Earnings Report /
Pakistan

Pakistan Cement: 4QFY22 preview – Higher tax and interest will chop earnings

  • IMS Cement Universe cumulative profitability are expected to decline sharply by 29% QoQ to PKR10.3bn in 4QFY22.

  • Despite elevated coal prices and reduced total dispatches, sector GMs n is likely to increase by 1.1ppt to 25% in 4Q.

  • During 4QFY22, total cement sales declined by 3%/13% QoQ/YoY to 12.1mn tons, while local dispatches increased by 2% QoQ.

Intermarket Securities
4 August 2022

IMS Cement Universe cumulative profitability are expected to decline sharply by 29% QoQ to PKR10.3bn in 4QFY22. However, it is expected to increase by 4% YoY.

Despite elevated coal prices (imported and Afghani) and reduced total dispatches, sector gross margin is likely to increase by 1.1ppt to 25% in 4Q. However, 10% one-off super tax will reduce earnings on a QoQ basis.

During the quarter, IMS Cement cluster declined by 26%, underperforming KSE-100 by c.18.5ppt. Reasons behind this were i) massive jump in international and Afghan coal prices, ii) slower demand amid elevated construction cost, slower economic activity, and iii) higher policy rate in an expansions cycle.

Super tax and finance cost will drag earnings

Core profitability of IMS Cement Universe is expected to decline by a steep 29% QoQ to c.PKR10.3bn in 4QFY22. This is mainly because of i) higher finance cost, ii) lower export prices and iii) 10% super tax on FY22 PBT will dent sector profitability the most. On a sequential basis, earnings of DGKC and FCCL are expected to decline significantly amid lower utilization levels and higher finance cost in case of DGKC. On the other hand, the highly leveraged CHCC and PIOC are expected to be the least affected owing to elevated retention prices and better utilization levels. Earnings of LUCK, MLCF and KOHC are also expected to slide amid lower volumes and higher tax. Also, LUCK will be impacted by the absence of dividend income.

Gross margin to increase amid better pricing power

Cement Sector has witnessed significant jump in variable cost during the quarter majorly led by imported and Afghan coal prices, coupled with higher fuel and electricity prices. However, despite the elevated input costs, IMS Cement Universe gross margins are likely to increase 1.1ppt QoQ to 25% in 4QFY22 (most scrips). This is due to more than adequate increase in cement prices, which led to elevated retention prices. During the quarter, cement retail prices in North and South have jumped by PKR120 and PKR90 per bag, respectively. This is expected to protect gross margins of majority of the players. The gross margin of DGKC, PIOC and KOHC are likely to decline by 1ppt, owing to higher fuel costs. DGKC will also be impacted from depressed clinker exports.

Demand contracted significantly

During 4QFY22, total cement sales declined by 3%/13% QoQ/YoY to 12.1mn tons, while local dispatches increased by 2% sequentially. Overall industry utilization stood at 70% compared with 81% in the same period last year. Sharp decline in exports 51%/70% QoQ/YoY in 4QFY22 to 0.6mn tons continues to weigh heavily on utilization levels. Overall increase in manufacturing cost has discouraged South players to export cement/clinker at current prices, which have not moved much in tandem with cost. Looking ahead, we believe that current monsoon spell, overall elevated construction cost and lower spending from the government amid fiscal tightening will keep check on domestic cement demand in 1QFY23. However, despite the contraction in cement demand, we expect that local cement prices will continue to rise due to passing on of higher coal prices and inflationary pressures. Hence, this is likely to sustain gross margins in 1HFY23. After that, the next key development will be demand dynamics when the new capacities start commissioning.