Background Of The Company :
Cherat Cement Company Limited is a GhulamFaruque Group (GFG)Company. It was
incorporated in 1981 and started its production [Link] was the first Cement factory in private
sector. This Company
is engaged in the manufacturing, marketing and sale of cement. Thecompany has a production
capacity of 2,400,000 tons per annumand 6,700 tons per day enjoys strong brand loyalty amongst
itscustomers both in Pakistan and abroad.
The shares of the company are listed on the Karachi, Lahore andIslamabad Stock Exchanges and
it is a recipient of Forbes “Asiaunder a Billion Dollar” company award. The company has an
ISO9001:2008 [Link] main business activity is manufacturing,marketing and sale of
Ordinary Portland Cement. TheCompany is the number one cement in its region and amongstthe
pioneers of cement industry in Pakistan. Our businessesQuality; therefore, there are no
compromises on QualityManagement. The Company’s annual installed capacity is 01million
tons of clinker.
The most significant milestone for your Company this year is the setting up and beginning of
production from Cement Line II. Line II began production in January 2017 and has increased the
production capacity of the Company to 2.4 million tons per year. 3rd production line of the
Company became operational in January 2019. In view of increased demand of cement, The
Company successfully installed back to back two production lines. On the financing front, the
company has finalized the long term loan for the project with leading banks on competitive
terms. The management is confident of completing the project by June 2019. Furthermore, the
company has also placed the order for 3 new Wartsila Diesel 34 DF engines with an ISO rating
of about 10mW each, which will help in efficiently meeting the energy requirements of the plant.
First of all, demand is not on cement industry's side. Domestic demand has been falling due to
the change in government and new measures being taken to slow down the economy including
PSDP cuts. Construction in the private sector has not been as robust either. This is why as local
domestic dispatches fall; companies are now selling more abroad. According to Cherat's
quarterly report, during 9MFY19, local cement sales declined by 11 percent and exports to
Afghanistan dropped by 13 percent compared to the corresponding period last year. Indeed,
while cement makers in the south have the advantage of selling of their cement to markets
overseas, those in the north incur too much transportation cost to sell to those markets. They
have to rely on bordered markets-of which both Afghanistan and India have become lethargic.
Indian market in fact, has all but shut down due to political tensions.
That takes care of the slowdown in revenue. Retention prices particularly in the north have been
shaky. Between Feb and March, prices dropped by Rs20 per cement bag or more (read more:
"cement cartel: do not resuscitate", April 11, 2019). On average, prices remained on the same
level as the previous year but could not grow to register a better revenue growth.
The other problem which has only exacerbated is the cost of imports. Coal imports for cement
manufacturers have become ever more expensive due to an average increase in its own
international prices, and the latest round of rupee depreciations. The rupee depreciated by 13
percent between July-18 and Mar-19 and by 27 percent since Jan-18. The 13 percent
depreciation led to a 4 percent decrease in cost of sales is in line with Cherat's earlier estimations.
Meanwhile, coal prices averaged $4 per ton higher during 9MFY19, against the period last year,
though prices slid down during some of the months.
Cherat seems to have managed its inventories well but lazy domestic demand, lack of options in
terms of markets, together with less than ideal prices and costs led to a fall in margin to 19
percent during the period. Though its indirect expenses remained 5 percent constant of revenues,
its finance costs grew to 5 percent, from 2 percent as a share of net revenues. Expansion related
borrowing and higher financing rates are ballooning these costs. Net profit margin however,
grew to 20 percent from 16 percent last year due to a tax reversal the company received. As a
comparison, before tax net margin fell to 9 percent.
The industry is going through a tough period, which will continue well into FY20 as the
government tries to get out of the economic mess it is in. Even if domestic demand improves,
rising industry capacities will lead to price competition, while inflation and currency adjustments
will further put pressure on costs. Exports also cannot come to the rescue of manufacturers in the
north.