EUR 15.00 For Business Accounts Only

D.G. Khan Cement (DGKC): 1QFY19 EPS Rs0.9, -86% YoY (-91% QoQ); (Below expectations)

• DGKC announced its 1QFY19 result which fell short of street consensus, on the back of lower than expected gross margins and higher financial charges.
• Cement gross margins fell (-23ppts YoY and -9ppts QoQ to 13% YoY) on account of higher cost of production from the new hub line amid lower economies of scale. New plant’s utilization remained at 50-55% in 1QFY19, however, sales were lower due to which the company was unable to pass on the new line’s fixed charges, as per channel checks.  The company also booked additional depreciation charge from new cement line.
• Financial charges on the other hand were higher, +6.7x YoY in 1QFY19, due to 1) higher debt levels 2) increase in interest rates, 3) higher financial charges on financing of new cement line which were previously capitalized as per accounting treatment and 4) one-time escalated trial run cost amid rupee devaluation, as per channel checks.
• Consolidated revenues were up 8% YoY in 1QFY19, mainly due to 9% increase in sales from cement operations. Cement sales were up on the back of 9% growth in local dispatches and 6% increase in exports, we estimate.
• The company’s effective tax rate clocked-in at 20% during the outgoing quarter due to tax benefit on the hub cement line.
• We flag 1) further decline in cement prices, 2) unanticipated increase in gas and coal prices and 3) lower than expected local cement demand as key risks for DGKC.