Cement sector’s profit grows in double digits

Performance of companies reflects resilience to macro adjustments

KARACHI:

Despite the ongoing macroeconomic challenges, Pakistan’s top cement companies have reported double-digit profit growth in the second quarter of current fiscal year (FY23).

“Recent core performance of top cement companies has reflected resilience to the ongoing macro adjustments, bringing the sector back on the radar,” JS Global cement sector analyst Waqas Ghani Kukaswadia stated in a report.

The sector reported 14% quarter-on-quarter (QoQ) profit growth in Oct-Dec 2022 on the back of higher sales as first quarter (Jul-Sept) was badly hit by disastrous flooding. Earnings in the second quarter were higher by 42% year-on-year (YoY) despite increase in financing charges, he said. Consequently, first-half earnings for cement companies showed an increase of 21% YoY.

Lucky Cement, DG Khan Cement, Attock Cement, Fauji Cement, Maple Leaf Cement and Pioneer Cement registered 23% rise in their topline in the second quarter of FY23, which took first-half sales to Rs167.8 billion, up by 22.4%, observed Insight Securities’ cement sector analyst Ali Asif.

“Revenues jumped mainly because of increase in retention prices by 56%,” he added.

However, local cement dispatches fell around 17% while exports plunged by 49%, which pushed total sales down to 21.7 million tons, Asif highlighted.

“Decline in sales is attributable to the burgeoning cost of construction, higher interest rates, low utilisation of Public Sector Development Programme (PSDP) and political uncertainty, which was further worsened by floods.”

However, despite the drop in sales, revenues surged amid higher retention prices, which offset the impact of lower offtake, Asif said.

“Average gross margins this quarter (Oct-Dec) brought a positive surprise. The sector experienced impressive average margins QoQ despite rising input costs and higher inflation in the second quarter, owing to effective coal inventory management,” Kukaswadia wrote in his report.

“Alternative coal is a blessing in disguise for the cement sector, which keeps margins healthier despite contraction in demand, import restrictions and higher energy prices,” Optimus Research cement sector analyst Mehroz Khan remarked while talking to The Express Tribune.

Coal prices, imported from the Richard Bay of South Africa, fell to $124, or around Rs34,461, per ton, the lowest since January 3, 2022, when the price was $121, or Rs21,358, per ton, according to Arif Habib Limited Head of Research Tahir Abbas.

Coal prices have declined by 73% from their peak of $460, or Rs82,188, per ton hit on March 8, 2022.

Insight Securities’ Asif was of the view that gross margins of cement companies grew by 110 basis points to 24.4% against 23.3% last year.

He attributed the surge mainly to the shift to alternative fuel, renewable energy including solar power and waste heat recovery (WHR), complemented by the substitution of local and Afghan coal with imported coal.

Profits of cement companies grew around 20% in the first half (Jul-Dec) of FY23 compared to the same period of last year, he said. Their earnings before interest, taxes, depreciation and amortisation (EBITDA) rose by 25.9% in H1, up by 130 basis points against 24.5% in the same period of last year.

However, profit margins shrank by 0.7 percentage point. The decline was attributable to the rising interest rates and increase in debt due to the expansionary cycle.

In the first half of FY23, about 9.7 million tons of capacity was added by the industry.

Published in The Express Tribune, March 10^th, 2023.

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