Earnings Report /
Pakistan

Pakistan Cement – Better prices and offtake to expand profitability

  • Core profitability of IMS Cement Universe is expected to increase by 7% QoQ to PKR12.7bn in 2QFY23.

  • During 2QFY23, total cement sales increased by 26% QoQ, but declined by 17% YoY to 12.1mn tons.

  • IMS cement sector gross margins are expected to slip by 3ppt QoQ / 1ppt YoY to 24% in 2QFY23.

Intermarket Securities
25 January 2023

IMS Cement Universe cumulative profitability is expected to increase by 5% QoQ and 15% YoY to PKR15.2bn in 2QFY23, driven by demand resumption post floods and monsoon season.

However, sector gross margins are expected to slip by 3ppt QoQ / 1ppt YoY to 24% in 2QFY23. The anticipated reduction in gross margins is due to the increase in inflation, as well as coal and other energy prices during 2QFY23.

During the quarter, the IMS Cement cluster underperformed the KSE-100 by 10.1ppt. This may be due to i) concerns over possible price disruption amid the new expansion cycle, ii) higher interest rates, and iii) sluggish demand outlook amid slower PSDP disbursement and lower focus of the government on new construction activity.

Better utilization levels to improve earnings

Core profitability of IMS Cement Universe is expected to increase by 7% QoQ to PKR12.7bn in 2QFY23. This is despite interest rates and inflation increasing the cost of doing business significantly. Sector profits are likely to improve on the back of i) increase in sequential volumes post floods, ii) higher retention prices amid elevated local cement prices, and (iii) better coal inventory management despite higher prices during 2QFY23. CHCC may be an exception to the trend of sequential profit growth due to lower utilization levels and an increase in interest rates during the quarter.

Gross margin to slip amid cost pressures

The cement Sector should witness a jump in variable cost during the quarter, majorly led by higher inflation, greater cost of doing business and an increase in coal prices. These, coupled with higher depreciation expenses on new expansions (in case of MLCF) should reduce sector GMs by 3ppt QoQ and 1ppt YoY to 24% in 2QFY23, in our view. Reduction in gross margins are likely to be offset by a higher topline amid higher utilization levels during 2QFY23 to some extent. During the quarter, cement retail prices in North and South have jumped by PKR25 and PKR30 per bag, respectively. However, export prices have remained flattish.

Demand rebounded sequentially

During 2QFY23, total cement sales increased by 26% QoQ, but declined by 17% YoY to 12.1mn tons, where local dispatches have improved on sequential basis post flood slowdown in 1QFY23. The YoY decline is explained by the overall increase in construction costs and economic slowdown. Overall industry utilization stood at 66%, compared to 66%/85% in 1QFY23/2QFY22. Exports continue to decline at 0.7mn tons (down 29% QoQ in 2QFY23). The increase in manufacturing cost has discouraged South manufacturers to export cement/clinker at current prices, which have not moved in tandem with cost. Looking ahead, local cement demand in 2HFY23 is likely to remain relatively subdued amid Pakistan’s fiscal constraints, slowdown in economic activity and elevated construction cost. Apart from this, the new expansion cycle where most of the plants are coming online, may create chances of possible price disruption in the North region post winter season when demand will start picking up. These factors will likely keep a check on sector margins and profitability in 2HFY23f and FY24f. We prefer LUCK (Buy, TP PKR770/sh) and MLCF (BUY, TP PKR30/sh) as top picks due to better positioning and their relatively limited exposure to elevated interest rates.