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Worst is over for DGKC

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September 30, 2020 (MLN): Post expansionary cycle, reopening of businesses after COVID-19, and key incentives provided by the State bank of Pakistan through principal deferral scheme and repayment for FY21 to the industry, cement companies are finally looking for better days ahead given positive outlook and more confidence on the pricing front.

FY20 proved to be a rough ride for cement players. The weak demand was mainly attributed to tight monetary and fiscal measures, weak export market post imposition of 200% import duty by India, price war to retain market share post-expansion, and economic slowdown due to COVID-19.

After reopening the economy post-COVID-19 lockdown, the cement industry is experiencing upbeat demand in the local market as heavy construction activities (both in private and public sectors) and government construction packages expected to accelerate the demand. Moreover, mega infrastructure, Naya Pakistan Housing Program, could generate cement demand by around 21 million tons while Dam projects which include, Diamer Basha Dam, Dasu Hydropower, and Suki Kinari would fuel up cement demand by nearly 15 million tons.

Among the highly leveraged players of the Cement sector, according to the research by Spectrum Securities, DG Khan Cement’s total debt to equity ratio stood at 66% as on March 31, 2020. As per the 3QFY20 result, the company’s total debt stands at PKR 42.6 billion. The uptick in long term loans was due to south expansion and the surge in short term loans attributed to meet the working capital requirement. The policy rate cut of 625bps by SBP coupled with approval of deferment of principal repayment for FY21 will create liquidity room to manage its finances in crucial times, improving dynamics to expand margins for FY21.  

With regards to DGKC dispatches, the research expects a 10% YoY growth in FY21 to settle at 6 million tons. Being in the North region, DGKC would gain a favorable light as the construction of dams and CPEC project would speed up the demand.

On the export side, the south plant of DGKC registered a healthy growth of 1.63x from 0.54 million tons to 1.4 million tons with major exports to Bangladesh and China during 9MFY20. The company is actively looking for a new export market and recently managed to secure export orders from the Philippines due to a strong demand drive. The research by Spectrum further expects total export sales of the company to deliver CAGR of 7% till FY25.

In the wake of higher dispatches, improved retention prices, strong dividend income, lower production cost on subdued coal prices due to shifting in renewable sources, and decline in financing costs on lower interest rates,  the bottom line of the company is expected to grow in FY21, reaching at PKR 6 billion. While in FY22, the research foresees that the company will derive growth from higher dispatches added by export from new plant and power cost saving.

It is pertinent to mention that DGKC’s earnings have been majorly supported by dividends from group companies including banks, textiles, dairy, and insurance, making it one of the diverse companies in Pakistan.  

Going forward, after the installation of 12 MW Waste Heat Recovery plant at Khairpur Site in Dec’ 19 the company is installing 10 MW WHR and 30 MW Coal-Fired Power Plant (CFPP) at its south plant with an estimated total outlay of around PKR 5 to 7 billion which is expected to be raised through debt, the research revealed.  

The research highlighted that WHR is anticipated to be commissioned by 3QFY21 while 30 MW CFPP is likely to start operations by the end of 4QFY21. The installation of these plants will give substantial yearly savings and reduce per ton cost by around 38 % (incorporated from FY22).

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Posted on: 2020-09-30T14:10:00+05:00

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