Earnings Report /
Pakistan

Cherat Cement: 1QFY22 review – lower than expected COGS leads to earnings beat

  • CHCC has posted 1QFY22 NPAT of PKR1.2bn (EPS: PKR6.14) up 3.9x yoy and 21% qoq. lower COGS leads to better profitability

  • Despite the decline in sales volumes by 1%/17% yoy/qoq, Revenue has increased by 37%/6% yoy/qoq to PKR7.16bn in 1QFY22

  • Like other cement companies, CHCC has post decent result for 1Q and beat market expectations

Intermarket Securities
27 October 2021

Cherat Cement (CHCC) has posted 1QFY22 NPAT of PKR1.2bn (EPS: PKR6.14), up 3.9x yoy and 21% qoq. The result has come higher than our expected earnings of PKR877mn (EPS: PKR4.51), where the major deviation was lower realization of coal prices as compared with our assumption. The qoq increase in earnings stemmed from increase in gross margins amid elevated retention prices and decline in average coal prices because of usage of local and Afghan coal.

Key highlights in 1QFY22 results:

Despite the decline in sales volumes by 1% yoy and 17% qoq, Net revenue has increased by 37% yoy and 6% qoq to PKR7.16bn in 1QFY22. Higher local cement prices have helped revenue to increase.

GMs clocked in at 29% (up 7.7ppt yoy and 1.3ppt qoq), vs our estimated gross margins of 25%. The qoq increase in margins is primarily led by 3% qoq increase in local retention prices to PKR408/bag in 1Q and a reduction in average coal prices amid procurement of coal from Afghanistan and local as well, in our view.

Finance cost in 1QFY22 declined by 43% yoy to PKR298mn amid partial retirement of long-term borrowing and scheduled payment of long-term debt as well, in our view.

Among other line items (i) distribution expenses increased by 24% yoy to PKR113mn in 1QFY22, mainly because of higher exports and increase in transportation expenses, and (ii) effective tax rate of 26% vs. same as last year.

Like other cement companies, CHCC has post decent results for 1Q and beaten market expectations. Lower-than-expected average cost of coal has been the primary reason behind the increase in sector profitability. We expect that CHCC and sector gross margins to remain around 1Q level in the next quarter as realized coal prices will remain lower than average global prices during the quarter over an increase in local cement prices. In the long run, earnings are expected to increase further owing to better retention prices going forward and a possible decline in international coal prices in 2HFY22.

Thus, we have a Buy rating on the scrip with a TP of PKR170/sh.