Equity Analysis /
Pakistan

Pakistan Cements: 3QFY20 preview – the worst is not over yet

  • Lower prices, higher input cost and elevated finance cost will drag overall losses to PKR2. 5bn for 3QFY20

  • Almost all producers including KOHC & FCCL along with other leveraged companies will book losses

  • Demand will get an impetus from government focus on low cost housing schemes and higher PSDP disbursement during 2HFY21

Intermarket Securities
20 April 2020

With a backdrop of lower retention prices, higher input costs, elevated finance costs and infighting among North-based producers, profitability of IMS cement universe is likely to remain depressed in 3QFY20, with an estimated cumulative net losses of PKR2.5bn.

Almost all producers – including the less leveraged FCCL and KOHC – alongside CHCC, MLCF and DGKC are likely to book losses in 3Q amid (i) further compression of retention prices qoq (ii) increased competition, (iii) higher coal prices and lower offtake sequentially.

Demand will likely get an impetus from the government focus on low-cost housing schemes and potentially higher PSDP disbursement during 2HFY21, in our view. We prefer LUCK (TP: PKR623/sh) and DGKC (TP: PKR94/sh) in the space owing to their diversified business exposures and geographical presence in both regions.

Expect losses in 3Q due to both poor volumes and lower prices

We expect the IMS Cement Universe to book combined net losses of PKR2.5bn in 3QFY20, extending the period of negative profitability for most of the sector. Except for LUCK, all other companies in our coverage are expected to post losses in 3Q, even KOHC and FCCL which are relatively less leveraged. Lower offtake and higher coal prices will erode FCCL’s profitability, while finance cost and lower retention prices will drag KOHC into the red for the first time since FY10. 

GMs to decline drastically yoy and sequentially

Gross margins overall will be reduced significantly by (i) higher input costs, (ii) lower retention prices and (iii) lower cement dispatches in March due to lockdown. The decline in retention prices yoy is expected due to higher FED (by PKR25/bag), and weak retail prices due to infighting among North producers. We estimate an average decline of 20ppt yoy in 3Q to an average level of 3%. This was worsened by the hike in coal prices and increased transportation costs. For the new plants, fixed overheads and higher contribution of exports in the sales mix will also compress margins, in our view. Average retail prices during the quarter stood at PKR513/bag (down 5% yoy) in North and PKR694/bag (up 8% yoy). Moreover, on a sequential basis, gross margins are expected to decline from an average 8% in 2Q because of lower sales (against fixed costs) and higher realized coal prices. 

Local demand had divergent trends

In 3QFY20, local cement sales were up 4% yoy to 10.2mn tons from 9.8mn tons in 3QFY19; however, export sales increased by 31%yoy to 2.1mn tons (mainly led by South producers). Overall industry utilization stood at 71% (vs. 80% in the same period last year). Dispatches in the North grew by 13% yoy (8.6mn tons) while the South region depicted a substantial decline of 27% yoy (1.6mn tons). Post commissioning of new capacities in North, some players were selling in the South market to capitalize on wide difference in prices between the two regions. However, on a sequential basis, local sales and exports declined by 10% and 6% respectively dragged by the lockdown amid the Covid-19 pandemic.