Cement sector: High finance costs drag 1HFY19 earnings down by 19%

March 1, 2019 (MLN): In line with an analysis carried out on financial earning reports of several major listed companies in Pakistan, the cement sector witnessed a growth of 1% YoY in Profit after Tax for 2QFY19 as compared to same period last year, whereas it suffered an estimated decline of 19% for the 1HFY19 as compared to same period last year.

The topline earnings of the sector reported positive growth of 17% for 2QFY19 and 10% for 1HFY19, owing to increase in cement dispatches and prices.

It is pertinent to mention that the rise in coal prices in 1QFY19 was expected to have a significant impact on the gross margins of 2QFY19. However, the sector managed to report decent growth of 27% in GP margin after taking into account the hike in coal prices. 

A lower effective tax rate played a major role in dragging up the net profit margins, as the Profit before Tax for the sector was down by a considerable margin as compared to Profit after Tax. 

The sector’s profits after tax were mainly affected by the finance cost, as it was up by 202% YoY during 2QFY19 and 179% during 1HFY19. This was a result of enhanced demand for debt to fund ongoing or upcoming expansions. Moreover, the State Bank of Pakistan recently hiked benchmark interest rate by 450 bps to 10.25%, leading to enhanced finance costs.

On an individual basis, DGKC emerged as the top performer during 2QFY19 as its net profits observed an increase of 81% YoY. Tax benefit of Rs.1.1/share and higher gross margins were attributed to better utilization of South plant. To note, the company is entitled to a 5-Year tax holiday on South plant which came online in 2H2018.

On the flip side, FCCL outperformed the rest of the companies during 1HFY19 by witnessing a growth of 44% YoY in net earnings, due to colossal growth in other income.

The analysis is based on the financial result of seven major listed companies, which represent around 77.15% of the total market capitalization of cement industry.

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