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Pioneer Cement Limited – BR Research

Pioneer Cement Limited (PIOC) is a public listed company incorporated in Pakistan in 1986 with an objective of production, marketing, and sale of cement and clinker. The company began its production with an installed production capacity of 2000 tons of clinker per day. In 2005, the company increased its capacity to 2350 tons of clinker per day. In the following year, the company installed another production line with a capacity of 4300 per day. PIOC also installed a new brownfield cement production line with a production capacity of nearly 8000 tons per day with a waste heat recovery plant. The company also produces interlocking concrete pavers as a part of its vertical integration strategy. As of 2022; the company has an installed cement manufacturing capacity of 5.19 million tons per annum.

PIOC is geographically located in Punjab to cater to the needs of central and South Punjab, however, the company has extended its services to other parts of the country through distributors, retailers, and dealers. The company has also tapped the foreign market, especially India and Afghanistan.

Pattern of Shareholding

PIOC has an outstanding share capital of 22.7 million shares, 57.87 percent of which is held by the shareholders holding 5 percent or more voting interest. This includes Vision Holding Middle East Limited and Maple leaf Capital Limited. Joint stock companies have a share of 19.5 percent in PIOC. The local public grabs the next spot, holding 17.25 percent of the company’s shares. 4.4 percent of shares are held by Banks, DFIs, and NBFIs, followed by associated companies, undertakings, and related parties having a shareholding of 2.18 percent. Insurance companies enjoy a shareholding of 1.86 percent. The remaining shares are held by other categories of shareholders such as Directors, CEO and their spouse and minor children, NIT and ICP, pension funds, etc, all of which have a shareholding of less than 1 percent.

Performance over the years (2017-2022)

The net turnover of PIOC has been riding a downward trajectory since FY17 led by a constant drop in volumetric dispatches; however, it recovered in FY21 and continued the same in FY22. In FY21, the company made a tremendous year-on-year growth of over 94 percent in sales volume. This coupled with improved cement prices in the local market gave a boost of 2.4 times to the topline of PIOC in FY21. This growth in sales volume came on account of PIOC’s capacity expansion, the result of which was a whopping year-on-year rise of 96 percent in the production volume. FY21 was also the year when the company recovered from a gross loss of Rs.103 million in FY20 to register a gross profit ratio of 18.9 percent. Bottomline also entered the profit zone in FY21. The gross profit ratio further improved in FY22 to clock in at 23 percent. However, the bottom line again entered the red zone and registered a loss after tax in FY22.

It is to be noted that while the sales revenue and gross profit grew in both FY21 and FY22, both years are quite different. In FY21, the growth was led by volumes, however, FY22 saw growth coming on the heels of a cement price hike.

It is to be noted that while the local sales volume enormously grew in FY20 from a downhill journey, export sales volume kept on dropping until it completely vanished in FY22. FY20 saw a major dip in export sales volume from 62000 tons to 12000 tons. This is because the company couldn’t make any sales to its chief export market i.e. India, while sales to Afghanistan also dropped significantly in FY20 and completely faded away in FY22. This puts the burden on the domestic market to deliver growth amidst economic slowdown, high inflation, discount rate, muted construction activities, and low PSDP allocation.

Financial Performance, FY22

During FY22, the volumetric dispatches of Pakistan’s cement industry dropped from 57.43 million tons to 52.89 million tons. As against the industry-wide drop in sales volume, Pioneer Cement could make a volumetric sales growth of only 0.6 percent. The growth came on the heels of local sales as the company made no foreign sales during the year. Despite a meager uptick in sales volume, the topline grew by 46 percent year-on-year in FY22. This is attributable to the cost-push increase in sale price in the local market. During FY22, the company operated on 64.93 percent of its capacity producing 6266 tons of clinker and cement out of which it could only sell 46 percent.

This decline is demand across the industry is attributable to myriad factors including ever-increasing fuel prices, overall economic downturn, and multiple hikes in the discount rate as well as flood impact in the southern region of the country. Moreover, there is a fall in construction activity due to global increase in prices of steel and other raw materials. Low allocation of PSDP also posed challenges for fuel-intensive industries like Cement.

The cost of sales also grew by around 40 percent year-on-year in FY22. The main culprits in the cost domain are fuel and power costs followed by packing material costs. Fuel and power costs soared to Rs5401 per ton compared to Rs3565 per ton in FY21 indicating a jump of 51.5 percent. Similarly packing material showed an uptick of 12.7 percent to clock in at Rs.646 per ton. The increase in the cost of production is attributable to Pak Rupee Depreciation coupled with the rise the coal and paper prices both domestically and internationally. The effect could be much bigger but PIOC has mitigated the further adverse effect by switching to cost-effective coal from the local and Afghan markets. To minimize the shock of rising power costs owing to an increase in electricity tariffs, the company largely relied upon a captive power plant that used waste heat recovery and coal fire to generate electricity. This has enabled PIOC to attain a year-on-year growth of 75 percent in gross profit in FY22.

On the operating front, while distribution and admin costs remain in check, posting a year-on-year rise of 0.7 percent and 4.6 percent respectively, the major increase was seen in the workers’ profit participation fund and workers’ welfare fund. Besides, the company also realized a loss on the sale of short-term investments. This translated into year-on-year growth of 42 percent on the operating expense front. However, operation profit-to-sales rebounded from 17 percent in FY21 to 21 percent in FY22.

Other income couldn’t contribute much to the bottom line in FY22 and dropped year-on-year by 39 percent. Moreover, Finance costs gave no breather and soared by 46 percent year-on-year in FY22. This hike came on account of an increase in the policy rate in FY22 coupled with the increase in the loan book of PIOC to finance a 24MW coal power plant.

The final hit on the bottom line was made by a hefty taxation charge owing to the imposition of super tax in FY22. This coupled with the consequent non-cash adjustments shrank the profit after tax and EPS by 47 percent year-on-year in FY22. EPS for FY22 stood at Rs.4.62 vis-à-vis Rs.8.69 in the yesteryear.

Financial Performance, 1QFY23

During 1QFY23, PIOC’s cement dispatches dropped sharply by 18.6 percent year-on-year. The production volume also dipped by 16.4 percent year-on-year, however, the cost-push increase in sales price kept the topline in pink as the prices nearly doubled during 1CFY23 compared to the same period last year.

Despite the increase in the prices of raw materials coupled with the rupee devaluation, gross profit showed a momentous growth of 31 percent year-on-year in 1QFY23 due to operational efficiencies undertaken by the company. While finance cost and taxation continued to bite, the rebound in other income, and a significant drop in the remeasurement loss on assets held at fair value, the bottom line registered a year-on-year growth of 22 percent in 1QFY23.

All in all, 1QFY23 told the same tale as FY22 as the macroeconomic indicators gave no breathing space. Record high inflation and discount rate, rupee devaluation coupled with the imposition of Super tax took a toll on PIOC’s financial health during 1QFY23.

Future Outlook

The cement sector looks forward to the upcoming quarters of FY23 for a growth rebound. With high cement prices, both locally and internationally, the topline of PIOC is expected to show an uptick. Besides, the slowdown in off-take owing to floods in 2022 is also expected to show some respite as routine economic activity resumed. Rehabilitation and reconstruction related to flood may boost the public sector demand for cement yet high construction costs will put brakes on the private sector development and spending.

With operational efficiencies such as the accumulation of low-cost coal inventory from local and Afghan markets and reliance on captive power plants, PIOC’s cost of sales is anticipated to remain in check. However, high finance costs and taxation charges will continue to haunt the bottom line.

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