Ayesha Mudassar

DG Khan Cement Company Limited (DGKC) took a prominent hit in its financial performance during the fiscal year 2022-23 as it posted a loss-after-tax of Rs3.6 billion against Rs2.9 billion profit-after-tax in FY22, WealthPK reports. The company's negative profitability is primarily attributed to the enhanced super tax rate, which increased from 4% to 10% under the Finance Act 2023, thus raising deferred tax liability and converting the bottom line into net loss.

However, the company posted a gross profit of Rs9.5 billion during FY23 as compared to Rs10.4 billion in FY22. Moreover, the company reported a decline in profit-before-tax in the year mainly due to an 89% rise in finance costs over the previous year. DGKC’s revenue increased 12% year on year to Rs64.9 billion. However, the cost of sales also surged by 16% in the period under review. Furthermore, the cement company posted a loss per share of Rs8.30 in FY23 compared to earnings per share of Rs6.78 in FY22. The business historically registered satisfactory financial performance.

However, during FY23, the company’s capacity remained under-utilised due to the demand and supply gap prevailing in the local market. Furthermore, the unfavourable rates in the export market significantly reduced clinker’s export sales. The record-breaking rising discount rates resulted in a high finance cost of Rs6.7 billion during the period under review. In addition, the lower margins are also related to high fixed costs.

Quarterly analysis

Quarterly results witnessed a growth trajectory except for quarter four, where net profit was massively hit by high taxation due to the enactment of a super tax from 4% to 10% and the lapse of tax credits. Sales also slowed down in the last quarter on account of lower demand. Gross profit also declined due to a lower base of sales and high per-unit fixed costs. Moreover, the finance costs kept on increasing quarter-on-quarter in line with the hike in policy rate.

Analysis of profitability ratios

The gross profit ratio showed a declining trend from FY18 to FY20, but the trend snapped in FY21 and FY22, before declining in FY23. The plant’s under-utilisation led to a high cost per unit, causing a decline in gross profit. The company shifted to different avenues to manage cost per unit, but could not hedge totally against the inflationary pressure on the cost side. The same trend is witnessed in the net profit to sales ratio. In FY23, the ratio turned negative due to high taxation expenses.  Furthermore, the net equity declined in FY23 due to net loss and a decline in the share price of major investments caused by macroeconomic factors and stock market performance. The operating leverage ratio showed a declining trend, except for FY21, indicating a gradually decreasing trend of fixed costs in the overall cost base.

Principal business activities

DG Khan Cement is a public limited company incorporated in Pakistan on September 27, 1978. It is listed on the Pakistan Stock Exchange. The company is primarily engaged in the production and sale of clinker and cement with more than 1,900+ employees. As of June 30, 2023, the total market capitalisation was about Rs22 billion.

Credit: INP-WealthPk