Stock Research Report

CHERAT CEMENT
COMPANY
DECEMBER 2022
LIMITED

STOCK RESEARCH
REPORT

PRESENTED TO

Sir Akbar Ali CFA, FRM

PRESENTED BY

Muhammad Mustafa

19051

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Table of Contents
1. Company Background ...................................................... 3
2. Industry Overview .......................................................... 4
3. Financial Analysis ........................................................... 5
4. Ratio Analysis................................................................ 6
4.1. Profitability Ratios ..................................................... 6
4.2. Solvency Ratios ......................................................... 7
4.3. Valuation and Assessment Ratios .................................... 8
5. Financial Projections ...................................................... 10
6. Valuation and Recommendation ......................................... 12
Annexure A: Statement of Profit and Loss ................................. 13
Annexure B: Statement of Financial Position .............................. 14
Annexure C: Valuation ........................................................ 16

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1. Company Background
Cherat Cement Company limited is one of the leading cements producing company in
Pakistan. The company is popular in the local and global market with a market share of 6.9%
in the Pakistani Market.

The company was incorporated in 1981 and is also listed on the Pakistan Stock Exchange.
The company primary business activity revolves around the manufacturing of Ordinary
Portland Cement and Clinker.

Cherat Cement Company Limited is a growth oriented Company. The Company has invested
in state-of-the-art machinery like Solar Panels, WHRs, Refused Derived fuel, Biomass,
Wartsila Generators, Solar Power Project, and Waste Heat Recovery plants to keep it align
with the sustainable development of our environment.

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2. Industry Overview
Cement industry in Pakistan is the most important industry due to the emerging real estate
and infrastructural developments happening in the country. The sector has a significant
impact on the economy as the sector is a major source of employment and revenue
generation of the country.

The Pakistani cement sector consists of nineteen companies, of which sixteen are
operational, in Punjab, KPK, and AJK. Overall economic growth, development projects like
China Pakistan Economic Corridor (CPEC), Naya Pakistan Housing Program (NPHP), and
other government subsidized infrastructure projects drive growth in the cement sector.

Pakistan’s cement consumption is around 182 kgs against a global average of 500 kg. The
global average is more than double, which shows the immense potential for growth in
cement demand.

The Cement Industry in Pakistan has some great strengths as the resources for production
are easily accessible. The industry has a weakness in fluctuating exchange rates and worse
global economic situation. However apart from the threats the industry is destined for
future growth due to growing demand of cement in the country and throughout the world.

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3. Financial Analysis
In the past 5 years Cherat Cement Company Limited (CCCL), has shown significant financial
performance and growth. The company has successfully recovered from the COVID-19
pandemic where it went into losses due to the global lockdown. However, sales have shown
a constant growth which is a great sign for the company as the company has successfully
created its place in the local and global market.

The sales for the company Turnover

40
have increased by over
120% from sales figures 30
from preceding 5 years. The 32
Millions

company has also tripled its 20 14 16 25

gross profit in the same 17
10
tenure while also defeating
challenges like COVID and 0
the Russia-Ukraine war. 1 2 3 4 5

The company has a rollercoaster ride in terms of net profit as it the company regained its
previous profitability after getting into losses in 2020. Furthermore, the profits have
increased by more than 33%. The EPS has also been growing and is currently on 23 Rs/per
share from 11 Rs. / Per share in 2018.

The company has also seen a rise in the asset size of the company. The asset size has grown
by 24% to Rs.38.6 billion from Rs. 30.5 billion in 2018. The reason for this is the continuous
expansion happening in the company and throughout the industry. The detail financial
projections are shown in Annexure A and Annexure B

5 Net Profit 4

4 3
3 2
2
2
Millions

0
1 2 3 4 5
(1) (2)
(2)

(3)

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4. Ratio Analysis
4.1. Profitability Ratios
Gross Profit Margin:
The gross profit margin of the company is starting from 20% in 2018 and increasing to
around 30%. The gross profit margin is very sufficient according to the industry and
witnessing an increasing gross profit margin shows that the company is progressing towards
increasing its sales efficiently while also cutting down on its cost of sales.

Gross Profit Margin

35%

30%

25%

20%

15%

10%

5%

0%
0 1 2 3 4 5 6

Net Profit Margin:

The net profit margin of the
company remains stable apart Net Profit Margin
from the bump of 2020. Apart 20%
from that the net profit margin
15%
is in the range of 12% to 15%
which shows that the company 10%
is having a stable series of
5%
expenses that include the
taxes and finance cost that do 0%
0 1 2 3 4 5 6
not escalate and reduce the -5%
profit. The net profit margin
indicates that the company has -10%
stable growing profit that may -15%
result in significant cash flows
in the company resulting in outlook for expansion.

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Asset Turnover:
The asset turnover of the company is high, and it starts from 50% and reaches above 80% in
the 5 years’ time. The high ratio on one side indicate that the company is almost running at
optimum level as the sales are upto the level of assets while on the other hand the ratio
indicates towards the future outlook for expansion as the company would need to increase
its production capacity to increase its sales.

Asset Turnover
90%
80%
70%
60%
50%
40%
30%
20%
10%
0%
1 2 3 4 5

4.2. Solvency Ratios

Acid Test Ratio:
An Acid Test Ratio indicates a
company’s ability to pay of its Acid Test Ratio
liabilities in the short term to
determine the company solvency. 1.60
A ratio greater than one show that 1.40
the company can service its 1.20
current liabilities through its 1.00
current assets. As the graph 0.80
clearly indicates that the current 0.60
ratio for the company does not fall 0.40
below one for any year which 0.20
indicates that company having the -
capability to service its liabilities. 1

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Long Term Debt to Equity:

LT Debt to Equity
180%
160%
140%
120%
100%
80%
60%
40%
20%
0%
1 2 3 4 5

The long-term debt to equity ratio of the company is on a declining trend as it shows the
long-term debt decreasing from the balance sheet of the company. The ratio indicates
towards the company paying of its long-term borrowings while also shows a ray of future
expansion as the company can borrow again if it is successful to pay its debt on time.

4.3. Valuation and Assessment Ratios

Return on Equity:
The return on equity of the company indicates that the shareholders have been getting a
growing return on their invested amount. Apart from the fall in 2020 the return on equity
has shown a great picture with an increase in profits the ROE of the company is 33% more
than what it was in 2018.

Return on Equity
50%
40%
30%
20%
10%
0%
-10% 1 2 3 4 5

-20%
-30%
-40%

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Return on Asset:
The company has an increasing return on assets which shows the increasing efficiency of the
company in increasing its earning while using the asset base efficiently. The ratio also shows
an upward potential as the company is sufficient to turn its investment into a positive
return.

Return on Assets
25%

20%

15%

10%

5%

0%
0 1 2 3 4 5 6
-5%

Overall, the ratio analysis of the company shows immense potential from its ability to
efficiently make great return and to have a great upward potential.

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5. Financial Projections
Based on the 5-year historical data available of the company, the financial of the company
were forecasted for 3 years from FY23 to FY25.

The projections were based on the trends being witnessed in the past data and considering
the assumptions such as inflation, prices, and certain economic conditions. The financial of
the company were forecasted to provide a better picture of the future growth potential of
the company.

Financial Position

35,000,000

30,000,000
2022
25,000,000
2023
20,000,000
2024
15,000,000
2025
10,000,000

5,000,000

0
1

As the graph indicates that there is a negative trend in the financial position of the
company, but this is due to the decreasing long-term debt of the company that have been
reducing and the company has been committing hefty cash flows in them.

Coming to forecast of sales

which was forecasted after Turnover
taking care of the recent 60
economic conditions and
50
taking the past production
and dispatches amount into 40
Millions

account. The figure of sales

30
decreased for the first year
due to decrease in local sales. 20
However, a significant upward
10
jump was witnessed in the
next two years as the sales 0
increased by more than 33% 1 2 3 4

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As the upward trend in sales led to increase in the profits, the costs were calculated by
keeping inflation and past trends in mind. The fuel and power costs were also forecasted as
they play a major part in cement production and recent economic scenario has led to an
abnormal increase in prices that affected the cost of sales of the company.

Net Profit
8,000,000

7,000,000

6,000,000

5,000,000

4,000,000

3,000,000

2,000,000

1,000,000

0
1 2 3 4

The forecast show that the company has a potential to earn significant net profits in the
future and prosper in the sector.

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6. Valuation and Recommendation

The valuation of the company was carried out through the discounted free cash flow
valuation technique. The cash flows were discounted through WACC which was calculated
through the 5-year daily return of the stock and the KSE100 market.

The WACC was obtained as 9.16% with the stock beta being 1.68. The terminal growth rate
on which the perpetual cashflows were forecasted was assumed to be 2.5% as the steady
growth of the company in the current years.

As per the valuation obtained the value per share of the company has the upside potential
to reach PKR 339 while the current price of the share is PKR 102 that shows that the share is
trading on discount and my recommendation would be to buy the share as it has a 70%
upside potential.

Details
Terminal Growth Rate 3%
Terminal WACC 9%
Terminal Value 80,365,551
PV of Terminal Value 61,790,120

Enterprise Value 73,046,658

Net Debt 7,128,964
Value of Equity 65,917,694

No of Shares Outstanding 194,295,038

Value Per Share 339

Market Price as on 30 Dec
2022 102

Discount to Fair Value 234%

Upside to the Current price 70%

Decision BUY
Note: Detailed Valuation is attached in Annexure C

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Annexure A: Statement of Profit and Loss

HISTORICAL FORECASTED
Details 2018 2019 2020 2021 2022 2023 2024 2025
Turnover 14,388,349 15,862,647 17,090,155 25,206,811 32,085,361 36,987,728 47,813,443 52,494,071
Cost of Sales (11,249,153) (12,979,533) (16,703,668) (18,478,508) (23,134,576) (27,460,978) (34,410,453) (37,952,522)
Gross Profit 3,139,196 2,883,114 386,487 6,728,303 8,950,785 9,526,750 13,402,990 14,541,549

Distribution Costs (337,132) (396,338) (362,003) (429,264) (529,254) (610,828) (665,763) (677,419)
Administrative Expenses (245,258) (293,925) (271,750) (291,220) (349,141) (374,105) (413,133) (510,502)
Other Expenses (133,966) (109,358) (19,025) (251,324) (275,286) (283,261) (279,223) (279,915)
(716,356) (799,621) (652,778) (971,808) (1,153,681) (1,268,194) (1,358,119) (1,467,836)
Other Income 81,112 106,836 70,561 104,900 390,495 133,957 111,190 112,261
Operating Profit 2,503,952 2,190,329 (195,730) 5,861,395 8,187,599 8,392,513 12,156,060 13,185,974
Finance Costs (356,585) (1,142,559) (2,526,997) (1,524,177) (1,358,874) (2,781,732) (2,527,472) (3,509,663)
Profit before taxation 2,147,367 1,047,770 (2,722,727) 4,337,218 6,828,725 5,610,781 9,628,588 9,676,311
Taxation (15,248) 714,995 829,619 (1,132,162) (2,372,760) (1,627,126) (2,792,290) (2,806,130)
Net Profit 2,132,119 1,762,765 (1,893,108) 3,205,056 4,455,965 3,983,654 6,836,297 6,870,181

No. of Shares 176,631,853 194,295,038 194,295,038 194,295,038 194,295,038 194,295,038 194,295,038 194,295,038
EPS 12 9 (10) 16 23 21 35 35

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Annexure B: Statement of Financial Position

HISTORICAL FORECASTED
Details
2018 2019 2020 2021 2022 2023 2024 2025
Assets
Non-Current Assets
Property, Plant & Equipment 23,805,845 26,890,963 25,306,834 25,590,839 27,568,302 33,401,908 32,780,310 31,791,721
Intangible Assets 15,406 18,462 17,371 16,213 14,755 14,546 14,722 13,903
Long Term Investments 396,794 254,970 390,863 660,950 481,559 497,957 503,006 537,389
Long Term Loans 686 701 83,580 75,446 67,811 61,751 56,205 50,977
Long Term Deposits 19,008 21,392 19,606 3,841 7,141 9,808 10,708 8,144
Deferred Taxation 418,912
24,237,739 27,186,488 26,237,166 26,347,289 28,139,568 33,985,970 33,364,950 32,402,134
Current Assets
Stores, Spare Parts, and Loose tools 2,778,907 3,484,620 3,766,674 4,184,247 7,472,016 4,664,774 7,311,888 10,687,188
Stock In Trade 753,638 1,268,194 962,470 1,005,590 926,075 1,055,272 1,009,416 1,075,113
Trade Debts 188,272 311,488 300,648 407,548 533,973 705,569 873,553 1,141,126
Loan & Advances 84,081 143,862 46,855 189,899 292,691 321,608 390,921 411,211
Trade Deposits and Short-Term Prepayments 25,940 23,759 16,309 25,174 15,469 15,990 18,338 25,582
Other Receivables 1,599,017 1,551,308 10,376 198,060 4,487 4,456 4,080 3,606
Taxation-net 804,915 1,280,573 1,544,789 1,695,693 94,133 0 0 0
Cash and Bank Balances 47,052 29,535 36,558 140,022 1,126,474 1,244,462 1,496,174 1,577,033
6,281,822 8,093,339 6,684,679 7,846,233 10,465,318 8,012,131 11,104,369 14,920,859
Total Assets 30,519,561 35,279,827 32,921,845 34,193,522 38,604,886 41,998,101 44,469,320 47,322,993

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HISTORICAL FORECASTED
Details
2018 2019 2020 2021 2022 2023 2024 2025
Equity and Liabilities
Share Capital and Reserves
Issued, Subscribed and paid-up capital 1,766,318 1,766,318 1,942,950 1,942,950 1,942,950 1,942,950 1,942,950 1,942,950
Reserves 9,407,430 9,989,851 8,110,608 11,646,602 15,373,372 19,378,859 26,205,967 33,159,883
11,173,748 11,756,169 10,053,558 13,589,552 17,316,322 21,321,809 28,148,917 35,102,833
Non-Current Liabilities

Long term Financing 14,700,000 16,900,000 16,928,044 12,624,315 9,918,167 6,611,515 3,371,109 120,898
Lease Liabilities 0 0 10,393 21,408 10,971 8,758 6,973 5,442
Long Term Security Deposits 17,667 21,871 27,661 28,105 28,450 27,678 28,291 28,219
Government grant 0 0 13,758 83,539 948,684 948,684 948,684 948,684
Deferred Taxation 975,640 405,659 0 573,593 535,045 0 0 0
15,693,307 17,327,530 16,979,856 13,330,960 11,441,317 7,596,634 4,355,057 1,103,243
Current Liabilities
Trade & Other Payables 1,990,431 1,863,434 2,151,4952,264,938 2,877,773 2,632,614 2,410,140 2,537,259
Contract Liabilities 0 0 0 191,403 243,921 0 0 0
Accrued mark-up 230,024 544,086 536,744 305,412 435,350 0 0 0
Short term borrowings 963,947 2,902,527 2,662,2411,741,387 3,135,925 7,173,148 6,204,927 5,230,364
Current portion of long-term financing 400,000 800,000 430,0162,646,955 3,037,906 3,172,279 3,250,211 3,250,211
Current portion of lease liabilities 0 0 8,929 14,655 10,438 7,224 5,674 4,687
Current portion of Government grant 0 0 11,012 20,294 19,953 19,953 19,953 19,953
Unclaimed dividend 68,104 86,081 87,994 57,123 74,441 74,441 74,441 74,441
Unpaid dividend 30,843 11,540 0 0 0
3,652,506 6,196,128 5,888,431 7,273,010 9,847,247 13,079,659 11,965,346 11,116,916
Total Equity and Liabilities 30,519,561 35,279,827 32,921,845 34,193,522 38,604,886 41,998,101 44,469,320 47,322,993

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Annexure C: Valuation
Details 2022 2023 2024 2025 Terminal Value

Valuation Date 30-Dec-2022 30-Jun-2023 30-Jun-2024 30-Jun-2025 30-Jun-2025

Time factor 1 2 3 3

FCFF

EBIT 8,392,513 12,156,060 13,185,974

Add Depreciation 2,040,307 2,229,404 2,334,198
EBITDA 10,432,820 14,385,464 15,520,172
Tax on EBIT (3,025,518) (4,171,785) (4,500,850)
Capex (5,244,674) (5,943,002) (1,135,209)
Change in Working Capital 5,685,599 (4,206,551) (4,664,920)
FCFF 7,848,227 64,126 5,219,193 5,349,673

WACC 9.16% 9.16% 9.16% 9.16%

PV of FCFF 7,189,873 53,819 4,012,846

NPV 11,256,538

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