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Cement: Bestway Cement Company Limited - Analysis of Financial

Statements - Financial Year 2006 - 1H - Financial Year 2011

Last Updated on Tuesday, 30 November 1999 05:00 Wednesday, 16 March 2011 10:56
Highlights - Corporate News
OVERVIEW : Bestway Cement engages in the production and sale of cement in Pakistan. It offers ordinary Portland
cement, sulphate resistant cement, quick setting cement, low alkali ordinary Portland cement, and clinker. Bestway
Cement Limited also exports its products to Afghanistan, India, Africa and the Middle East.
The company was incorporated in 1993 and is headquartered in Islamabad, Pakistan. Bestway Cement Limited is a
subsidiary of Bestway (Holdings) Limited. It was listed on KSE in February 2001.
Company Snapshot
Company Name Bestway Cement Limited
Industry Construction- Cement Producers
Ticker Symbol BWCL
Share Price as on 30th June 2010 PKR. 14. 82
Earnings per Share PKR -3. 71
The company is a major manufacturer and seller of cement. In FY09 Bestway Cement held 13.
2% local market share and a share 10% in total exports of share. Bestway has been a major
exporter to Afghanistan and began exporting to India, Africa and Middle East recently. Bestway
Group decided to set-up its first cement plant in Pakistan in 1992. The company commenced
work on its first cement plant at Hattar, Haripur in NWFP with an initial investment of US $ 120

The plant s initial capacity was 0. 99 million tons per annum. Hattar s capacity was enhanced to
1. 17 million tons per annum in 2002 owing to increased domestic demand. In 2005, the plant s
capacity was further increased to 1. 20 million tons per annum of clinker. During FY07, the
clinker production at Hattar reached 1. 14 million tons and cement production was 1. 17 million

Initially, the cement plant at Hattar used furnace oil as fuel. Around 2001, the plant was
converted to operate on natural gas. This was a prudent step towards achieving cost efficiency as
a hike in petroleum prices was anticipated. In 2003, the plant was converted from gas to coal
with an investment of around US $ 10 million. Now, the Bestway Cement Hattar can operate all
the three major fuels. These measures have reduced the energy cost component, which at times
constituted about 65% of the total production cost of the company.

In 2004, BWCL set up a new cement plant near Village Tatral of District Chakwal in Punjab to
meet the growing cement demand in the domestic market. The plant had a cement capacity of 1.
8 million tons per annum and cost US $140 million. The plant was fully functional and
production started in June 2006. In FY07, cement production and clinker production at Chakwal
was 1. 119 million tons and 1. 061 million tons, respectively.

In an attempt to increase its presence in the cement industry, BWCL bought 85. 3% stake in
Mustehkam Cement Limited in 2005. The plant had a capacity of 0. 63 million tons per annum
and was close to BWCL s plant at Hattar. BWCL planned a project of upgrading and
modernizing Mustekham plant to a capacity of 0. 9 million tons per annum.

In May 2006 the company announced plans for setting up of a second 1. 8 million tones per
annum capacity plant adjacent to the plant in Chakwal at a cost of US $180. 0 million. With such
major capacity expansion plans the company s cement manufacturing capacity is set to exceed 6.
0 million tones per annum by FY 08, making Bestway the second largest cement producer in the

The cement industry in Pakistan has grown gradually with the passage of time. At the time of
independence there were only four units with total production capacity of nearly half a million
tons per annum. By 1972 the number of cement plants increased to 14 and the production
capacity also increased to 2. 5 million tons. Both public and private sectors took initiative to
establish new plants.

As was the case for other industries, the cement industry was also nationalized in 1972 and the
State Cement Corporation of Pakistan (SCCP) was established and given the responsibility to
manage the production of cement in the country. Considering the higher cement demand as
compared to supply, cement import was also allowed in FY 76-77 that continued until FY 94-95.
With a change in policy of state control over industrial units, the state owned cement plants were
also put-up for privatisation along with other industries. The private sector was allowed to invest
in the cement manufacturing. Consequently, the role of SCCP as market leader vanished
gradually and currently it owns only four plants, of which two have been closed down
inefficiency and profitability grounds. In view of the higher demand during the period of de-
regulation and liberalization, a number of new units were set up and many others invested
heavily to increase their existing production capacity. As a result, the production capacity has
reached 17. 7 million tons per annum during 2003.

Bestway Cement s capacity expansion has been in line with the trend of the entire cement sector.
The overall production capacity of the cement sector increased substantially to 38. 95 million
tons at the end of 3QFY08 as compared to 30. 1 million tons at the same time in FY07. In FY09,
the production capacity further increased by 12. 4% to 41. 67 million tons.

The cement sector of Pakistan showed an impressive growth of 24. 3% in the cement dispatches
during FY08. Total cement dispatches grew from 24. 22 million tons in FY07 to 30. 11 million
tons in FY08. In FY09 the total dispatches grew only slightly by 1. 61% to 30. 755 million tons.

There was a 6. 5% growth in local cement dispatches as demand for cement in the domestic
market due to increased construction activity and government spending on infrastructure
development. Local cement demand witnessed a decline of 13 percent YoY in FY09 at 19. 4
million tons versus 22. 4 million tons in FY08. As per data, northern cement market recorded a
decline of 17 percent at 15. 9 million tons, whereas the southern market posted a growth of 4
percent at 3. 5 million tons during FY09.

Considering the fact that there is a direct relationship between the economic growth and cement
demand of the country, Pakistan s cement industry has started to bear the brunt of ongoing
economic slowdown with a notable decline in domestic dispatches of the year. After six years of
consecutive YoY growth, the domestic cement market depicted a declining pattern in the wake
of lukewarm construction activities amid economic slowdown, high interest rates, liquidity
crunch and cut in infrastructure spending both in public and private sectors.

The slight increase in total dispatches came from the record high cement exports during the year.
Despite global economic turmoil, the country s cement exporting players have managed to depict
upbeat performance by exporting 11. 40 million tons of cement - an all time high level depicting
a phenomenal growth of 47 percent. Interestingly, during June 2009, the industry also achieved
the highest ever monthly exports of 1. 22 million tons with 35 percent capacity utilization.

However, during FY09, domestic cement plants operated at 74 percent capacity utilization level
as compared to 81 percent in the last year. The decline in utilization level was mainly the
function of lower domestic demand and addition of new capacities during the year. The
utilization for the domestic market stood at 46 percent, as against the previous year s level of 60
percent. On the other hand, the utilisation level for export sales recorded at 27 percent versus 21
percent in FY08. The rising export demand helped the local cement industry to operate at an
optimum level during the FY09.

2009 was another year of fierce competition; however, Bestway Cement was able to increase its
share to 14. 53% of the market in the north zone in FY09 as compared to 11% in FY08 and
retained its position as one of the largest cement producers in the country. Bestway Cement
continued to be one of the largest exporters of cement to Afghanistan and India.

Pakistan cement industry may face tough time ahead as the exports are winding down on account
of falling demand amid growing capacity expansion in the region. The cement industry has gone
through a hard time over the past few months as after devastating floods the industry witnessed a
decline in sales during the disruptions and tepid constructional activities across the country.

In sharp contrast to market projections that had expected local cement demand to show signs of
growth during the second quarter, local cement demand did not pick up during October and

Recent results (1H11)

The brunt of the impact caused by the massive floods that struck Pakistan during the first quarter
of FY11 and the corresponding decline in government expenditure on Public Sector
Development Programme was faced by the cement industry. The market went through a
contractionary phase in the first half of FY11 and its sales decreased by 11%. The negative
effects were seen to have harmed the local and foreign dispatches alike as the domestic
despatches of cement declined to 10. 1 million from 11 million in the last year and the exports
shrunk by 1 million to 4. 6 million tones.

Considering the scenario for Bestway Cement in particular, we find that the firm suffered from
considerable excess capacity during the tenor (62% utilisation achieved); however the shutdown
of the Hattar plant for maintenance purposes was a significant contributor to the existence of this
surplus capacity in addition to the lack of demand. The details of the company s comparative
production and sales figures are as follows:
HY 10 HY 11
Tonnes Tonnes
Clinker production 1974857 1270194
Cement production 2158494 1511178
Despatches: Cement 2143425 1477075
Clinker 3439 -
One significant achievement of the company during this tenor was the registration of the Waste
Heat Recovery project with the UNFCCC under the Clean Development Mechanism. The
company is a pioneer firm in the cement industry to have launched such a project.


The graph above provides a snapshot of the impact that the contractionary demand base for
cement during 1HFY11 has had on the various profitability fronts. GP margin seems to have
been the least resilient head amongst those under consideration as it took a drastic dip from 21.
58% to 14. 9% in 1HFY11. The primary reason for this change has been the combined impact of
falling sales volume and rising costs of production. Where on one hand the sales revenue
suffered a decline of 19. 8%, the consequent reduction in cost of sales was a low 13%; this
clearly explains the reasons for the shrinkage in the gap between revenue and production costs.
Next we see a 10. 9% dip in the operating profitability of the firm, coming from a net adjustment
of rising distribution costs and falling selling and distribution expenses. Moreover, the combined
impact of a 19. 5% rise in financial charges, coupled with a more than proportionate change in
the other income has helped to improve the Net loss margin of the firm over the year. The net
loss percentage declined from 25% to approximately 10% over the tenure and this has primarily
been a function of the rising income from other investment sources; also that the increase in
borrowing seen over the period fueled the rise in financial charges.

Asset management and liquidity:

Despite the low cement off take during this period, the company succeeded in maintaining its
inventory turnover ratio; given the reduction in sales volume and the less than proportionate
contraction in cost of sales, the firm s prudent inventory management policy helped it to achieve
a reduction in the inventory levels by a match able 13% thereby preventing a situation of
exacerbated gross losses. However, we cannot ignore the fact that the fixed costs that
accompanied the existence of the surplus capacity severely undermined the company s
performance. As far as the utilisation of total assets is concerned there was a marginal dip in the
firm s ability to generate sales from its given infrastructure. Also that net sales as a proportion of
equity were found to be lesser as compared to the same period last year.

Given the pressing liquidity considerations evident from the less than advisable current ratio of
the company, it was no surprise to find that the firm embarked on a policy of credit control. The
operating cycle has drastically declined from 97 to 85 days and this has primarily been a product
of the decrease in debtor days from 29 to 17. 25 days. Hence the firm used a policy of credit
control in lieu of its imminent and pressing liquidity crisis.

Debt management:

The firm s debt position deteriorated over the six months ended 31 December 2010 primarily as
the company took on more and more debts to navigate through the recessionary phase in the
cement industry. As the figure below shows the shareholder interests in the firm got significantly
diluted s the debt to equity ratio widened from 2. 63 to 3. 4 times. Given the rising finance costs
and the lower profit generation capacity of the company, the TIE ratio suffered a great blow
declining to 46 cents of profit for every rupee of finance cost. The increase in the proportion of
long-term debt has been a major cause of such adverse movements.

Market value:

As far as the market position of the company is concerned, it is safe to say that the firm reached
no closer to the list of investor favorite companies than it had in the past. While the EPS declined
to -1. 46 rupees, the change in the book value of the firm was no better. A 17% decline took the
book value down to Rs 18. 65 over the six months as opposed to 22. 4 rupees last year.

Financial analysis (FY06-10)
Current Ratio 0. 512547 0. 463142
Inventory Turnover Ratio 5. 301058 5. 303979
Total Asset turnover 0. 249023 0. 198076
Sales/Equity 0. 90491 0. 870189
Current Ratio 0. 512547 0. 463142
Debt to Asset 0. 724809 0. 772376
Debt/Equity 2. 633835 3. 393208
Times Interest Earned (Times) 0. 623558 0. 464717
Long Term Debt to Equity 1. 420253 1. 559608
Gross Profit Margin 21. 58163 14. 90508
Net Profit Margin -25. 0546 -9. 754
Return on Asset -1. 34652 -0. 28797
Return on Common Equity -4. 89303 -1. 26512
Earning per share -1. 18 -1. 46
BOOK VALUE 22. 37806 18. 65449
Profitability: The company recorded net sales of Rs 13,333 million in FY10 as compared to Rs
14,815 million during the preceding year FY09 reflecting a decrease of 10%. The cost of sales
increased from 10,045 million in FY09 to 11 billion in the current year. Also cost of goods sold
as percentage of sale increased from 67% to 87%. This indicates that the cost of sales
proportionate to sales has increased tremendously. The reason for this is the rising inflation and
cost of production in the already struggling economy. Gross Profit reflected a major decrease of
67%, which can be attributed to both increase in cost of sales and decrease in net sales.

Finance cost decreased from Rs 2,286 million for the FY09 to Rs 2,223 million this year. Profit
before tax for FY09 stood at Rs 1,205 million as compared to loss of Rs 1,412 million for the
current year. Profit after tax for FY09 amounted to Rs 974 million as compared to a loss of Rs
1,210 million in FY10 indicating negative earnings per share (EPS) of the company.

FY10 proved to be a difficult year for the company as it suffered from huge losses during the

Though finance cost decreased but sales also decreased along with an increase in cost of
production, which not only decreased gross profit but also affected the bottom line profitability
of the company negatively. All these problems can be attributed to increasing cost of production.

The cement manufacturers in the industry were faced with rising fuel and power costs during
FY09; this problem persisted in FY10. The cost of production for the entire cement sector of
Pakistan went up due to rise in the prices of imported coal. The cement companies in Pakistan
have shifted from oil to coal or gas during the past few years. Coal is now used as a basic fuel by
all cement manufacturers. Pakistan has huge reserves of coal, but cement companies import it, as
local coal has high sulphur content.

Profitability ratios of BWCL went down during FY10 after showing slight improvement in the
proceeding year. Much of this is attributable to lower sales and higher costs.

Gross Profit and Net Profit Margins decreased from 32. 2% and 6. 57% respectively to 13. 27%
and -9. 07% indicating the huge loss suffered by the company.


During FY10, the company s liquidity position with the current ratio decreasing to 0. 52. This is
attributed to a 21% increase in current liabilities whereas current assets decreased by 2. 3%. The
major reason for such rise in the current liabilities is the increased short term borrowing by the
company, which rose by almost 50% in FY10. The interest payables decreased significantly but
the effect was offset by an increase in trade payables.

Asset quality

The company s asset management ratios also reflect a gloomy picture of its performance.

Since inventory forms such a major part of the company s current assets, it is important to
analyze the management of this asset. The inventory turnover ratio of the company was
considerably lower in the last year; however it rose to 14 days this year. This is understandable
as company achieved a growth in sales in this period. The days to sell inventory reduced to 24
days indicating a high turnover for the current period.

Accounts receivable are the other major current assets of the company. The declining Days sales
outstanding ratio shows that the number of days within which the management is able to recover
accounts receivables is decreasing. Thus the operating cycle of the company also decreased
indicating that it took the company shorter to convert its inventory into cash in FY10.

Sales/Equity has remained the same over the last two years. Lately, the ratio increased due to a
large percentage increase in the sales revenue generated by the company. Higher sales resulted in
the rising trend of total asset turnover ratio of the company. Though the company management
was not able to generate enough revenue during the year, it managed to maintain its ratio with
regard to the asset and equity base of the company.

Debt management ratios

The debt situation of the company had deteriorated in FY07 as the debt to assets and debt to
equity ratios continued to rise due to an increase in long-term loans taken by the company.
However, since then debt/equity ratio has remained stable. This year the ratio increased by 5%
which indicates the rising levels of debt. Debt to assets also registered a slight increase. This can
attributed to a slight decrease in total assets also there was a slight increase in total debt.

BWCL was a highly leveraged company in the industry as evident from its enormously high
long-term debt to equity and debt to asset figures. Considerable part of financing comes through
long-term debt mainly from banks, modarabas and syndicate financing. However, issuance of
ordinary shares in FY09 improved the capital structure of the company, making space for
reduced reliance on debt for financing expenditure and future growth.

Future outlook

During the financial year ended 30 June 2010 the demand for cement witnessed growth of more
than 11 percent despite continued uncertainty on economic, political and law and order fronts.

This indeed is a welcome sign as it indicates the resilience of demand for cement. As a
consequence of unprecedented flooding caused by heavy monsoon during the 1 quarter of 2010-
11 demand for cement has been adversely affected, however the devastation caused by the floods
should result in additional demand for cement for the rehabilitation of infrastructure and housing.

In the year under review the cement industry has had to contend with low selling prices due to
fierce competition, high interest rates, increasing power tariffs and increase in duties, taxes and
royalty on raw materials. Selling prices have however started showing signs of firming up with
further improvement likely in the coming months. There also has been improvement in the law
and order situation recently. These factors should result in higher domestic demand and selling
prices of cement.

On the export front, regional markets like the UAE are likely to remain depressed for the
foreseeable future, while other markets like Afghanistan continue to generate good demand for
Pakistani cement. Bestway is already firmly established as the leading brands in Afghanistan and
your Company will continue to expand its share in that market. Other markets like Africa, India
and Sri Lanka are likely to continue to generate some demand for our cement for few more years
to come.
Income Statement (Rs) FY 06 FY 07 FY 08 FY 09 FY 10
Total Revenue 4,683,048,995 5,649,378,012 7,487,162,751 14,814,797,196 13,333,062,606
Cost of Goods Sold 2,250,304,518 4,636,508,040 6,478,902,770 10,044,450,173 11,564,255,751
General & Administrative Expenses 124,952,073 103,121,152 119,917,940 140,138,550 123,548,579
Selling and Distribution Expenses 24,563,397 38,278,894 300,827,927 1,395,877,311 1,074,655,856
Operating Profit (EBIT) 2,283,229,007 871,469,926 587,514,114 3,234,331,162 570,602,420
Financial Charges 468,727,103 1,211,745,924 1,236,140,238 2,286,086,256 2,223,124,658
Net Income Before Taxes 1,730,467,597 56,356,202 -419,135,339 1,204,710,754 -1,411,994,556
Net Income After Taxes 1,225,853,177 51,538,731 168,581,479 974,023,986 -1,209,436,510
Balance Sheet (Rs) FY 06 FY 07 FY 08 FY 09 FY 10
Stores & Spares 318,619,484 365,845,980 578,150,212 795,246,779 2,167,264,132
Stock in Trade 155,641,894 113,143,807 93,439,984 150,269,307 785,462,819
Cash & Bank Balances 41,617,196 293,181,265 605,636,439 419,561,826 187,776,744
Total Assets 18,017,999,297 22,643,808,478 25,415,490,867 28,222,442,425 28,122,934,432
Total Liabilities 13,168,036,519 17,100,282,811 18,558,986,657 20,006,882,962 21,116,811,479
Paid Up Capital 2,340,981,610 2,575,079,770 2,832,587,750 3,257,475,910 3,257,475,910
Total Equity 4,849,962,778 5,543,525,668 6,856,504,210 8,215,559,463 7,006,122,953
Current Ratio 0. 76 0. 82 0. 70 0. 65 0. 52
Inventory Turnover Ratio 14. 98 15. 94 8. 88 9. 51 14. 72
Days to sell average inventory 24. 04 22. 58 40. 55 37. 86 24. 45
Day Sales Outstanding (Days) 2. 63 5. 39 17. 56 14. 22 8. 02
Operating cycle (Days) 26. 67 27. 97 58. 10 52. 08 32. 48
Total Asset turnover 0. 25 0. 25 0. 29 0. 52 0. 47
Sales/Equity 0. 94 1. 02 1. 09 1. 80 1. 90
Debt to Asset 0. 73 0. 76 0. 73 0. 71 0. 75
Debt/Equity 2. 72 3. 08 2. 71 2. 44 3. 01
Times Interest Earned (Times) 4. 57 0. 72 0. 48 1. 41 0. 26
Long Term Debt to Equity 2. 18 2. 47 1. 93 1. 53 1. 73
PROFITABILITY (%) FY 06 FY 07 FY 08 FY 09 FY 10
Gross Profit Margin 50. 48 17. 93 13. 47 32. 20 13. 27
Net Profit Margin 26. 98 0. 91 2. 25 6. 57 -9. 07
Return on Asset 6. 80 0. 23 0. 66 3. 45 -4. 30
Return on Common Equity 25. 28 0. 93 2. 46 11. 86 -17. 26
PER SHARE FY 06 FY 07 FY 08 FY 09 FY 10
Earning per share 0. 58 3. 51 4. 37 3. 17 -3. 71
Dividend per share 7. 50 10. 00 10. 00 10. 00 0. 00
Book value 20. 72 21. 53 24. 21 25. 22 21. 51
COURTESY: Economics and Finance Department, Institute of Business Administration,
Karachi, prepared this analytical report for Business Recorder.

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