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The Pakistan Credit Rating Agency Limited
Press Release

Date
04-Mar-21

Analyst
Anam Waqas Ghayour
anam.waqas@pacra.com
+92-42-35869504
www.pacra.com

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

Rating Type Entity
Current
(04-Mar-21)
Previous
(03-Apr-20)
Action Maintain Maintain
Long Term AA- AA-
Short Term A1+ A1+
Outlook Stable Stable
Rating Watch - -

DG Khan Cement’s ratings reflect the company’s strong position in the cement industry emanating from its third highest market share of ~10% in terms of installed cement capacity. The cement sector’s despatches have recorded splendid growth over the five-month period (Aug-Dec); surged around 16% to 28.6mln tons in the first half of the current fiscal year 20-21 as demand in the domestic market accelerated due to the attractive incentives announced by the government for the construction sector. Export is another avenue. Industry-wide exports (sizeable increase in South Region) have gone up as a new export window is created in Bangladesh market where the sector is exporting notable volumes of cement and clinker. DG Khan - through its Hub plant is exporting a sizeable amount of clinker to Bangladesh and the company is also exploring other export opportunities to achieve the optimal level of capacity utilization. A significant drop in coal prices on the back of reduced demand during Covid-19, stayed within the range of $57-$67 along with the much-debated cut on FED duty supported the performance. Therefore; the company managed to recoup previous losses and reported profits of ~PKR 800mln for half-yearly financial statements after the two periods where the company’s bottom line turned red i-e; FY20 & its following quarter. The profitability of the company took a significant dip where deteriorated margins were attributable to a challenging environment resultant of Covid-19 impressions that led to reduced demand and depressed prevailing cement prices in FY20. Industry’s dynamics encompassing expected phase of expansion which will stretch the leveraging levels and pose the challenge to maintain profit margins and coverages in order to reflect positively on the ratings. The Company is in the process of installation of new WHR (operational in January) and CFPP at the hub site (expected to be completed by end of FY21). Going forward, it would be important to keep an eye on the sustainability of the current bust in demand to channelize the augmented supply on the back of expanded capacities; resultant in the aforementioned plant expansions.
The rating takes into account the association company with Nishat Group. Future performance seems to be promising as a revival in profitability and EBITDA is insight on the account of a significant increase in reported sector’s local and export despatches and being the top player of the industry – DGKC is going to capture a significant chunk to boost its profit margins which are evident from half-yearly results. The ratings are a reflection of a strong business profile and dependent upon the market standing post completion of expansions.

About the Entity
DG Khan Cement, operates as the third largest cement manufacturer of the country with a 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 the 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 three are non-executives and two independent director. The CEO, Mr. Raza Mansha, is associated with the company in the 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.