DGKC sees durable FY27 cement recovery on lower rates, reconstruction demand

October 05, 2026 (MLN): The recovery in local cement dispatches that began in FY26 appears to rest on foundations more likely to persist than reverse, D.G. Khan Cement (PSX: DGKC) sees. An easier cost of borrowing and a gradual return of construction activity are the drivers, and flood rehabilitation should add to underlying demand over the medium term.

The domestic market offers the clearer opportunity in the year ahead, and the company's strategy is weighted toward serving that recovery efficiently.

Export markets are treated as opportunistic rather than dependable, given the disruption to regional trade routes. Capacity flexibility, particularly at the Hub site, lets volumes go to whichever market offers the better realization at a given time.

Higher royalty rates and other input cost pressures will continue to test margins. The response is not to rely on price recovery, which market conditions may not permit, but to hold cost discipline and allocate volume to the most rewarding markets.

Construction activity remains constrained by the cost of materials and labor, and the company does not expect a rapid release of pent-up demand. Planning assumes a measured recovery rather than a construction boom.

That should be sufficient for reasonable utilization and fixed-cost absorption, but not enough to be taken for granted. If policy measures such as housing incentives or a lower financing cost lift activity, the company is positioned to capture the additional volume without committing capacity ahead of demonstrated demand.

Public-sector spending is assumed to stay restrained, so the base case rests on private and reconstruction demand rather than large infrastructure programs.

The interest-rate picture has changed in character rather than direction. Rates are assumed to hold near current levels, and the material development is on the liability side.

The foreign currency facility raised to fund the Rafhan Maize investment will bear a full year of financing cost in the coming period, lifting finance cost from the unusually low level recorded in FY26. It also adds sensitivity to SOFR alongside the existing KIBOR exposure.

Management is focused on optimizing the financing structure and borrowing costs tied to the investment, while keeping leverage prudent and the overall financing burden manageable through the cycle.

Energy remains the single largest lever on the cost base, and the one least within the company's control. Rather than assume relief from international prices, the company continues to reduce dependence on any single fuel by deepening the use of alternative fuels and adjusting the coal mix as availability and price dictate.

This is treated as a structural cost strategy rather than a response to one year's prices, and it is the principal defence against inflation that cannot be recovered through selling prices under current market conditions.

The same logic now applies to purchased electricity. In September 2026 the company contracted a 25 MW solar plant with 10 MWh of battery storage at the DG Khan site. On commissioning in March 2027, it will displace part of the site's grid and captive power on terms fixed at the outset rather than set by the tariff cycle.

Competition is expected to intensify as peers invest and expand capacity, and the company does not assume that scale alone will protect its position. Its answer rests on cost leadership, disciplined pricing and operational reliability rather than market share pursued at the expense of margin.

The step into Rafhan Maize Products (PSX: RMPL) is part of the same thinking at a strategic level. By broadening the earnings base beyond cement, the company reduces its exposure to a single cyclical sector and builds a second stream of returns less correlated with the construction cycle. Investment in people, processes and selective partnerships across the value chain continues to support this direction.

On the projections management believes are achievable despite these factors, FY27 sales are put at Rs87,352m, gross profit at Rs21,938m and profit before tax at Rs17,124m.

On projects, the 11,000 MT per day brownfield clinker line at the DG Khan site remains on schedule. On commissioning, it is expected to improve operating efficiency and strengthen the cost position for years to come.

The 25 MW PV solar plant with a 10 MWh battery energy storage system, contracted after the approval of the financial statements on August 27, 2026, is expected to begin generation in March 2027.

The storage will extend solar output beyond daylight hours, reducing power cost per ton and the carbon intensity of production.

Measured against the outlook published a year ago, the company met or exceeded its expectations on profitability, though the path differed from the one foreseen. Last year's hopes rested largely on exports, but it was domestic demand that recovered, growing for the first time in three years, while export volumes fell as regional trade routes closed.

The anticipated pressure from inflation and higher royalty costs materialised and was contained through cost discipline and the fuel strategy. Finance cost fell further than anticipated as debt was repaid into a low-rate environment, and dividend income again proved a dependable contributor.

The year validated the strategy of cost control, fuel flexibility and financial discipline. It also showed why the company plans around a range of demand scenarios rather than a single expected outcome, since the mix of domestic and export demand can shift materially within a year.

The projections draw on data from the All-Pakistan Cement Manufacturers Association (APCMA), the annual federal budget, independent economic research, the Pakistan Bureau of Statistics (PBS) and the International Monetary Fund (IMF), among others.

Management also drew on feedback from the dealer and distributor network and its own historical data, and no external consultants were engaged. The company enters the period ahead focused on converting the momentum of FY26 into durable, long-term value for shareholders.

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