September 27, 2019 (MLN): In a time of economic slowdown, when most of the companies are striving hard to stay profitable, Cement Producers continued to keep their heads above the water, as the preceding fiscal year (FY19) witnessed some major developments in the Cement Sector, mostly of which have cumulatively chewed the sector’s profitability.

During FY19, the local demand for cement remained in dismay, as the average industry dispatches for the year remained flat compared to FY18. Sluggish economic activity and unfavourable policy changes have hurt the earnings and cashflows of Cement Industry. These include; Supreme Court ban on high-rise construction, restriction on non-filers to purchase property, CNIC requirement for sale of goods above PKR 50,000 (where more than 80% cement is sold to unregistered buyers), the revision in provision of tax credit which is declined to 5% from a previous 10% on expansion and imposition of FED on cement sale.

The financial analysis of 5 major companies namely; LUCK, DGKC, MLCF, CHCC and FCCL which represent 55.5% of the total market capitalization of cement industry as of today, revealed that the cement sector witnessed a significant diminution of 34.37% YoY in Profit after Tax during FY19 as compared to last year, which can be seen in the table below.

The topline earnings of the sector reported a scanty growth of 10.7% YoY owing to minimal increase in cement dispatches by 3.7% as compared to 10.6% in FY18. Moreover, higher coal prices given the currency depreciation and cost pressures took a toll on sector’s profitability.

Another major factor responsible for dragging the sector’s earnings downward is a colossal rise in finance cost due to highly leveraged position of all major players. As all major cement companies have amplified their debt profiles for financing the on-going expansions in a rising interest rate environment.

However, on external front, the exports witnessed significant volumetric growth, up by 37% YoY. Prices however, remained fairly under pressure, especially in the north mainly due to excess supply during the year.

Since the Cement sector is amongst the top 5 key drivers of KSE-100 index, therefore, the dismal performance of the sector during FY19, indicates that the sector continued to snatch points from the benchmark index, as evident in the graph below.

Individual Assessment

Based on companies’ earnings share as percent of total sector’s earnings, LUCK stood on top with 61% of the sector’s earnings followed by FCCL (14%), DGKC and CHCC both contributed around 9%, while MLCF owned a share of 7% in total sector’s earnings. This clearly suggests that LUCK outperformed all the companies within the sector.

• LUCK posted Net Profit of Rs. 12.35 billion, which was 23.5% lower as compared to last year.  The disappointing performance of the company was mainly due to rising costs.
• DGKC reported a massive decline of 75% in its net earnings compared to last year. This decline largely came from rise in cost of sales and finance cost owing to increase in short term borrowing and higher interest rates.
• FFCL net profits for the year locked in at Rs. 2.8 billion which was 17% lower than the income recorded last year. The decline in company’s profits was mainly attributable to decline in volumetric sales, lower other income and hefty tax payments.
• MLCF saw 60% YoY decline in its net profits to Rs 1.46 billion, mainly due to higher coal prices given currency depreciation and a considerable rise in finance cost.
• CHCC observed 17% drop in profits after tax to Rs 1.7 billion due to upsurge in cost of sales.

Is it the worst time for Cement Sector?

Apart from exhibiting dismal performance, many companies in the cement sector announced cash dividend not more than 10%, signaling that the companies are witnessing liquidity crunch. It is evident that the reduced profitability amid inflated costs have swayed cement companies to subsequently reduce payouts.

There is no doubt that the slowdown in economic activity, weak demand and inflated costs have made injuries to the sector’s profitability, however, paying out dividend suggests that it is not the worst time for the sector, but it will be an uphill battle for the sector to generate more business and increase profits in this difficult time.

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