Cement 3Q Preview: Robust volume, higher retention price to drive earnings growth

April 07, 2021 (MLN): The cement sector is likely to report a 37 percent increase in its combined net profit for the third quarter of FY21 ended March 2021 with robust volume growth and higher retention prices.

Despite the increase in variable costs due to higher international coal and oil prices, robust domestic sales (up 35% YoY and 5% QoQ) along with higher local and retention prices are key drivers of earnings growth. This would result in a higher average gross margin, expanding by 32ppt YoY to 28% (ex-LUCK) in 3QFY21.

DGKC and PIOC, which remain highly leveraged and had posted relatively moderate profitability in 2Q due to lower export prices and high energy costs, respectively, are expected to show better earnings growth than peers in 3Q. Additionally, in the coming quarters, these two can continue outperforming the sector’s earnings growth, because of higher export prices and installation of new Coal-Fired Power Plant (CFPP) and WHR – where the improvement in cost per unit will complement the benefit of higher retail prices, Research Analyst at Intermarket Securities, Rahul Hans wrote.

During 3QFY21, local cement sales rose 35% YoY to 13.1mn tons, up from 9.75mn tons in 3QFY20. However, exports declined 8% YoY to 1.9mn tons. Overall industry utilization averaged 87% against 68% in the same period last year. Strong private demand stirred by lower interest rates and the Construction Package, along with PSDP disbursements, were the main drivers. It is expected local demand to remain strong in the coming quarters as government infrastructure spending will also increase for low-cost housing projects. In addition, despite the decline in exports, demand for cement in the South has improved significantly when compared to the previous quarters on the back of reduced selling from North producers in the South market, Hans added.

The research remained optimistic that the local demand for cement to double after FY21 / 22f. the research expects that international coal prices will come off to about US$80/ton by 4QFY21 amid lower demand in summer and the third wave of Covid-19 raging globally, however, a 56% surge in coal price from US$62/ton in October 2020 to around US$97/ton presently is almost completely passed on in the prices.

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Posted on: 2021-04-07T15:32:00+05:00