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Profitability of cement giants may tumble by ~37% QoQ in 4QFY21

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July 28, 2021 (MLN):  Being a crucial building block of growth and development, cement sector has a huge economic impact owing to its diverse supply chain which contributes significantly to the GDP. The infrastructural development and construction activities including allied sectors i.e, steel, wood, tiles etc. are heavily relied on the performance of the cement sector.

The cement companies are all set to issue its financial statements for the 4QFY21 and according to the projection put forth by different brokerage houses, the sector will likely post exceptional growth in profitability on yearly basis given cumulative losses of around 2bn in 4QFY20.

However, on quarterly basis, the profitability of the sector is anticipated to plunged by around 37% on the back of increase in variable cost amid surge in international coal and oil prices, while local cement prices not rising in tandem, and lack of dividend income in case of
DG Khan Cement (DGKC), Maple Leaf Cement (MLCF), and Lucky Cement (LUCK).

Earnings of LUCK, DGKC and MLCF are anticipated to decline more steeply than peers. PIOC, on the other hand, is the only producer which is expected to post an increase in earnings, by 13% QoQ owing to the energy cost savings from the 24MW coal based CPP (fully operational).

Even though coal prices continue to rise in 1QFY21, the sector’s profitability should increase backed by volumetric growth and recent increase in local cement prices which are expected
to increase to Rs650 and 720 per bag in the North and South markets, respectively, a report by Intermarket Securities underlined.  

The report also noted that average gross margins (GM) in 4QFY1 are expected to decline by 2ppt yoy to 26% in 4QFY21. The reason behind QoQ decline in gross margins is inadequate increase in local cement prices compared with the surge in variable costs.

To note, average retail prices rose only moderately during the quarter, up by 2% QoQ in the
North to Rs600 per bag and Rs650 per bag in South, increase by 1.5% QoQ. It is expected that GMs to remain range-bound in the coming quarters, potentially due to continuous increase in coal prices, but higher cement prices should offset the impact.

On a yoy basis, GMs will increase by 28ppt from -2% in 4QFY20, despite the higher variable cost and freight charges on a yoy basis largely because of higher sales volumes and retention prices.

With regards to the topline, the report underscored that cement sales fell by 3% QoQ to 13.96mn tons during 4QFY21from 14.4mn tons in 3QFY21. The overall industry utilization stood at 81% compared with 62% in the same period last year. In FY21, local and total sales increased by 20% to 48mn tons and 57mn tons, respectively. While average utilization levels stood around 70% and 83%, respectively.

Given this, it is projected that local cement demand growth will remain healthy, assumed as 10% and 8% in FY22 and FY23, respectively mainly supported by multiple projects initiated by the government and continuation of incentives for the private sector. In line with demand, cement prices are also expected to increase in FY22 from the present level of Rs635 per bag and Rs680 per bag in North and South, respectively, the report added.

According to the earning preview by Topline Securities, LUCK’s consolidated earnings per share (EPS) to tumble by 28% QoQ to Rs17.6 owing to decline in cement sales by 10% QoQ and auto sales by 17% QoQ. Auto sales are likely to come down due to shortage of parts and deferment of June sales of Picanto in to next fiscal year to pass on the incentives to the consumers provided in the federal budget. It is expected that KIA, ICI and foreign operations to contribute Rs6, Rs1.9 and Rs2.8 in 4QFY21, respectively. Unconsolidated EPS is likely to come in at Rs7.8, down 65% QoQ due to absence of dividend from auto business.

Meanwhile, KOHC will likely post EPS of Rs4.4 in 4QFY21, down by 16% QoQ. volumetric sales are anticipated at 0.91mn tons, drop by 8% QoQ while the GMs will likely reach 22.9%, down by 3ppts QoQ and finance cost to Rs101mn, dip by 15% QoQ.

 Unlike other players, Fauji Cement FCCL earnings to remain largely unchanged on QoQ basis as volumetric sales of the company have increased by 9% QoQ in 4QFY21. Given this, the company to post EPS of Rs0.7 with gross margins of 24%, drop by 6ppts QoQ.

Similarly, DGKC will likely witness the drop in EPS by 52% QoQ at Rs2.24, as in last quarter MCB paid jumbo dividend to the company.

In addition, the anticipated EPS of MLCF to reach at Rs0.9, plunge by 23% QoQ. With respect to sales, it is expected that volumetric sales will likely to tumble by 5% QoQ to 1.21mn tons while GMs to decline by 4.6% to stand at 22% QoQ.

The cement sector may also expose to the potential threats in a time to come which may further hit its profitability/earnings. The risks include lower than anticipated despatches, Higher coal prices, disruption in local prices, rupee depreciation, delay in dams and infrastructure projects, and hike in energy cost, the report by Pearl Securities noted.

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Posted on: 2021-07-28T16:13:00+05:00

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