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Lafarge Pakistan Cement

Apr, 18 2012

(Pakistan)  --  Lafarge Pakistan Cement (LP) is a part of Lafarge, a French company specialising in the manufacture of construction materials.

It is the only multinational cement manufacturer in Pakistan, which commenced commercial operations in December 2006 with an annual cement production capacity of 2.5m tons.

LP's unique product offering is its product PAKCEM, which is the first cement in Pakistan to comply with European Standards (EN 197) and Indian Standards (IS 12269), and also exceeds requirements of Pakistani Standard (PS 232).

INDUSTRY REVIEW FY11 had been a rough year for cement manufacturers because of the Great Floods of 2010 and low PSDP expenditures.

Consequently, in FY11, local cement dispatches had fallen by over six percent to 22 million tons versus FY10.

At the same time, export demand in FY11 was also lull due to excess capacity and low prices in export markets, in particular the GCC countries.

Consequently, export dispatches from Pakistan also decreased by nearly 12 percent to 9.4 million tons versus the previous fiscal year.

However, FY12 saw local cement retention prices going up, lending some price-based support to local cement manufacturers.

In addition, post-flood reconstruction activity and greater housing construction in some parts of the country also brought about a volumetric growth in local sales - an eight percent year-on-year improvement in 9MFY12 at 17.4 million tons.

Export sales, however, continued to be stifled during the year, clocking in at 6.2 million tons during 9MFY12, eight percent less than the same period last year.

PROFITABILITY Sales and gross margins

In a year that has seen the financial health of many cement companies improving on account of better retention prices at home, smaller companies like Lafarge Cement have also benefited.

With turnover improving by over 13 percent in CY11 relative to CY10, the company's gross margins improved phenomenally about nine percentage points.

Much of the improvement in gross margins can be attributed to better retention prices of cement, which have lately risen significantly, helping improve the margins of several cement players.

However, export sales remained lull in line with the industry trend.

The improvement in turnover was brought on more due to improving prices rather than improving volumes of local and export sales.

This can be further observed in the lower capacity utilisation of the company in CY11 versus the previous years.

"The capacity utilisation of the Company stood at 70 percent in 2011 as against 79 percent during 2010, mainly attributed to the low sales volumes in local as well as in export markets," said Lafarge's latest annual report.

Operating margins The improvement in gross margins cascaded down into a phenomenal improvement in operating margins for the company of about 12 percent.

The decrease in export sales can also help explain the significant improvement in operating margins, since distribution expenses, largely related to export sales, went down by a whopping 50 percent to Rs 246 million in CY11.

From seven percent in CY10, the distribution cost to sales ratio decreased to about 3 percent in CY11.

However, finance costs continue to be the Achilles heel of Lafarge Cement.

The finance costs have stayed above 13 percent during the past three years, and have been responsible for driving down the company's profits significantly.

Net margins With retention prices of cement improving in the local markets, much of the impact of the hefty finance costs has lately been mellowed down, with the company's net loss to sales ratio improving from -13.8 percent in CY10 to -1.5 percent in CY11.

Yet, thanks to domestic cement prices improving - by about 25 percent during the second half of CY11 relative to the second half of CY10 - with expectations of the prices being kept at similar levels, if not raised further, analysts expect the company's CY12 bottomline to turn to green.

"Given rising cement prices in local market and higher export prices in Afghanistan, we expect Lafarge Pakistan to post healthy EPS of Rs 0.88 per share in 2012", said Farhan Mahmood, analyst at Topline Securities in a research report issued earlier this month.

LEVERAGE Debt to equity ratio Against an industry average of 1.1, Lafarge Cement's leverage position appears mildly weaker at a debt to equity ratio of nearly 1.2.

Delving into the details reveals that while the overall debt level of the company has stayed the same, CY11 saw a significant increase in long-term liabilities - from Rs 1.8 billion in CY10 to Rs 7 billion in CY11 - while the current liabilities decreased tremendously from nearly Rs 9 billion in CY10 to Rs 3.6 billion in CY11.

Much of the increase in long-term liabilities was brought upon by loans taken up by Lafarge for capital expenditure purposes from a syndicate of commercial banks.

Besides this, also included in the non-current liabilities is a Rs 4 billion loan arranged from a syndicate of commercial banks for paying off short-term payables to local banks.

A loan received from the parent company worth nearly Rs 0.5 billion, previously a part of short-term borrowings, has also been reclassified as a long-term loan after an amendment in the loan agreement.

Similarly, in CY11, some of the company's payables representing fee for technical services and royalty worth around Rs 1.6 billion were reclassified as long-term payables.

These are payable to Lafarge Building Material Holding, Egypt.

This reclassification of payables is also partially responsible for bringing down short-term liabilities because of the conversion of nearly Rs 1.6 billion of current liabilities to long-term liabilities.

A reduction in the company's short-term running finance borrowings as well as export refinance facilities from various commercial banks also accounts for the decrease in short-term liabilities.

Overall, it appears much of short-term loans were reclassified into long-term loans in CY11.

Interest coverage and current ratio Thanks to this reduction in short-term liabilities, Lafarge's current ratio also showed a remarkable improvement in CY11, while the interest coverage ratio improved at the heels of a better operating performance due to improved retention prices of cement.

OUTLOOK Owing to improving cement prices this year, the outlook for most cement players has been a positive one, and Lafarge Cement is no different.

Even in export markets, an improvement in both volumes and prices of cement exports to Afghanistan is expected, promising a ray of hope to the north-based cement company.

Local cement dispatches are also expected to go up owing to an improvement in PSDP expenditures this year, as well as to expected increases in house construction.

Therefore, analysts' prophesy of Lafarge's bottomline turning to profits in CY12 doesn't seem unrealistic.

In fact, prices of Lafarge Cement on the local cement have also taken a steep flight lately, indicating rising investor interest in the scrip.


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