DG Khan Cement (DGKC) has posted an unconsolidated NPAT of PKR1.27bn (EPS: PKR2.90) in 2QFY22, up 10% yoy and 40% qoq. The results has come in higher than our EPS estimate of PKR1.79; higher-than-expected gross margins is the major deviation. The result takes 1HFY22 NPAT to PKR2.18bn (EPS: PKR4.97), up 172% yoy.
Key highlights of 2QFY22 results:
Net sales have increased by 43% yoy and 46% qoq to PKR16.3bn. The sequential increase in sales is contributed by both increase in total sales and a massive surge in local cement prices to pass on higher variable costs.
Gross margins have clocked in at 16.9% (down 4.3ppt yoy but up 2.4ppt qoq); GMs are much higher than our estimate of 12%. Despite higher exports (relatively bagged lower margins) and a massive surge in international coal prices, DGKC has managed to post elevated quarterly margins. This is majorly attributed to optimal operations of coal based CPP during the quarter and relatively lower procurement cost of coal than expected, in our view
Other income has increased to PKR749mn, up 138% yoy and 38% qoq. The qoq increase may be due to higher dividend income received from invested companies. We await detailed financials for more clarity on this.
Among other line items: (i) Finance cost has increased by 6% yoy to PKR802mn, due to increase in interest rates, (ii) distribution expenses have increased by 81% yoy, and doubled qoq to PKR694mn owing to surge in exports qoq, and (iii) effective tax rate during the quarter is reported at 25% vs.16% in 2QFY21.
Despite the significant rise in cost pressures, DGKC has posted decent quarterly margins and earnings, thanks to optimal operations of coal based CPP at Hub plant and better coal inventory management. Going forward, elevated global coal and oil prices will subdue profitability of the next two quarters. From FY23 onwards, however, pick up in local demand and normalized coal prices should elevate profitability. We have a Buy rating on the scrip with a June 2022 TP of PKR120/sh.