Earnings Report /
Pakistan

DG Khan Cement: 4QFY22 Review - Higher tax rate and other expenses led to losses

  • DGKC has posted unconsolidated loss of PKR0.65bn (LPS: PKR1.48) in 4QFY22, from a NPAT PKR0.87bn (EPS: PKR1.99) in SPLY

  • Gross margins have clocked at 17.8% (down 0.8ppt QoQ but up 0.2ppt YoY), slightly higher than our expected GM of 16.3%.

  • The massive jump in tax rate and other expenses have led DGKC to book a quarterly loss for the first time since 1QFY21.

Intermarket Securities
13 September 2022

DG Khan Cement (DGKC) has posted unconsolidated loss of PKR0.65bn (LPS: PKR1.48) in 4QFY22, from a NPAT of PKR0.87bn (EPS: PKR1.99) in SPLY. Whereas, we expected an EPS of PKR1.14, with the major deviation largely stemmed from higher-than-expected effective tax rate and other expenses. The result takes FY22 NPAT to PKR3.0bn (EPS: PKR6.78), down 18% YoY. The result was accompanied with a final cash dividend of PKR1.0/sh against our expectations of no payout for FY22.

Key observations

  • Net sales have increased by 19% YoY and down 7% QoQ to PKR14.7bn. The sequential decline in topline is majorly due to 46% QoQ reduction in exports and 4% QoQ decline in local sales.

  • Gross margins have clocked in at 17.8% (down 0.8ppt QoQ but up 0.2ppt YoY), slightly higher than our expected GM of 16.3%. Despite the surge in international coal prices and moderate increase in export prices, margins held up reasonably well due to efficient procurement of coal and increase in local retention prices, in our view.

  • Other income has increased to PKR755mn, up 62% YoY and 13% QoQ. We estimated other income of PKR475mn, where the deviation is attributed to dividend received from unlisted holdings, in our view.

  • Among other line items: i) Other expenses have significantly increased to PKR627mn, from PKR20mn in SPLY and against our estimate of PKR174mn, (ii) Finance cost has surged by 60% YoY owing to higher debt and interest rates, and (iii) effective tax rate during the quarter clocked in at 154% vs. 27% in 4QFY21, due to one-off super tax. We assumed an ETR of 66%. This resulted in the net loss in 4Q, and is the major deviation from our estimates.

The massive jump in tax rate and other expenses have led DGKC to book a quarterly loss for the first time since 1QFY21. However, if we ignore these one-offs, the company has posted a decent gross margin, despite the burgeoning cost pressures and flattish export prices (on a QoQ basis). Moving ahead, lower dispatches amid monsoon rain, recent floods and elevated coal prices will hurt DGKC’s margins in 1HFY23. But, in 2HFY23, we believe that demand recovery and higher cement prices will revive profitability. We have a Buy rating on DGKC with a June 2023 TP of PKR96/sh.