The Pakistan Credit Rating Agency Limited / Cement

Ratings (October 2013)

Lafarge Pakistan Cement Limited (LPCL)

New
Entity
Long Term / A-
Short Term / A2

FinancialData

PKR (mln)

1HCY13* / CY12 / CY11
Assets / 19,526 / 19,528 / 19,217
Equity / 10,660 / 10,189 / 8,701
Debt / 4,934 / 6,059 / 9,005
Turnover / 5,068 / 9,624 / 7,804
Gross Margin (%) / 35.0 / 32.6 / 21.2
Net Income / 865 / 1,488 / (118)
EBITDA / 1,514 / 2,932 / 1,602
ROE (%) / 16.2^ / 14.7 / (1.4)
FCFO/Interest / 5.7 / 2.8 / 1.4
Debt/ Debt + Equity (%) / 31.6 / 37.3 / 50.9
FCFO / CMLTD+ Interest / 5.7 / 2.8 / 1.4

*Based on unaudited accounts forsix months ended June 30, 2013

^Annualized

Analysts

M. Shahnawaz A. Khanzada

+92 42 3586 9504

Aisha Khalid

+92 42 3586 9504

Rating Rationale and Key Rating Drivers

  • The ratings of LPCL reflect its strong parentage – Lafarge Group (LG). The group, having presence in different regions of the world, possesses good financial flexibility to support LPCL, if need arises. The ratings incorporate improved performance of the company, an outcome of better product prices, primarily fueled by stable trend in local demand. The company, benefiting from improvedcashflows, pre-paid certain long term obligations, thereby rationalizing its financial risk. The ratings recognize the company's seasoned management team, having sound understanding of the industry dynamics and quality support infrastructure. Moreover, the organizationalstructure is designed to segregate key roles in order to ensure due focus and responsibility. The ratings incorporate LPCL’s integration into LG. This, while adding a robust monitoring mechanism ensures flow of best practices in all facets of the company, particularly production processes.
  • The ratings are dependent on sustainability in the industry’s demand pattern, in turn,price levels supporting LPCL’s recently improved margins. Any sizeable deterioration in the company's cash flows and/or debt structure, resultantly weakening thecoverages would have negative implications for the ratings.

Assessment

  • Pakistan’s cement industry comprises 24 plants with an annual production capacity of ~45mlnMT. Cement demand in the local market remained robust during last few years (local dispatches: FY13: 25.06mlnt; FY12: 23.9mlnt; FY11: 22mlnt). This, while strengthening the business profile, enhanced the pricing power of cement manufacturers. Meanwhile, weakening in coal prices gave further boost to business margins. Resultantly improvement in bottom-line enabled market players to deleverage, thereby giving relief to stretched financial profile of most of the companies. With the ongoing infrastructure development programmes, the domestic demand is expected to remain strong in the near term.
  • LPCL carries 5% market share of the country’s production capacity. Plant location corresponds to the North Zone of Pakistan, where 81% of the production capacity is concentrated. In terms of capacity utilization, as against largely stable pattern industry average, LPCL has been facing a declining trend (70% in 2011 and 68% in 2012). LPCL sells a major portion of its products in local market (76%) while exporting the rest (24%) in Asian Countries through land.
  • LPCL witnessed significant growth in the revenues in the last two years despite reduction in the capacity utilization. This was mainly a function of robust demand in the local market, which influenced product prices to go up significantly. Moreover, improved operatingleverage contributed to strengthen the business margins of the company. During CY12, LPCL, benefiting fromimproved business dynamics, registeredpositive bottom-line for the first time since commencement of its operations.
  • During 1H13, LPCL continued to improve its performance, whereby turnover increased by 6%. Meanwhile relatively lower financial charges on YoY basis provided additional relief to the bottom-line.
  • Going forward, the management expects the prices to remain stable largely at current levels in the near term. However, owing to LPCL’s dependence on WAPDA, increase in power ratesis the key risk to margins. For this, the management is in the process of finalizing a Power Purchase Agreement (PPA) with an independent organization. This entity would set up a power plant mainly based on coal and this plant is expected to be operational by 2015. LPCL is continuously working on alternative energy sources and plans to increase the proportion of alternative fuel in the energy mix to 50% till end-Dec2015 (CY12: 30%). Moreover, the company intends to sustain its market share and is working on forming a marketing strategy to create brand awareness among the users. Moreover, the management, opting a debt free balance sheet, plans to repay all its long term loans in the medium term.
  • LPCL requires working capital (WC) to meet its inventory and receivables requirements. With better business margins,the company’s EBITDA and FCFO improved significantly. Resultantly interest and debt service coverages depicted significant recovery. In the absence of adequate adjusted quick assets to cushion adjusted quick liabilities, short term borrwings remained uncovered. This,while resulting in negative short term borrowings coverage, has limited further borrowing capabity. Nevertheless, healthy internal generation is expected to ease out pressure on liquidity.
  • LPCL has a low leveraged capital structure with debt:capital ratio standing at 32:68 at end-Jun13. The company has decided to issue 159.4mln right shares @90% of the par value of PKR 10/share to the sponsor against the repayment of foreign currency loan of USD 10.8mln, which will further improve the capital structure of the company. LPCL hasa syndicate loan (outstanding as at end-Jun13: PKR 3bln) acquired to pay off short-term bank borrowings. The terms of the loan has been revised twice in CY12 and the company has paid PKR 935mln as per the revised terms. The remaining loan is to be paid in 7equal bi-annual installments commencing from December 2014. The management is hopeful to repay this debt from internal sources, which carries corporate guarantee from Lafarge Building Materials Holding Limited.

Profile

  • Lafarge Pakistan Cement Limited (LPCL),though incorporated in May 1993,took long to commence. Lafarge SA acquired the company in December 2007 and production happening in December 2006. LPCL is the only multinational cement manufacturer in Pakistan. The company is listed on all three stock exchanges of the country. The company has an annual capacity of 2.4MT.
  • LPCL is a part of Lafarge Group (LG), world leader of construction materials.The majority stake of the company (~73%) is owned by the group through its subsidiaries. Lafarge S.A, France is the ultimate parent of Lafarge Pakistan Cement Limited. The remaining stake (27%) is held by the general public, financial institutions, and others.
  • Lafarge, founded in 1833 and situated in France, is the world leader in building materials. Lafarge currently operates in 58 countries having 161 production sites.
  • The company has a seven member board comprising six group nominees, including four non-executive directors and two executive directors – CEO and CFO. The newly appointed CEO of the company, Mr. Amr Ali Reda, an MBA, is on the board of the company since 2007. Mr. Redahas previously served the company as chief financial officer for two years. He is supported by a team of experienced professionals.

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