FEBRUARY 2015

The Pakistan Credit Rating Agency Limited

INITIAL

[FEB-15]

REPORT CONTENTS

Entity

1. RATING ANALYSES

Long Term A-

2. FINANCIAL INFORMATION

Short Term A2

3. RATING SCALE

Outlook Stable 4. REGULATORY AND SUPPLEMENTARY

DISCLOSURE

CHERAT CEMENT COMPANY LIMITED

The Pakistan Credit Rating Agency Limited

CEMENT

CHERAT CEMENT COMPANY LIMITED (CHERAT CEMENT)

February 2015 www.pacra.com

RATING ANALYSES

(FEBRUARY 2015)

CHERAT CEMENT COMPANY

LIMITED (CHERAT CEMENT)

Industry: Pakistan’s cement sector, comprising 18 players, has an operational capacity

of 45.6mln tons. The sector operates from two regions – North and South – having

distinguished supply-demand dynamics. During FY14, local-export mix (FY14: 76:24,

FY13: 75:25) remained skewed towards domestic market. Local dispatches, on account of

various on-going developmental activities and higher utilization of PSDP, witnessed growth

(4%) which compensated the decline (~3%) in exports – a factor of plunging demand from

Afghanistan as result of NATO forces exit and availability of cheaper Iranian cement in the

region. Hence, the overall cement dispatches registered an uptick of 2.5% YoY during

FY14. Industry players continued to hold cement prices, though slight rationalization has

been witnessed on the back of decline in fuel and power costs. During 5MFY15, the sector’s

performance continued its growth trajectory posting sizeable growth of 6% YoY. Going

forward, owing to rationalizing costs the cement companies’ margins are expected to

improve. Thus, outlook on Pakistan’s cement sector is positive.

Performance: Capitalizing on domestic demand in recent years, Cherat Cement

continued to increase its topline. During FY14, the overall revenues grew by ~3%; however,

the growth rate was subdued (FY13: 15%, FY12: 29%) as the exports to Afghanistan

plunged by 17%. Nevertheless, local sales remained the key contributor to the topline

registering a growth of ~14%. The growth mainly emanated from uptick in prices. Owing to

overall lower cement demand, the company’s capacity utilization (FY14: 87%, FY13: 90%)

declined. Due to higher manufacturing cost – mainly a factor of increased power tariff, the

margins dropped yet remained healthy. Substantial drop in finance cost due to debt

repayment during the period augmented the bottomline. Hence, the company posted a

healthy net margin of 20%. During 1QFY15, the performance trend was largely maintained.

Business Strategy: Cherat Cement is in process of installing another production line at

its existing site with production capacity of over 1.3mln tons p.a. The new plant will be

acquired from M/s. Tianjin Cement Industry Design and Research Institute Company

Limited (TCDRI) – the largest cement plant manufacturer in China. The project, with

estimated cost of PKR 10.5bln (revised downward from initial estimate of PKR 12bln), will

be financed mainly through debt, followed by equity, and retained earnings. To date, equity

portion has been injected and a commercial loan of PKR 7bln (estimated utilization from

total facility of PKR 9.5bln) has been arranged from a consortium of Meezan Bank, Bank

Alfalah, and MCB. The plant is expected to come online by Jan17. Meanwhile, the company

would harness its marketing efforts to enhance demand; however, materialization of the same

remains to be seen. Timely commissioning of the project is expected to strengthen the

company’s footing in the local market.

Working Capital Management: Cherat Cement’s working capital needs are mainly a

function of inventory. During FY14, the inventory needs surged; however, the company

managed the impact through extending payables. The same is reflected in increased Creditor

days (end-Jun14: 14days, end-Jun13: 6days). Over the years, the cash cycle has become

efficient, depicted by declining days.

Cashflow & Coverages: The Company maintains reasonably good cash conversion

ratio; though it has slightly reduced in recent years. During FY14, despite higher YoY

profitability, the EBITDA margins declined (FY14: 30%, FY13: 33%). The company has

repaid major part of its existing debt. Draw down of new debt would be completed in FY16.

Thus incorporating the projected cashflows from existing plant on the back of expected local

demand, the coverages are likely to remain adequate. Any cashflows from new capacity

would provide additional cushion. Furthermore, comfort is drawn from the debt structure,

whereby in addition to grace period on principal, interest during construction is an inbuilt

component. Meanwhile, retention of available free cashflows would provide support to the

company’s financial risk profile.

Capital Structure: In pursuit of planned expansion, Cherat Cement has gradually

deleveraged its balance sheet. Going forward, with accumulation of sizable debt, the

leveraging would increase but expected to remain in comfortable range. The company has a

practice of paying dividends. The sponsors intend to follow a flexible dividend policy

whereby the dividend announcement would be subordinate to company’s needs.

Profile: Cherat Cement – a part of Ghulam Faruque Group, controls majority stake –

commenced operations in 1985 as a public listed company. Cherat Cement is engaged in the

manufacturing, marketing and sale of Ordinary Portland Cement. Installed capacity of the

company is 1.1mln tons p.a. With planned expansion of over 1.3mln tons p.a, likely to be

completed in FY17, market share of the company would improve to ~5% (current: 2.5%). Governance and Management: The overall control of the company vests in eight

member BoD, including the CEO and three Faruque family members. Four directors are

independent from Ghulam Faruque family. Mr. Azam Faruque, the CEO, is supported by a

team of professionals with relevant experience in the cement industry.

RATING RATIONALE The ratings reflect Cherat Cement's

adequate business profile - likely to be

strengthened through planned expansion

- and conservatively designed financial

profile. The company has ventured into

brown-field project to add above 1.3mln

tons p.a of new production line. This,

while more than doubling existing

capacity, is likely to add efficiency to

overall operations. In pursuant of

expansion, Cherat Cement has to create

room for debt driven capacity addition.

Although this would raise the

leveraging; given currently deleveraged

balance sheet it is expected to remain at

adequate level. Comfort is drawn from

the debt structure, whereby in addition

to grace period, first principal payment

falling due two years after planned

CoD, interest during construction is an

inbuilt component. Meanwhile,

available free cashflows would be

retained. This would provide cushion to

financial risk profile. The ratings draw

comfort from positive cement sector

fundamentals.

KEY RATING DRIVERS The ratings are dependent on the

management's ability to improve

business and EBITDA margins to

become at par with industry. Timely

execution of the planned expansion

while tapping potential demand creating

room for capacity utilization of new

plant is considered critical to maintain

the ratings at current level.

The Pakistan Credit Rating Agency Limited

Cherat Cement Company LimitedBALANCE SHEET 30-Sep-14 30-Jun-14 30-Jun-13 30-Jun-12

3MFY15 Annual Annual Annual

Non-Current Assets 4,608 3,394 3,463 3,284

Investments (Incl. associates) 506 1,374 68 139

Equity 128 132 68 139

Short-term (Mutual Funds) 378 1,242 - -

Current Assets 1,594 1,663 1,534 1,289

Inventory 640 788 719 505

Trade Receivables 0 1 1 1

Others 954 874 814 784

Total Assets 6,708 6,431 5,065 4,712

Debt 426 303 441 1,525

Short-term 223 99 237 436

Long-term (Inlc. Current Maturity of long-term debt) 204 204 204 1,089

Other shortterm liabilities 871 741 545 404

Other Longterm Liabilities 508 522 370 34

Shareholder's Equity 4,902 4,864 3,709 2,748

Total Liabilities & Equity 6,708 6,431 5,065 4,712

INCOME STATEMENT

Turnover 1,553 6,451 6,294 5,457

Gross Profit 412 2,103 2,190 1,152

Operating Profit 319 1,773 1,910 895

Financial Charges (9) (29) (109) (311)

Net Income 251 1,316 1,228 437

Cashflow Statement

EBITDA 366 1,927 2,051 1,129

Free Cashflow from Operations (FCFO) 319 1,766 1,984 1,079

Net Cash changes in Working Capital (27) (9) (54) 315

Net Cash from Operating Activities 289 1,741 1,777 1,052

Net Cash from InvestingActivities (400) (1,379) (428) (104)

Net Cash from Financing Activities 123 (371) (1,361) (980)

Net Cash generated during the period 12 (8) (12) (33)

Ratio Analysis

Performance

Turnover Growth 4.3% 2.5% 15.3% 28.6%

Gross Margin 26.6% 32.6% 34.8% 21.1%

Net Margin 16.2% 20.4% 19.5% 8.0%

ROE 20.9% * 30.3% 34.3% 2.4%

Coverages

Debt Service Coverage (x) (FCFO/Gross Interest+CMLTD+Uncovered STB) 16.8 * 25.4 18.2 1.3

Interest Coverage (x) (FCFO/Gross Interest) 36.1 61.4 18.2 3.5

Debt Payback (Years) (Total Lt.Debt (excluding Covered Short Term Borrowings) / FCFO) 0.3 * 0.1 0.1 1.3

Liquidity

(Liquid Assets (hi)+ Adjusted Quick Asset - Short-Term Borrowing) / Adjusted Quick Liabilities 1.5 3.0 1.1 0.3

Net Cash Cycle (Inventory Days + Receivable Days - Payable Days) 41.9 49.3 48.2 56.2

Capital Structure (Total Debt/Total Debt+Equity) 8.0% 5.9% 10.6% 35.7%

* Annualized

Cherat Cement Company Limited (Cherat Cement)

Feb-15 www.pacra.com

Cement

Financials (Summary)

PKR mln

The Pakistan Credit Rating Agency Limited

STANDARD RATING SCALE & DEFINITIONS

LONG TERM RATINGS SHORT TERM RATINGS

AAA Highest credit quality. Lowest expectation of credit risk. Indicate exceptionally strong capacity for timely payment of financial commitments. This capacity is highly unlikely to be adversely affected by foreseeable events.

A1+: The highest capacity for timely repayment.

A1:. A strong capacity for timely repayment.

A2: A satisfactory capacity for timely repayment. This may be susceptible to adverse changes in business, economic, or financial conditions.

A3: An adequate capacity for timely repayment. Such capacity is susceptible to adverse changes in business, economic, or financial conditions.

B: The capacity for timely repayment is more susceptible to adverse changes in business, economic, or financial conditions.

C: An inadequate capacity to ensure timely repayment.

AA+

AA

AA-

Very high credit quality. Very low expectation of credit risk. Indicate very strong capacity for timely payment of financial commitments. This capacity is not significantly vulnerable to foreseeable events.

A+

A

A-

High credit quality. Low expectation of credit risk. The capacity for timely payment of financial commitments is considered strong. This capacity may, nevertheless, be vulnerable to changes in circumstances or in economic conditions.

BBB+

BBB

BBB-

Good credit quality. Currently a low expectation of credit risk. The capacity for timely payment of financial commitments is considered adequate, but adverse changes in circumstances and in economic conditions are more likely to impair this capacity.

BB+

BB

BB-

Speculative. Possibility of credit risk developing. There is a possibility of credit risk developing, particularly as a result of adverse economic change over time; however, business or financial alternatives may be available to allow financial commitments to be met.

B+

B

B-

Highly speculative. Significant credit risk. A limited margin of safety remains against credit risk. Financial commitments are currently being met; however, capacity for continued payment is contingent upon a sustained, favorable business and economic environment.

CCC

CC

C

High default risk. Substantial credit risk “CCC” Default is a real possibility. Capacity for meeting financial commitments is solely reliant upon sustained, favorable business or economic developments. “CC” Rating indicates that default of some kind appears probable. “C” Ratings signal imminent default.

D Obligations are currently in default.

Rating Watch Alerts to the possibility of a rating change subsequent to, or in anticipation of, a) some material identifiable event and/or b) deviation from expected trend. But it does not mean that a rating change is inevitable. Rating Watch may carry designation – Positive (rating may be raised, negative (lowered), or developing (direction is unclear). A watch should be resolved with in foreseeable future, but may continue if underlying circumstances are not settled.

Outlook (Stable, Positive, Negative, Developing) Indicates the potential and direction of a rating over the intermediate term in response to trends in economic and/or fundamental business/financial conditions. It is not necessarily a precursor to a rating change. ‘Stable’ outlook means a rating is not likely to change. ‘Positive’ means it may be raised. ‘Negative’ means it may be lowered. Where the trends have conflicting elements, the outlook may be described as ‘Developing’.

Suspension It is not possible to update an opinion due to lack of requisite information. Opinion should be resumed in foreseeable future. However, if this does not happen within six (6) months, the rating should be considered withdrawn.

Disclaimer: PACRA's ratings are an assessment of the credit standing of entities/issues in Pakistan. They do not take into account the potential transfer / convertibility risk that may exist for foreign currency creditors. PACRA's opinion is not a recommendation to purchase, sell or hold a security, in as much as it does not comment on the security’s market price or suitability for a particular investor.

Withdrawn A rating is withdrawn on a) termination of rating mandate, b) cessation of underlying entity, c) the debt instrument is redeemed, d) the rating remains suspended for six months, or e) the entity/issuer defaults.

Credit rating reflects forward-looking opinion on credit worthiness of underlying entity or instrument; more specifically it covers relative ability to honor financial obligations. The primary factor being captured on the rating scale is relative likelihood of default.

Rated Entity

Name of Rated Entity Cherat Cement Company Limited

Sector Cement

Type of Relationship Solicited

Purpose of the Rating Independent Risk Assessment

Rating History Notification Date Long Term Short Term Outlook Rating Watch

24-Feb-15 A- A2 Stable -

Methodology: Corporate Rating Methodology

Rating Analysts Rehan Alam Saira Rizwan

rehan.alam@pacra.com saira.rizwan@pacra.com

(92-42-35869504) (92-42-35869504)

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