. The economy has been experiencing rising interest rates and this could affect the finance costs and future earnings of ACPL.

MARKET VALUEThe book value of the company has been increasing as the net assets underlying each share increased. The market/book ratio has also increased over the years indicating that investors regarded ACPL favorably. However, the market/book ratio fell during Jul-Mar FY08 because of a fall in the average share price.

FUTURE OUTLOOKCement dispatches of the sector are expected to continue growing in future as demand for the cement may increase in response to construction activities in the private sector. In the budget FY09, the government has announced that Rs 550 billion will be allocated to the PSDP. Thus the local sales of cement are expected to increase in future.

In the budget FY09 the central excise duty on cement was increased to Rs 900 per ton from current Rs 750 per ton. On each bag the CED increased by Rs 7.50 per bag (from Rs 37.5 per bag to Rs 45 per bag). But this increase is not expected to impact the profits of the cement sector because this increment in CED will be passed on to the consumers. However, the rise in the GST by 1% will increase the local cement prices and may dampen the demand for cement.

Expenses are expected to increase for cement manufacturers due to the hike in coal prices and higher interest rates in our economy. This will negatively impact the gross margins of the cement sector. During the past, our cement manufacturers shifted production from oil to coal or gas. Pakistan has huge reserves of coal but manufacturers need to import coal due to high sulphur content.

Coal prices more than doubled during FY08 with average coal prices being around US $176/ton during the fiscal year. Rising coal prices coupled with a depreciating rupee will increase the cost of production for the cement companies and hit their gross margins hard.

From a wider perspective, the cement consumption in the domestic market is expected to fall because of the deplorable economic situation in the country. The declining GDP and volatile economic situation may restrict the construction activities in the country and may hit the demand for cement.

However, there is hope for cement sector on the international front. Presently, Pakistan is exporting to Afghanistan and India. Regional shortage of cement has presented a favorable opportunity for our cement manufacturers. Cement demand in Afghanistan is expected to be 1.5m-2.0m tons per annum for the next five years.

Cement manufacturers have growing opportunities in Middle East and African countries. New export markets like Russia and European countries have been identified. Growth in export sales may boost the margins of the industry and reduce the negative impact of rising costs on its profitability.

Attock Cemet Pakistan Limited will focus on achieving 100% capacity utilization and improved efficiency. This will lower wastages and reduce its operational costs, essential to increasing its profitability. This will also prevent any production constraints in the future. ACPL will also expand its exports by focusing on new and emerging international markets.