Cement sector turns into profit after four consecutive quarters of losses

LAHORE: Pakistan listed cement sector has turned in a profit of Rs5.3billion in 1QFY21 after posting losses for four consecutive quarters.

The turnaround in profits is due to (1) 57pc QoQ higher net sales on the back of 26pc QoQ higher volumes and 19pc QoQ better retention prices and (2) 19pc QoQ decline in finance costs.

During the quarter, total cement dispatches came in at 13.56mn tons (utilisation: 82pc) – second-highest quarterly volumes. Local dispatches increased to 10.8mn tons, up 16pc QoQ, wherein the North region’s volumes improved by 14pc QoQ and South sales grew by 30pc QoQ. Exports too went up by 95pc QoQ to 2.7mn tons.

Topline Securities Deputy Head of Research Limited Shankar Talreja said that local retention prices increased by an average of 19pc QoQ or Rs48 per bag due to (1) increase in cement prices by Rs15-20 per bag, (2) decline in Federal Excise Duty (FED) by Rs25 per bag and (3) narrowing of discounts by Rs10 per bag.

He added that our sample includes 15 out of the 16 listed cement companies, i.e. 100pc of the sector’s market capitalisation.

Talreja said that gross margins of the sector touched six-quarter high of 19.4pc due to higher retention prices and decline in fuel and power costs in the range of 2-12pc QoQ.

He maintained that coal prices (FOB) during 1QFY21 averaged at US$55 per tonne, incorporating a two-month lag, as compared to US$69 per tonne in 4QFY20 and US$66 per tonne in 1QFY20. 

He said that the PKR/US$ averaged at Rs167 during 1QFY21 compared to Rs164 and Rs158 in 4QFY20 and 1QFY20, respectively.

Talreja shared that the finance costs of the sector also declined by 19pc QoQ to Rs3.6bn as repricing of loans has started to kick in after the decline in Policy Rate by 625bps to 7pc.

The research analyst added that the sector’s income tax expense was Rs1.5bn in 1QFY21 compared to an average tax benefit of Rs1.1bn in the last four quarters.

Selling and distribution expenses increased by 95pc QoQ, in line with the growth in exports. Other expenses increased by 187pc QoQ. This mainly includes the Workers’ Welfare Fund (WWF) and Workers’ Profit Participation Fund (WPPF), which are indexed to the profitability of the companies.

“We remain overweight on the country’s cement sector, wherein our top picks are Lucky Cement (LUCK) and Kohat Cement (KOHC),” he added.