Earnings Report /
Pakistan

Fauji Cement: Q2 FY 20 review – Lower-than-expected GMs erode bottom line

    Intermarket Securities
    21 February 2020

    Fauji Cement Company Ltd (FCCL) posted 2QFY20 NPAT of PKR189mn (EPS: PKR0.14), down 81%yoy and 35%qoq, as compared to our estimate of PKR334mn (EPS: PKR0.24). The yoy decline in 2Q profitability is mainly due to (i) lower retention prices, (ii) higher energy tariffs, and (iii) increased transportation cost.

    Key highlights:

    • Net sales increased by only 4%yoy to PKR5.3bn on account of (i) increase in local and export sales by 10%yoy and 13%yoy respectively, which was offset by, (ii) decline in cement retention prices by about 15%yoy.
    • GMs descended to 7% in 2Q20, down by a whopping 25ppt yoy. The decline is mainly attributable to (i) lower retention prices (failure to pass on the impact of increase in FED by PKR25/bag) owing to pricing rift amongst the North producers, (ii) higher energy tariffs, and (iii) increased transportation cost.
    • Other line items include: (i) the company has booked tax reversal of PKR36mn, which supported their PAT, whereas in 2QFY19 ETR was 29%, (ii) finance cost of PKR52mn, up by 2.2x yoy, owing to higher short term debt and higher interest rates.

    Though FCCL’s breakeven price level (owing to lower debt burden) is among the lowest in our universe (ex. LUCK), we believe declining market share in the backdrop of existing and upcoming expansions will negatively affect domestic sales. Hence, we maintain our Neutral stance on the scrip with Jun’20 TP of PKR17/sh.