Equity Analysis /

Pakistan Cements: Slower demand and elevated costs will reduce sector profits

  • Core profitability of the IMS Cement Universe is expected to decline by steep c.18%/38% qoq/yoy to c.PKR9.6bn in 3QFY22

  • During 3QFY22, total cement sales declined by 9% qoq to 13.4mn tons, while local dispatches declined by 5% qoq

  • We expect that average GMs in 3QFY22 will decline by c.3ppt qoq to 22.1%

Intermarket Securities
18 April 2022

IMS Cement Universe cumulative core profits are expected to decline sharply by c.18%/38% qoq/yoy to PKR7.7bn in 3QFY22, from PKR9.6bn in 2QFY22 and PKR13.1bn in 3QFY21.

Despite better retention prices and import of coal from Afghanistan, lower utilization levels during the winter season and elevated international coal and oil prices will reduce sequential gross margins, by c.5ppt. Therefore net profits are estimated to decline.

During the quarter, IMS Cement cluster declined by 5.8%, underperforming the KSE-100 Index by c.6.5ppt. Reasons behind this were (i) a massive jump in international and Afghan coal prices, (ii) slower demand amid elevated construction cost and winter season, and (iii) an expected increase in policy rate at the time when most players have announced new expansions.

Multiple factors will lead to depressed earnings

Core profitability of the IMS Cement Universe is expected to decline by a steep c.18%/38% qoq/yoy to c.PKR9.6bn in 3QFY22. This is mainly because of margin compression, which is led by the steep jump in global and Afghan coal prices, coupled with depressed demand and a less than commensurate increase in local and export prices. On a sequential basis, earnings of DGKC, MLCF and FCCL are expected to decline significantly amid lower utilization levels. On the other hand, flat or slight decline in utilization level will help CHCC and KOHC sustain better margins. LUCK, despite being operational on FO (in the North) for almost half of the quarter is expected to post higher earnings in 3Q amid higher dividend income from ICI. Lastly, PIOC’s profitability will also decline amid higher coal prices and decline in utilization level on a qoq basis.  

GMs to decline on higher COGS and inadequate pricing premium

Despite most of the IMS Cement Universe companies relying on Afghan coal (which is cheaper than Richard Bay), the significant rise in Afghan coal prices will limit the support to margins during the quarter. In the initial days when Afghan coal first start floating in Pakistan, the prices were PKR19,000/ton, which soared above PKR40,000/ton by the end of 3Q. In tandem higher transportation and energy costs have elevated overall COGS, while local cement prices remained unchanged for most of the quarter before increasing marginally in March. This is the key reason why we expect that average GMs in 3QFY22 will decline by c.3ppt qoq to 22.1%. Note that average retail prices rose by 5% qoq in the North to PKR750/bag and by 10% qoq to PKR800/bag in the South. Apart from these, export cement prices and demand were also weak during the quarter.

Demand contracted significantly

During 3QFY22, total cement sales declined by 9%/10% qoq/yoy to 13.4mn tons, while local dispatches declined by 5% qoq/yoy basis. Overall industry utilization stood at 77% compared with 83% in the same period last year. Exports were the major contributor of overall depressed utilization levels, declining by 32%/41% qoq/yoy in 3QFY22 to 1.3mn tons only. The overall increase in manufacturing cost has discouraged South-based cement players to export cement/clinker at current prices, which have not moved much in tandem with cost. Looking ahead, we believe that post-Ramadan, when construction activity kicks in, local demand will revive accordingly, we also expect an increase in local cement prices to pass on higher international and Afghan coal prices. This will help the sector to post sustainable earnings in 4QFY22. After that, the next key development will be demand dynamics when the new capacities start coming online.