Fauji Cement: Little fish in a big pond

February 20, 2020 (MLN): In a current interest rate environment, the companies who are keeping their balance sheet unlevered is a blessing in disguise. However, in the long-run such companies find themselves on losing end as situation reverses and other players start to capture the market.

Fauji Cement Company Limited (FCCL), is a quintessential example of the above-mentioned case in which the absence of expansion which so far has been the misfortune with a positive outcome for the company as low finance cost has led it to post healthier results compared to its peers, drawing investor’s interest in the company.

A report by EFG Hermes says Fauji’s lack of expansion will hit the company in terms of losing market share.

The report accentuated that whenever the cyclical recovery kicks in, competitors will have a greater capacity to cater to demand. If the Fauji opts to expand, it will be a double-edged sword because of late entrant to the previous expansionary cycle as PKR has depreciated against dollars so the company will have to procure a plant at higher average price (due to higher PKR/USD exchange rate) compare to its peers, thus prolonging its payback cycle.

Secondly, the construction time (c30-36 month) might deprive it of benefiting from the recovery cycle, the report added.

As the local supply of cement depends upon the capacities of the players, this signifies that Fauji is set to witness a decline in its local market share in FY20 compared to FY19. Going forward, it will have to stick with this (held-off increasing its capacity) as the industry is already oversupplied, peers have become much bigger and pricing consensus will be only reached on market share compromises, the report underscored.

Apart from this, Fauji Cement is expected to announce its financial results tomorrow for the six months ended on December 31, 2019, wherein the company is expected to post net profits ranging in between Rs 654 million- Rs 973 million, this would be around 62 to 64% lower than the profits earned in the corresponding period of last year, as per the projections put forward by four brokerage houses in the table given below.

The expected decline in FCCL’s profitability is primarily attributable to lower sales volume on the back of weak cement demand, and the combined impact of lower retention and fuel prices during the period.

However, lower finance cost at the expense of not expanding is the saving grace for the company’s profitability for now but in the long run, it will hold back Fauji to attain higher gains in future.

Copyright Mettis Link News