Industry turnaround to cut FCCL debt to Rs11.4bn by end-2013

Fauji Cement Company Limited (FCCL), country’s 4th largest cement, would be a major beneficiary of the operating and financial leverage as its new line became operational while the local cement industry dynamics have started improving.
The FCCL with higher market share, improved production efficiency and strong cash flows has the potential to considerably reduce its debt obligations and post better than average earnings growth, said the market analysts.
The (FFCL) stock is currently trading at FY13 and FY14 PE of 5.2x and 4.0x versus sector PE of 5.5x and 5.5x, respectively.
After 2.3mn tons (7200tpd) expansion, the FCCL has become the country’s 4th largest cement manufacturer with 8.0% market share compared to an average 6.6% in FY12.
Further, the European-made $335mn new line has brought efficiencies as FCCL’s EBITDA margins has improved by 14pps in 1HFY13 versus average rise of 9pps of the industry. “Resultantly, FCCL’s sales are likely to grow by 41% and 6% in FY13 and FY14 respectively with EBITDA margin improving from 34% in FY12 to 38% in FY13 and onwards,” said Topline analyst Asad I. Siddiqui.
The analyst said that due to improved efficiency and higher financial leverage, the FCCL would be the major winner of turnaround in cement sector stemming from better margin scenario and sharp fall in interest rates.
The company generated EBITDA of Rs2.8bn in 1HFY13 against Rs934mn in 1HFY12, which will help in early repayment of loan. “We expect debt to decline to Rs11.4bn by end of FY13 from Rs13.5bn at end FY12,” Asad said.
Moreover, he said, 425bps decline in KIBOR since July 2011 will also positively affect its profits. We expect financial charges to decline by 15% in FY13 and 36% in FY14.
In 1HFY13, the FCCL posted earnings of Rs938mn (EPS Rs0.7), against loss of Rs102mn. However, it reported taxation of Rs398mn (incl. deferred tax) while actual outflow was only Rs37mn.
“This suggests that FCCL’s actual earning is understated and this will continue in the presence of deferred tax liability,” said Asad.
This non-cash tax expense along with high depreciation (Rs1.1bn a year) due to its expansion will generate enough cash for early debt retirement. Considering better cash position, FCCL may surprise investors by dividend of Rs0.5 in FY13 after a gap of 7-years, he concluded.