Karachi, October 19, 2022 (PPI-OT): FCCL: Synergies to likely improve prospects

Fauji Cement Company Limited (FCCL) conducted its Corporate Briefing yesterday. The company’s first set of results post amalgamation with Askari Cement were reported at a growth of 105% YoY, where EPS clocked in at Rs3.3. Company also announced a bonus issue in the proportion of 12.5 shares for every 100 shares held (12.5%) alongside FY22 results.

Management apprised the 2.05mn tons expansion at Nizampur is scheduled to commence from Nov-2022, whereas Greenfield expansion of 2mn tons at DG Khan is expected to come online by 3QFY24. Including the recent amalgamation, upcoming expansions will make FCCL third largest in the country with respect to capacity.

For 1QFY23, we expect the company to post earnings of Rs1.6bn translating into an EPS of Rs0.72, +16% YoY. We do not expect any dividend announcement alongside the first quarter results.

Set to become third largest cement company by 3QFY24

Following the merger with Askari cement and upcoming expansions, Fauji Cement Company Limited (FCCL) is set to become the third largest cement player in Pakistan (based on capacity). The company’s capacity increased from 3.6mn tons to 6.4mn tons post the merger executed in FY22, whereas the number of plant locations rose from one to three. The amalgamation resulted in increased market share of almost 14% in the North region compared to 8% earlier.

While sharing about future expansion projects, the company’s management in its Corporate Briefing held yesterday, apprised that their planned expansion at Nizampur is expected to commence operations from Nov-2022. The plant will have a capacity of 2mn tons and an estimated CAPEX of Rs27bn financed through debt of Rs17bn and Rs10bn Equity. Company is also working on a Greenfield expansion of 2mn tons at DG Khan, with a CAPEX estimate of Rs32.4bn of which Rs20bn is to be financed with debt with 44% of the debt at preferential rates under TERF and LTFF arrangements. The project is expected to commence operations by 3QFY24. The expansion at DG Khan will help the company expand FCCL’s reach to the Southern market as well covering South Punjab, Balochistan and Sindh.

Fuel and power arrangements focusing on renewables

There has been a significant increase in fuel and power costs during the last year mainly due to rise in commodity prices on back of geo-political tensions. FCCL’s power mix for FY22 comprised of 42% through own generation whereas national grid reliance came in at 58%. To save up on fuel costs, company’s fuel mix for FY22 was tilted toward Afghan and local coal with 70% in the mix. Imported coal stood at only 30% in the mix as opposed to 60% in FY21. The management shared that it has 3 months of coal inventory at hand and the current cost averages Rs43-44k/ton.

The company has also increased its captive power generation ability over the years through the addition of solar plants. It has three captive solar plants at the Wah, Nizampur and Jang Bahtar sites with capacities of 8.6MW, 11.5 MW and 20MW, respectively. Waste Heat recovery units at the three sites total to around 40MW. With the expansion, internal power generation capacity of the company is expected to increase further.

Decline in margins expected for 1QFY23

We preview FCCL’s profitability for 1QFY23 where we expect the company to post earnings of Rs1.6bn translating into an EPS of Rs0.72, +16% YoY for the quarter. During the quarter, top-line is expected to clock in at Rs 14.2bn, +105% YoY, largely due to the merger impact. Since the company is about to kick start its 2mn tons new cement line in a month’s time, we do not expect any dividend announcement alongside the first quarter results given CAPEX commitments.