EUR 9.10 For Business Accounts Only

DGKC - FY23 Analyst Briefing Takeaways, (AKD Off the Analyst's Desk Nov 23, 2023)

AKD, Off the Analyst's Desk

DGKC - FY23 Analyst Briefing Takeaways

 

DGKC held its corporate briefing earlier today to apprise investors on their FY23 financial results and future outlook of the company. Following are the key highlights of the call:

 

• Management stated that cement prices in the North have been increased to PkR1,260/bag after a recent hike today, while prices in the South stand at PkR1,100/bag. This upward adjustment brings retention prices to ~PkR16k/ton.
• The said increase in prices is to offset the impact of the axle load limit implementation by the GoP. If this impact is completely absorbed through price increases, it is expected to help sustain gross margins going forward.
• On the fuel mix front, South relies 80% on imported coal, with the remaining 20% being a mix of local, Afghani, Iranian, and alternative fuel. Meanwhile, North uses ~20-30% imported coal, with the rest being a mix of local and Afghan coal. The weighted average price of coal was around PkR45k/ton in 1QFY24 and has now increased to PkR47-50k/ton.
• Additionally, transportation prices from South to Kallar Kahar (North) have risen from PkR8.5k/ton to PkR12k/ton due to the axle load implementation. With this development, the use of imported coal (through sea) has become unviable, with the only alternative option being Afghan coal.
• Management highlighted that the price of Afghan coal is in the range of PkR48-52k/ton, but the available supply is not 100% pure and has some mix of local coal.
• Moreover, current coal inventory on hand is no more than for 7-8 days, howbeit, the company's coal shipment is expected to arrive by the end of this month.
• Regarding the requirement, energy requirement (kiln operations) for the HUB plant is ~680-685kcal/ton (DGKC’s new and most efficient plant), Kallar Kahar plant is 715-720kcal/ton, and the DG Khan plant (oldest and least efficient) has higher requirement. Meanwhile, power requirement per ton of cement ranges between 85-100kWh.
• Power mix for the company is 70% self-generation, with the remaining 30% from the grid. Furthermore, company's total power requirement stands at ~113MW. Regarding pricing, the grid price is uniform in the North and South, currently standing at around PkR41/kWh (exclusive of sales tax).
• Management is actively focusing on exports to increase capacity utilization. They expect higher clinker exports this year, but the impact wouldn’t be significant as clinker exports have minimal margins. However, margins on cement exports are comparable to local margins, as per management.
• Clinker export prices stand at US$30-31/ton, and cement export prices stand at US$45/ton, meanwhile due to bulk shipments export price to USA is over US$50/ton (Retention price: US$43-44/ton; bag cost ~US$10/ton). The continuity of the company's supplies to the USA is anticipated to contribute to improved gross margins.
• Along with USA, company has exported to Mexico and is making efforts to export more in that region. Though, export to South Africa has become unviable after the imposition of an 80% anti-dumping duty on most Southern cement players (except LUCK, only 30% duty). Besides, export to Afghanistan is minimal, as it is mostly exported by players located near its border.
• Looking forward, management expects flat or slightly negative growth in the industry offtakes for the current year. However, they are optimistic about the next year, expecting a growth of 5-10%.
• Management apprised that as the company's utilization goes above 70%, gross margins are expected to become comparable with the industry.
• Conversely, management anticipates financial charges to be a challenge going forward, expecting elevated interest rates due to sustained high inflation.
• Management mentioned that after unloading its loans from the books, probably after two years, they would plan for further expansion.
• On the subsidiary side, for NPPCL (Nishat Paper Products Company Ltd.), management told that a 90mn PP (Polypropylene) bag production line is under pipeline (expected COD 1HFY25). Notably, company previously has three production lines with annual capacity of 220mn paper bags (FY23 sales 50.7mn bags).
• The objective of new PP bag line is to meet the growing market preference for PP bags over traditional paper bags. Additionally, company is planning to sell two old paper bag production lines. NPPCL (DGKC holding: 55%) reported a loss of PkR177mn in FY23, primarily due to less demand from the cement industry.
• Another subsidiary, Nishat Dairy (Pvt) Ltd (DGKC holding: 55.1%) posted profits of PkR491mn in FY23. This subsidiary is a major supplier of “Milkfield” (a joint venture between a Turkish brand and Nishat group company, i.e., Sutas).

 

AKD Research