November 4, 2021 (MLN): Fauji Cement Company Limited (FCCL) is set to become the second-biggest cement North player after the amalgamation of Askari Cement Limited (ACL) with and into FCCL and expansions of 2.05mn tons each at D.G Khan and Nizampur site.
Furthermore, FCCL market share in the North would increase from the current 6.7% (11.9% including Askari) to 13.2% which would be the second-highest after Bestway Cement (BWCL) market share of 19.2% in the North region.
With increased market share FCCL would benefit from higher demand from the private/public sector as it is expected that the domestic demand will increase by 7.7/10.0/6.1% YoY in FY22/FY23/FY24. However, post-COD of 4.1mn tons option to export cement production would depend upon the economic recovery of Afghanistan, as per the report by Foundation Securities.
Earlier this year, FCCL in February 2021 had announced to set up of a Greenfield Plant for the manufacturing of 2.05 million tons of cement per year at Dera Ghazi Khan. the construction period of the project is 2.5 years.
While the wholly-owned subsidiary of Fauji Foundation group i.e Askari Cement (ACL) had also announced a 2.05 million tons Brownfield expansion at its Nizampur plant that will take its total capacity to 4.85 million tons per year.
To highlight, the research has only incorporated the impact of FCCL Greenfield expansion of 2.05mn tons as further disclosure of Askari amalgamation transaction will give a clear picture. This post amalgamation synergies may provide further upside to research’s FCCL Jun-22 TP of Rs27.6/sh.
On the current debt matrix, FCCL has the lowest debt/ton that would allow it to avail debt at lower markup rates. The company's total debt stands at Rs1.1bn at the end of Sep’21 and would increase to Rs20bn in FY24 due to 2.05mn Greenfield expansion (Rs32bn expansion cost). It is worth mentioning that FCCL has already secured Rs10bn TERF/LTFF facility to finance its Rs20bn debt component of the expansion, it added.
Going by the report, the higher reliance on internal power generation provides a competitive edge to FCCL as it meets its 70% energy requirement. This will hold positive in the sense that it is expected the national grid rates will increase due to the resumption of the IMF Program. However, the company fuel cost would remain on the higher side as coal prices are expected to remain elevated till 4QFY22.
To note, the company profitability had clocked in at Rs1.36 billion (EPS Rs0.98) in 1QFY22 as compared to a profit of Rs696mn (EPS Rs0.50) in 1QFY21, backed by higher retention prices in the domestic market, the decline in finance cost, higher other income given strong cash position of the company and coupled with the lower effective tax rate.
Going forward, the domestic cement demand is expected to remain stable with the ongoing construction activity in the country including the demand for housing, commercial and hydropower projects. Exports to Afghanistan have slowed down due to frequent border closures but are likely to improve with the improvement in the political situation, an excerpt note by FCCL Directors in its official document.
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