The Pakistan Credit Rating Agency Limited
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Abdul Wahab

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PACRA Maintains Entity Ratings of D.G. Khan Cement Company Limited

Rating Type Entity
(03-Apr-20 )
(28-Sep-19 )
Action Maintain Maintain
Long Term AA- AA-
Short Term A1+ A1+
Outlook Stable Stable
Rating Watch - -

DG Khan Cement’s ratings reflect company’s strong position in the cement industry emanating from its third highest market share in terms of installed cement capacity. As of 1HFY20, the company’s three manufacturing units are operating at optimal capacity. Cement sector achieved second phase of expansion (18 mln tpa). However, slow local demand and expanded capacity resulted in depressed cement prices (especially in north region). Export is another avenue. Industry wide exports (sizeable increase in South Region) have gone up as new export window is created in Bangladesh market where sector is exporting notable volumes of cement and clinker. Cement sector's local capacity utilization already recorded dip to 65% in 1HFY20 (FY19: 68%). This will be further impacted amid COVID-19 outbreak and country wide lock down being observed. The likelihood of impact is considered high where quantum is directly correlated with tenure of lock down. Curtailed key policy rate will provide much needed breathing space to the sector. DG Khan - through its Hub plant is exporting sizeable amount of clinker to Bangladesh. The profitability of the company took a significant dip where margins deteriorated attributable to depressed prevailing cement prices. The company’s bottom line turned red in 1HFY20. However, bottom line was still supported by the established dividend stream of PKR 1.18bln from investment book; investment book's size of PKR 13.7 bln and PKR 16.3 bln in Nishat Group companies - mainly MCB Bank. The company’s financial profile reflects moderate leveraging; cashflows and coverage impacted because of negative profitability and increase in debt servicing. Going forward, improvement in margins and coverage remains vital. The rating takes into account the association company with Nishat Group. Revival in profitability and EBITDA is crucial, going forward.
The ratings are dependent on improvement of the company’s business vis-à-vis financial risk profile. Industry’s dynamics encompassing expected challenges of substantial decline in local demand or deterioration in cement prices will negatively affect the ratings.

About the Entity
DG Khan Cement, operates as the third largest cement manufacturer of the country with total cement capacity of 7.1mln tons p.a. DG Khan Cement, listed on PSX, is owned by Nishat Group (~49%), mainly through associated companies (32%), followed by sponsor family members (~17%). The overall control of the company vests in seven member board including the CEO. Mrs. Naz Mansha and Mr. Raza Mansha, the Chairperson and the CEO, both represent sponsoring family on board. Two board members (including CEO) hold executive positions while four are non-executives and one independent director. The CEO, Mr. Raza Mansha, is associated with the company in capacity of CEO since 2003.

The primary function of PACRA is to evaluate the capacity and willingness of an entity to honor its obligations. Our ratings reflect an independent, professional and impartial assessment of the risks associated with a particular instrument or an entity. PACRA's comprehensive offerings include instrument and entity credit ratings, insurer financial strength ratings, fund ratings, asset manager ratings and real estate gradings. PACRA opinion is not a recommendation to purchase, sell or hold a security, in as much as it does not comment on the security's market price or suitability for a particular investor.