Earnings Report /
Pakistan

1QFY23 Previews - Profitability to remain firm despite sluggish demand

  • IMS Cement Universe’s cumulative profitability is expected to increase by 4%QoQ to PKR12.7bn in 1QFY23.

  • Total offtake declined by 23% QoQ to 9.6mn tons, where local sales have reduced by 25% QoQ to 8.6mn tons in 1Q.

  • Elevated energy prices coupled with higher inflation will reduce GMs by 4ppt YoY and 5ppt QoQ to 22% in 1QFY23

Intermarket Securities
17 October 2022
  • IMS Cement Universe’s cumulative profitability is expected to increase by 4% QoQ to PKR12.7bn in 1QFY23. However, it is expected to decline by 1% YoY.

  • Sector gross margins are expected to slump by 4ppt YoY / 5ppt QoQ to 22% in 1QFY23. The reduction in gross margins is due to the drop in cement offtake by 23% YoY / 21% QoQ to 9.6mn tons and elevated coal prices (sea-based and from Afghanistan).

  • During the quarter, the IMS Cement cluster outperformed the KSE-100 by c.10ppt. Reasons behind this were i) revival of local demand post floods, ii) softer international and Afghan coal prices, and iii) expected reduction in interest rates going forward.

Lower offtake likely to offset super tax impact

Core profitability of IMS Cement Universe is expected to increase by 4% QoQ to c.PKR12.7bn in 1QFY23. This is despite multiple factors including i) significant offtake reduction amid recent floods and torrential rain, ii) higher finance cost, and (iii) overall increase in cost of doing business amid elevated international and Afghan coal prices, coupled with overall high inflation. Lower super tax will likely help the sector to post decent profitability as compared to the last quarter. That said, on a sequential basis, earnings of CHCC, FCCL and LUCK are expected to decline amid lower utilization levels, elevated COGS and one-off earnings from Askari Cement in case of FCCL (post-amalgamation). On the other hand, highly leveraged DGKC and PIOC are expected to post positive bottomlines, against losses in the last quarter (owing to super tax). Earnings of MLCF and KOHC are also expected to increase amid elevated retention prices and better inventory management.

Gross margin to reduce amid low utilization and cost pressures

The cement Sector has witnessed a jump in variable cost during the quarter, majorly led by high inflation and increase in local and Afghan coal prices. These, coupled with higher fuel and electricity prices should reduce sector GMs by 4ppt YoY and 5ppt QoQ to 22% in 1QFY23. This follows low offtake and a lower than adequate increase in cement prices, which should lead to a contraction in sequential margins. During the quarter, cement retail prices in North and South have jumped by PKR120 and PKR90 per bag, respectively. Export prices have remained muted. The latter, coupled with higher coal prices are likely to result in a decline in margins for LUCK, in our view.

Demand contracted significantly amid floods

During 1QFY23, total cement sales declined by 23% QoQ / 21% YoY to 9.6mn tons, where local dispatches have witnessed a major slump of 25% QoQ to 8.6mn tons. The contraction in offtake was majorly led by floods and the intense monsoon spell which hampered local sales in the initial two months of 1Q, before picking up in Sep’22. Overall industry utilization stood at 56%, compared to 72% in the same period last year. Exports during the quarter increased by 65% QoQ to 1.0mn tons (down 33% YoY in 1QFY23). The overall increase in manufacturing cost has discouraged South players to export cement/clinker at current prices, which have not moved in tandem with cost. Looking ahead, demand for the remainder of FY23 is likely to improve following resumption of stalled construction activity and rehabilitation of the damages caused by the floods. This, coupled with expected increase in cement prices and recent reduction in coal prices, should benefit margins and sector profitability.