Analyst:

Muhammad Sarfraz Abbasi

sarfraz.abbasi@atlascapital.com.pk
(+92-21)-111-226-100 (Ext.403)
Morning Pulse Nov 11, 2010

Cement: DGKC – 1Q/FY11 financial by 7.83% Y-o-Y to PRs3.30bn against PRs3.07bn in BUY
1Q/FY10. This increase in production cost was mainly
performance review… because of upsurge in furnace oil, gas and coal prices.
Furnace oil and gas charges recorded a increase of
Synopsis… 11.76% to PRs1.50bn in 1Q/FY11 against PRs1.34bn Market Snapshot
D.G. Khan Cement Company Ltd (DGKC) has during the same period of last year. Coal prices Index Chg %
announces its operating results for 1Q/FY11 recently. witnessed rising trend which played main role in
Pakistan Research

KSE 30 10534.35 -66.74 -.63

Below than our expectations, the company posted increasing production cost. Gravity of the situation can KSE 100 10941.94 -50.34 -0.46
Profit after Tax (PAT) of PRs22.15m translating into an EPS be judged by seeing the coal prices which were at KSE ALL 7605.22 -34.36 -0.45
of PRs0.06, posting a sharp decline of 96.21% against US$80 per ton a year back have gone beyond US$125
the corresponding period of last year when company per ton by1Q/FY11. Frequently increasing electricity and
was recorded PAT of PRs584.62m and EPS of PRs1.60 gas tariffs has emerged as another cause of concern
respectively. In our today’s report we present detailed for the company. Despite of 17.82% lower production, Key Data
review of the financial performance of the company in electricity and gas charges increased by 5.12% and Market Cap(PRs bn) 10.91
1Q/FY11. recorded at 16.05% of cost sales in 1Q/FY11 against Shares Outstanding (m) 365.10
13.28% in 1Q/FY10. Bloomberg DGKC PA
Fragile dispatches hurting revenues… 12M Avg. Volume (m) 3.32
DGKC witnessed a sharp decline in revenue of 23.17% Rise in other Income and decline in operating
to PRs3.53bn in 1Q/FY11 against PRs4.60bn in 1Q/FY10. expenses imparted a breathing space…
This momentous decrease in revenue was attributed to During the period under review, income of the
the significantly plunge in volumetric sales which was company other than its core business witnessed an
recorded 0.93m tons in 1Q/FY11 drastically down by upsurge of 39.44% to PRs233.41m against PRs167.39m in 138%
12M DGKC relative performance vs KSE

34.38% in comparison of 1.403m tons sales during the 1Q/FY10. This gigantic increase in other income played
116%
same period last year. There are quite a few factors can a due role in rescuing bottom line. Major portion of the
be assumed the key culprits behind this dwindle in both other income was received from the associated 94%

domestic and export dispatches. Local sales volumes companies. Another positive factor was, operating 72% DGKC KSE-100
were 39.48% Y-o-Y low because of 1) slow pace of expenses which declined by 14.82% to PRs368.69m in 50%
construction activities during the month of Ramadan 2) 1Q/FY11 against PRs432.82m in 1Q/FY10 which bode

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moon soon rains which turned into devastating floods. well for the company. On the other hand, financial
Whereas export sales were down by 8.32% because of charges of the company witnessed a slight increase of
1) relatively slow construction activities in GCC countries 4.28% to PRs488.23m in 1Q/FY11 against 468.18m in
2) over supply situation at other destinations 3) higher 1Q/FY10. Even though the company has curtailed its
prices of Pakistani cement in comparison to others due long term debts by PRs510m, posting a decline of
to increasing sea freights and transportation charges. 10.04% to PRs4.58bn in 1Q/FY11 against PRs.5.09bn in Atlas Capital Markets (Pvt.) Ltd
1Q/FY10. Nevertheless this impact of lower long term B-209, Park Towers, Clifton, Karachi
Rising production cost eradicated profitability… debt on financial charges was mitigated by increase in Equity Research: Equity Sales:
Even though cost of sales in 1Q/FY11 was 12.99% down short term borrowing. During the 1Q/FY11 short term Tel: 92 (21) 5376125 Tel: 92 (21) 5368261-8
to PRs2.85bn in comparison of PRs4.60bn in 1Q/FY10 borrowing of the company increased by PRs1.75bn,
Fax: 92 (21) 5376126 Fax: 92 (21) 5376122
however, when evaluated its components, they tell the showing considerable increase of 18.17% to PRs11.33bn Money Market: Corporate Finance:
different story. Total production cost has increased Tel: 92 (21) 5376128 Tel: 92 (21) 5824991
against PRs9.58bn in 1Q/FY10. Fax: 92 (21) 5376129 Fax: 92 (21) 5376122

Disclaimer: All information contained in this publication has been researched and compiled from sources believed to be accurate and reliable at the time Financial Products Distribution:
of publishing. However, in view of the natural scope for human and/or mechanical error, either at source or during production, Atlas Capital Markets (Pvt.) Tel: 92 (21) 5376125
Limited accepts no liability whatsoever for any loss or damage resulting from errors, inaccuracies or omissions affecting any part of the publication. All Fax: 92 (21) 5376126
information is provided without warranty and Atlas Capital Markets (Pvt.) Limited makes no representation of warranty of any kind as to the accuracy or Atlas Research is available on Bloomberg and
completeness of any information hereto contained. Thomson Financial
 ATLAS CAPITAL MARKETS (PVT.) LIMITED Morning Pulse

(PRs m) 1Q/FY10 1Q/FY11 Chg

Volumetric Sales (Tons) 1,403 921 -34%
Revenue 4,592 3,528 -23%
Cost of Sales 3,275 2,849 -13%
Gross Profit 1,317 678 -48%
Operating Expenses 433 369 -15%
Other operating income 167 233 39%
Operating profit 958 514 -46%
Pakistan Research

Financial charges 468 488 4%

Profit before Tax 490 26 -95%
Taxation 95 3 -96%
Profit after tax 585 22 -96%
EPS 1.60 0.06 -96%
Gross profit margin 29% 19%
Operating profit margin 21% 15%
Net profit margin 13% 1%
Source: Company accounts, Atlas Research

Future Outlook and recommendation…

We are optimistic on full year hefty earnings of the
DGKC. We are of the view that even though at this
point in time the company is faced with quite a few
challenges equally as its peers. Rising cost of production
and dwindling demand in both local and export
markets harmed company’s profitability, however, our
analysis on sector reveal that worst is not going to be
last longer. Cement sector dispatches in October ’10
were giving an obvious signal of headway as on the
M-o-M basis total dispatches of the sector have
increased by 45.87%. Even though we anticipate
revival in demand and impact of it will start coming out
by the end of 2Q/FY11, nevertheless, we expect major
upshot is likely to be seen in 2H/FY2011 as substantial
growth in dispatches especially in local market will
emerge by then. Our anticipation is backed by the
factors 1) reconstruction activities for flood infected
people 2) normal constructions actives 3) infrastructure
rebuilding post floods 4) augment in exports orders. Our
BUY stance is maintained on scrip as it offers an upside
potential of 30% to our SOTP based target price of
PRs39.