September 30, 2019: Pakistan Credit Rating Agency (PACRA) has assigned initial entity rating of ‘AA-’ for long term to D.G. Khan Cement Company Limited, while the short term rating is ‘A1+’. Meanwhile the outlook forecasted on this rating is ‘stable’.
As per an official press release by the agency on this occasion, company’s strong position in the cement industry emanating from its third highest market share in terms of capacity. As of 9MFY19, the company’s two existing manufacturing units (Khairpur Site and DG Khan Site) are operating at a capacity utilization levels of ~89% (FY18: ~114%).
Last year, the company added a new plant at South region-Hub of 2.9 M tpa capacity which assisted the company in improving its market share amid industry wide capacity expansions. Upcoming industry wide expansions of ~7mln tpa (North Region only) commissioning in next six months and slowdown in the local demand seems a challenge. The demand needs to be up to secure companies’ margin.
Export is another avenue. Industry wide exports (sizeable increase in South Region) have gone up due to muted growth in local demand. A new export window is created in Bangladesh market. Previously, cement exports were seen at its peak after financial crisis in 2008.
DG Khan through its Hub plant is exporting sizeable amount of clinker to Bangladesh. The company is eying new export fronts and exploring new opportunities to channel exports in cost-efficient manner because the Bangladesh market won’t stay for longer.
The profitability of the company has taken a dip. Resultantly, EBITDA margins of the company squeezed. The company’s bottom line is supported by the established dividend stream of the company from investments in Nishat Group companies – mainly MCB Bank. Revival in profitability and EBITDA is crucial.
The company’s financial profile reflects moderate leveraging; cashflows and coverages impacted because of declined profitability and increase in debt. The rating takes into account the association company with Nishat Group.
The ratings are dependent on improvement of the company’s business vis-à-vis financial risk profile. Industry’s dynamics encompassing expected challenges of substantial decline in local demand or deterioration in cement prices will negatively affect the ratings.