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JS Securities Limited – JS Research (November 22, 2022)

Karachi, November 22, 2022 (PPI-OT): KOHC: Focus remains on cost efficiencies

Kohat Cement Company Limited’s (KOHC) management in its Corporate Briefing yesterday, apprised about its planned 3mn tons Greenfield expansion at Khushab sharing that it is scheduled to come online by 1QFY25.

In order to improve efficiencies, work is currently being done to optimize the pyro process at Line-3. According to the management, the process will result in 5-6% savings in kiln efficiency and is expected to start contributing from early FY24.

KOHC’s strong balance sheet compared to peers along with a continual focus on cost efficiencies leading to strong gross margins places the stock in an attractive position.

Cement capacity addition by 1QFY25

KOHC management in its analyst briefing held yesterday highlighted that it has always taken timely action to increase its market share over time in the northern region. To cater to expected demand in future, KOHC is working on a Greenfield expansion of ~3mn tons at Khushab, with a CAPEX estimate of Rs35bn of which Rs21bn is to be financed with debt and 40% Equity. The company missed out on obtaining debt at preferential rates under TERF for the expansion. The project is facing delays due to restrictions on LCs but management expects it to commence operations by 1QFY25. For the said expansion, KOHC is currently procuring land and ground work on infrastructure is underway. The expansion will accompany a 10MW captive solar plant as well. KOHC’s capacity utilization during FY22 stood at 71%, down 4pptsYoY whereas for 1QFY23, capacity utilization for the company stood at 55%.

Continuous focus on improving efficiencies

In order to improve efficiencies, work is being done to augment the pyro process at Line-3. According to the management, the process will result in 5-6% savings in kiln efficiency and is expected to commence operations from the start of FY24. Capex estimate for the BMR is around Rs 750mn which will be funded through internal cash generation.

There has been a significant increase in fuel and power costs during last year mainly due to rise in commodity prices on back of geo-political tensions. To save up on fuel costs, company’s fuel mix for FY22 was tilted toward Afghan and local coal with 66% in the mix. Imported coal stood at only 34% in the mix as opposed to 83% in FY21. The management shared that currently it has started import of Mozambique coal which costs the company US$150/ton ex Karachi. The company holds 1 month of coal inventory of Mozambique coal, management apprised that the company prefers it over Afghan coal as it is processed and quality is homogenous across batches.

KOHC’s power mix for the previous year mainly comprised of WHR and National Grid. According to the management, the company uses furnace oil during peak hours for electricity generation as it has FO inventory available at low rates. KOHC also avails subsidized rates of grid electricity on consumption of incremental units.

Margin expansion witnessed during 1QFY23

KOHC’s profitability for 1QFY23 clocked in at Rs1.8bn translating into an EPS of Rs8.89, +28% YoY. During the quarter, top-line grew 30% on a YoY to arrive at Rs 8.85bn, largely due to 63% YoY higher retention prices. On a QoQ basis the revenue declined due to drop in dispatches owing to extended monsoon and floods. Gross margins however expanded by 4ppt compared to previous quarter on the basis of better retention prices.

Outlook

We have an outperform stance on KOHC with a target price of Rs230/share as the company has been able to consistently pull off a strong gross level performance due to better cost management and also has low leverage ratios.

We believe that the cement industry will continue to garner attention in the coming months due to the falling trend of coal prices and expectations for a rise in demand. Nevertheless, unfavourable repercussions from the upcoming capacity additions of around 11mn tons in the coming months by cement manufacturers, remains a key concern and was also highlighted by the company’s management yesterday.

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