Cement industry’s profits grow seven times in fiscal 2012

Earnings rise sharply on the back of 26% price increase.

KARACHI:

Cement companies showed strong growth in fiscal 2011-12 with almost all of them returning to profitability, but the construction industry did not respond to this growth and still remained gloomy, say analysts and industry officials.

The top reason for high profits was a significant increase in cement prices, which strongly supported balance sheets of the companies, but it did not translate into overall growth of the construction industry.

According to a report issued by Topline Securities on Tuesday, a 26% jump in cement prices mainly propelled profits of cement companies to Rs16 billion ($168 million) in FY12, a whopping increase of roughly seven times.

“If you see the figures for FY12 compared to FY11, you will find strong growth, but people did not receive any benefit, particularly due to persistently high inflation,” commented Atif Zafar, an analyst at JS Global Capital.

“Similarly, the significant increase in profits did not correspond with lacklustre sales of cement or weak growth in the construction industry.”

With just 4% increase in total sales, anything significant cannot be expected in the construction industry, he added.

A former chairman of the Association of Builders and Developers (ABAD), a top body of builders with over 700 members, blamed the overall economic slowdown for the slow pace of the construction industry in the last fiscal year.

According to the report of Topline Securities, out of 10 cement companies, which have announced their full-year results, only one posted losses in FY12. A year earlier, almost 50% of the companies were in the red.

The turnaround in FY12 and better outlook led the cement sector post a 119% return so far this calendar year.

The 10 companies, which unveiled their results, represented 76% of stock market capitalisation. These did not include Javedan Cement as it did not operate during FY12.

Kohat Cement saw its profit grow 26-fold, followed by DG Khan Cement, up 24-fold. Most of the companies, which had operational issues due to high cost of production and high leverage, switched from losses to profits in FY12.

Cement prices: the game changer

One of the turnaround stories for cement manufacturers was a sharp rise in domestic demand, which led to a 26% improvement in cement prices in the local market and a handsome 33% increase in revenues to Rs123 billion.

Local sales rose by 9% to 24 million tons, but total sales including exports stood higher by only 4% to 32.6 million tons.

Despite energy cost (higher oil prices and gas cess), the cement manufacturers remained comfortable with the gross margin, which increased by 7 percentage points to 30% during FY12. However, a 17% increase in financial charges to Rs8.7 billion amid rupee depreciation and higher borrowing slightly diluted the bottomline.

Published in The Express Tribune, September 26^th, 2012.