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Cement Sector: Turning the corner


Despite going through an expansionary cycle whereby 10.7 mln tons have been added during the past 2 years, the cement sector continued to be in turmoil. Similar to 2HFY19, the 1QFY20 remained a dismal for the cement sector with a bottom line of Rs 756.8 million against Rs 7.2 billion in 1QFY19, depicting a massive decline of 89.4% YoY.

These results are based on the financial analysis of six major players of the Cement Industry, which represent around 82.5% of the total sector, though some of them are not listed on the Pakistan Stock Exchange. These are Lucky Cement (LUCK), DG Khan Cement Company Limited (DGKC), Bestway Cement Limited (BWCL), Fauji Cement Company Limited (FCCL), Attock Cement Pakistan Limited (ACPL) and Kohat Cement Company Limited (KOHC). Hence, the financial analysis of the sector based upon the consolidated financial statements of these companies is as follows:

Cumulative annual Profit and Loss statement of Cement Sector (Jul-Sept 2019)
(Rupees in thousands) Sep-19 Sep-18 % Change
Revenue               58,859,534                60,020,862 -1.93%
Cost of sales            (52,171,372)              (46,127,677) 13.10%
Gross Profit                 6,688,162                13,893,186 -51.86%
Selling and Distribution Cost               (3,167,204)                (2,498,241) 26.78%
Admin Expenses               (1,621,342)                (1,438,414) 12.72%
Other expenses                  (316,879)                    (823,664) -61.53%
Other Income                 2,238,471                   1,864,878 20.03%
Finance cost               (2,628,682)                (1,495,375) 75.79%
Pre-Tax Profit                 1,192,526                   9,502,369 -87.45%
Taxation                  (426,677)                (2,268,798) -81.19%
After-Tax- Profit                     765,849                   7,233,571 -89.41%


Performance Analysis:

During the quarter, the major decline in the sector’s profitability came due to a significant reduction in margins by 12 ppts to 11% owing to the increase in cost of sales by 13% YoY. In addition, pricing pressure in the domestic market and stiff competition in exports along with an increase in input costs were also the reasons in dragging sector’s profits.

In 1QFY20, industry’s revenues were decline by 2% YoY due to lower sales although cement dispatches recorded a growth of 2.56%YoY to 11.132mn tons on the back of increase in cement’s exports by 9%YoY to 1.96mn tons but fall in cement prices in the south by 4%YoY to Rs 551 damaged revenue growth.

Similarly, exports sales also contributed negatively in revenue caused by discounted prices offered by cement companies to international buyers.

On the domestic front, the sales of the cement in southern regions was affected by Axle load condition. The implementation of the Axle load adversely impacted the sector, as it resulted in an increase in transportation cost along with rise in turnaround time for loading and unloading of trucks.

As the cement sector is highly leveraged, financial charges increased by 75%YoY due to the hike in interest which further impacted sector’s profitability. However, taxation provided some solace to the profitability as total tax of the sector dropped considerably by 81% YoY.

Since the Cement sector is amongst the top 5 key drivers of KSE-100 index, therefore, the dismal performance of the sector during the quarter, indicates that the sector continued to snatch points from the benchmark index, as evident in the graph below.

Individual Assessment:

Based on companies’ contribution in total sector’s earnings, LUCK stood on top with 199% of the sector’s earnings followed by ACPL (55%), BWCL (39%), FCCL (38%) and KOHC (12%). While DGKC contributed negatively as it declined the sector’s profitability by 189%.

  • Lucky Cement Limited reported net profit of Rs. 1.53 billion (EPS: Rs. 3.93) for the first quarter ended September 30, 2019, i.e. 51.7% lower than the earnings of the same period last year.
  • Profitability for Attock Cement Pakistan Limited (ACPL) for the period under review, remained flat at Rs 421 million with Earning per share (EPS) stood at Rs 3 as compared to the same quarter last year.
  • Bestway Cement Limited (BWCL) posted its net earnings of Rs. 300 million (EPS: Rs.0.5), i.e. around 86.67% lower than the same period of last year.
  • Fauji Cement Company Limited reported profits of Rs. 292 million (EPS: Rs. 0.21) i.e. around 64% less than the numbers reported in same period of last year.
  • Kohat Cement Company Limited (KOHC)’s overall financial performance remained dismal as its net profits after tax deteriorated extensively by 83% to Rs 88 million against Rs 528 million reported in the corresponding period last year.
  • Lastly, DG Khan Cement Company Limited (DGKC) bore net losses after tax of Rs.1.44 billion (LPS: Rs 3.30), as compared to net profits of Rs. 341 million (EPS: Rs 0.78) in the corresponding quarter of last year.

Despite tough current macroeconomic environment along with low growth period, the demand for cement is likely to improve going forward, as October data indicates steady increase in cement prices and dispatches rising to all time high of 4.98 MT supported by double digit growth in exports. In addition, the government deferred the implementation of axle load regulation and CNIC condition for sale and purchase of goods which would provide a much-needed relief to the cement companies.

Moreover, the Prime Minister’s Naya Pakistan housing Scheme and expected start of Dams construction is further likely to enhance cement’s demand.

Furthermore, the expectations regarding easing monetary policy would fuel up economic growth and cement demand, moreover, this would also reduce finance cost. By analyzing the aforementioned factors, the profitability of cement sector is likely to improve in 2HFY20.

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