The Bell

Pakistan Research

Cements
Overweight
DGKC PA

DGKC: Expansion a race against time; Reiterate BUY!

Bottom line expansion to continue in FY16; Reiterate BUY!: DGKC posted a robust earnings
growth of 28% YoY (i.e. PKR17.40/sh) in FY15 beating street consensus. We expect DGKC to
continue to post expansion in bottom line in FY16 albeit at normalized levels as the company
booked non-recurring tax reversals related to its group tax losses in FY15. 1QFY16 earnings are
estimated to grow by 29% in the backdrop of 5% growth in dispatches amidst declining fuel
costs and flat power costs. DGKC is currently trading at FY16 PER of 8.7x, an 18% discount to
industry average. We maintain our Buy call on the stock with Jun-16 PT of PKR176.0/sh offering
a total potential upside of 24% to last closing.

Price Target: PKR176/Share

Closing Price: PKR145.0/Share
BUY
Stock Statistics
12m Price Range (PKR)

162.2 76.0

Market Cap (PKR mn)

63,505.4

Outstanding Shares (mn)

438.1

Avg. Daily Volume mn (6m)

4.3

1Yr Relative Performance

Oct-15

Aug-15

Jun-15

Apr-15

KSE-100 INDEX

Feb-15

Oct-14

Dec-14

DGKC

(%)
220
200
180
160
140
120
100
80

Source: Elixir Research

DGKC

FY15A

FY16E

FY17E

EPS (PKR)

17.40

16.72

18.09

DPS (PKR)

5.0

5.0

5.5

PER

16 October, 2015

8.4

8.7

8.0

Div Yield

3.4 %

3.4%

3.8%

BVPS

142.2

153.9

167.1

P/BV (x)

1.0

0.9

0.9

ROE

12%

11%

11%

Source: Elixir Research

South Expansion a race against time: Our latest correspondence with company management
indicates that progress on its green field expansion in South is going smoothly with total forex
component of approximately ~PKR15-18bn. While, progress on its expansion initially was in a
go-slow mode with regards to uncertainty over installing captive coal power plant at the new
site owing to water shortage in the area (Note that ACPLs plant which is also located in the
same area is also facing a similar issue with regards to its plans of setting up a 40MW coal
power plant). However, since the announcement of tax credits (five year tax holiday) by federal
govt in FY16 budget for industrial units setup in Balochistan before FY18, DGKC has stepped up
its expansion pace with the company signing plant equipment contracts with two foreign
suppliers and is targeting to achieve CoD by 4QFY18.
Capital call risks minimal: The company, as per its notice on the KSE has established LCs for
import of Pyro processing equipment from FLSmidth, a Denmark based cement supplier with an
estimated total cost at around ~PKR6.5bn (~EUR55mn) while it has also signed an agreement to
procure raw, cement and coal grinding mills from a German based supplier (Loesche GmbH)
with an estimated cost of PKR6.2bn (~EUR52mn). Furthermore, the company is also currently in
negotiations to source conveying and bagging/packaging equipment from a foreign supplier
named Haver & Boecker, based in Germany, with an estimated cost of PKR2.3bn (EUR20mn).
With average annual FCFE generation estimated at ~PKR5.9bn for FY16-18, DGKC is comfortably
placed to finance the expansion with a mix of internal cash flows and debt.
Efficiency gains from Coal fired boiler to augment earnings by PKR1.37/sh: DGKC is currently
installing 30MW captive coal fired power plants at its DG Khan Plant location with a total capital
outlay of ~PKR3.5bn which shall allow its DG Khan Cement unit to completely shift away its
reliance from expensive grid electricity. With coal prices expected to remain subdued in the
medium term owing to deteriorating supply demand dynamics of the commodity, we believe
the project would results in sizable energy savings and is estimated to add PKR1.37/sh to the
bottom line in FY17.
1QFY16 result preview: DGKC is shortly expected to announce its 1QFY16 earnings. We
estimate earnings to clock in at PKR3.41/sh, up 29% YoY but down 34% QoQ.

Bottom line expansion to continue in FY16; Reiterate BUY!

AC

M. Ibad-ur-Rehman
irehman@elixirsec.com
(+92-21) 3569 4622

DGKC posted a robust earnings growth of 28% YoY (i.e. PKR17.40/sh) in FY15 beating street
consensus. We expect DGKC to continue to post expansion in bottom line in FY16 albeit at
normalized levels as the company booked non-recurring tax reversals related to its group tax
losses in FY15. 1QFY16 earnings are estimated to grow by 29% in the backdrop of 5% growth in
Please refer to the last page for Analyst Certification and other important disclosures.

dispatches amidst declining fuel costs and flat power costs. DGKC is currently trading at FY16
PER of 8.7x, an 18% discount to industry average which we believe is unwarranted given 1)
sizable regular non-core other income which partially shields the bottom-line from cost hikes, 2)
capital call risks for its green field expansion are minimal in our view given average FCFE
generation of PKR5.9bn in FY16-18 (i.e. enough to meet investment commitments of ~PKR18bn),
3) captive coal power plant scheduled to start in 4QFY16 to result in energy savings estimated at
PKR1.37/sh in FY17 and 4) alleviation of uncertainty over pricing arrangement on account of
likely uptick in industry utilization in the backdrop of robust local demand outlook vis--vis CPEC
projects and rise in PSDP spending. We maintain our Buy call on the stock with Jun-16 PT of
PKR176.0/sh offering a total potential upside of 24% to last closing.

South Expansion a race against time

Our latest correspondence with company management indicates that progress on its green field
expansion in South is going smoothly with total forex component of approximately ~PKR1518bn. While, progress on its expansion initially was in a go-slow mode with regards to
uncertainty over installing captive coal power plant at the new site owing to water shortage in
the area (Note that ACPLs plant which is also located in the same area is also facing a similar
issue with regards to its plans of setting up a 40MW coal power plant). However, since the
announcement of tax credits (five year tax holiday) by federal govt in FY16 budget for industrial
units setup in Balochistan before FY18, DGKC has stepped up its expansion pace with the
company signing plant equipment contracts with two foreign suppliers and is targeting to
achieve CoD by 4QFY18. We believe since the ground leveling work at the site has already
started and the company has also secured a contract with KEL for power supply, likelihood of
DGKC completing its expansion by end of FY18 remains bright.

Capital call risks minimal

The company, as per its notice on the KSE has established LCs for import of Pyro processing
equipment from FLSmidth, a Denmark based cement supplier with an estimated total cost at
around ~PKR6.5bn (~EUR55mn) while it has also signed an agreement to procure raw, cement
and coal grinding mills from a German based supplier (Loesche GmbH) with an estimated cost of
PKR6.2bn (~EUR52mn). Furthermore, the company is also currently in negotiations to source
conveying and bagging/packaging equipment from a foreign supplier named Haver & Boecker,
based in Germany, with an estimated cost of PKR2.3bn (EUR20mn). With average annual FCFE
generation estimated at ~PKR5.9bn for FY16-18, DGKC is comfortably placed to finance the
expansion with a mix of internal cash flows and debt where we expect DGKC to fund payment to
foreign suppliers through debt while local civil works will be financed through internal cash
flows. Moreover, full year cash dividend payout in FY15 at PKR5.0/sh further reinforces our view
of a minimal possibility of a capital call; however we flag heightened risks of curtailment of
future payout over the course of the project.

Efficiency gains from Coal fired boiler to augment earnings by PKR1.37/sh

DGKC is currently installing 30MW captive coal fired power plants at its DG Khan Plant location
with a total capital outlay of ~PKR3.5bn which shall allow its DG Khan Cement unit to completely
shift away its reliance from expensive grid electricity. With coal prices expected to remain
subdued in the medium term owing to deteriorating supply demand dynamics of the
commodity, we believe the project would results in sizable energy savings and is estimated to
add PKR1.37/sh to the bottom line in FY17. Given attractive returns expected from the projects,
we believe the company will also implement a similar energy solution for its Khairpur cement
unit contingent upon successful operations of the same at DG Khan Cement plant location.
2

1QFY16 result preview

DGKC is shortly expected to announce its 1QFY16 earnings. We estimate earnings to clock in at
PKR3.41/sh, up 29% YoY but down 34% QoQ. Net sales are expected to rise by 6% YoY during the
quarter on the back of expected dispatch growth of 5% with local dispatches posting a sizable
gain of 13% YoY. Gross margins are estimated to clock in at 34%, up 2.2pp YoY owing to lower
fuel costs while distribution expenses is also expected to remain subdued ( 11% YoY) owing to
expected lower exports ( 24% YoY). Other income is also expected to decline by 5% YoY during
the quarter as the expected dividend from NML will not be realized during the quarter as the
company has yet not announced its financial results for FY15. Consequently we expect DGKC to
book dividend income from NML (expected payout of PKR4.0/sh) in 2QFY16.
Key Financials
(PKR mn)

1QFY16E

YoY

Net Sales

5,812

6,173

6%

7,159

Cost of Sales

3,986

4,099

3%

4,121

-1%

Gross Profit

1,826

2,074

14%

3,038

-32%

Selling and distribution

209

186

-11%

158

18%

Admin expenses

119

128

7%

114

12%

Other Charges

226

123

-45%

272

-55%

Other Income

437

415

-5%

604

-31%

Finance cost

67

58

-13%

31

90%

1,642

1,994

21%

3,067

-35%

PBT
Taxation

-14%

484

498

3%

817

-39%

PAT

1,157

1,495

29%

2,250

-34%

EPS (PKR)

2.64

3.41

29%

5.14

-34%

Source: Elixir Research, Company Accounts

Outstanding shares:438mn
4QFY15A
QoQ

1QFY15A

Analyst Certification and Disclosures

The research analyst(s) denoted AC on the cover of this report, primarily involved in the preparation
of this report, certifies that (1) the views expressed in this report accurately reflect his/her personal
views about all of the subject companies/securities and (2) no part of his/her compensation was, is or
will be directly or indirectly related to the specific recommendations or views expressed in this report.
Furthermore, it is stated that the research analyst or any of its close relatives do not have a financial
interest in the securities of the subject company aggregating more than 1% of the value of the
company. Additionally, the research analyst or its close relative have neither served as a
director/officer in the past 3 years nor received any compensation from the subject company in the
past 12 months.
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Elixir employs a 3-tier rating mechanism i.e Buy, Hold and Sell, which is based upon the level of
expected return for a specific stock. Time horizon is usually the annual financial reporting period of
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A Sell rating is issued whenever total return is less than -10% and for return in between the 2 ranges,
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